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How to Design Your Forex Trading Strategy

How to Build EA Robot Strategy | How to Design Your Forex Trading Strategy

This post is to show you how to build a good forex trading strategy for your trade or for your EA robot. A good strategy covers different aspects from trade entry, trade management to account management. These 3 aspects are the crucial elements that you should think while you are designing your trade strategy.

Trade strategy is the golden trade secret that each trader owns. Revealing the trade strategy to other is like allowing other to know your secrets. On the other hand, stealing other trader trade strategy or reverse engineering the EA robot to reveal the trade strategy is an unethical behavior that I definitely say NO. Therefore, protect your trade strategy and protect your own copyright.

Back to the topic, any of the trading method could be written as a trade strategy. If someone is trading through the gut feeling, then he will surely lost in trade in long run when the emotions come. Therefore, before you trade, you should design your trade strategy. You should follow your trade strategy in any circumstances without affected by any emotion, especially in trade entry, in taking profit, in stopping lost and in account management. These are the keys that you will accumulate your profit, rather than you are betting all your money in a trade blindly. Trading is not gambling, but trading is a skill of finding out the probability through technical analysis or fundamental analysis.

What you'll learn in this post?

  • What is Forex trading strategy

  • How to design trade strategy

  • Step 1: Design strategy for trade entry

  • Step 2: Design strategy for trade exit (take profit or stop loss)

  • Step 3: Win to Loss Ratio, Profit to Loss Ratio

  • Step 4: Test your strategy


What is Forex trading strategy

Trading strategy is a set of condition checking to take an action in MT4. The set of criteria could consists of ONE or MANY conditions. Use the keyword "WHEN" to ask yourself when you want to do an action. The action could be buy / close / modify / close trade.

So you need to ask yourself these questions:

  1. What is your action ?
  2. When you want your action to be executed ?

For example:

  1. (What is my action) : I want to do a buy trade
  2. (When you want your action to be executed) : I want to execute a new buy trade when I've detected 3 past bars is bullish bar

Thus, The "When you want to trade " is the strategy checking or you could say this is a set of criteria.

So this is pretty simple right.

Now, it is time to convert your thoughts into a sequence of thought flows. I normally just use power point to help me or draft out in a paper.  You could use a flow diagram with rectangle shaped box, diamond shaped box, and round shape box to form your idea. For example as:

Flow Chart Explanation:

  • Round shaped boxes are use to indicate start of strategy checking and end of the checking
  • Diamond shaped box is used for decision making. There are ONLY two possible outcome: whether is the checking is matched or fail (In programming, it is true or false)
    • True is when the checking is matched
    • False is when the checking is fail
  • Rectangle shaped box is used for action: i.e. You want to do a buy trade
  • Arrows flow is used to indicate the flow of thought of what will happen next

So, try to draft out your trading strategy in a paper or even in power point. You can use this template for a quick start too.

Download the Template here.




Step 1: Design strategy for trade entry

First is to design your trade entry, whether is a buy trade, sell trade or pending trades like buy stop, sell stop, buy limit or sell limit.  These are the action for the trade entry.

Before that, you need to think of when you want the trade to be executed. In general, it can be broken down into two:

  1. Which timeframe you want the trade to be checked
    • For example in 5 minutes chart, 15 minutes chart, 30 minute chart, 1 hour chart, 4 hours chart, 1 day chart, 1 week chart or 1 year chart
    • i.e. I want to check on every new bar created in 5 minutes chart
  2. What is the criteria need to be met ?
    1. You can use indicator to find the criteria
      1. For example moving average , RSI, MACD.
      2. i.e. Price is moving above 5 moving average
    2. You also can use the help of Price action in finding the resistance and supports

With these, then you can form a single criteria check. You could write it out your criteria check as below

  • I want to check on every new bar in 5 minutes chart
    • When the previous price is moving more than previous bar 5 moving average

For more advance criteria check, you could combine more criteria into checking, for example

  • I want to check on every new bar in 5 minutes chart, previous price is moving more than previous 5 moving average
  • I also want to check that at the same time previous RSI value is lesser than 70

In this example, you combine two indicators check.
There is also time that you could combine checking in different time frames. For example

  • I want to  check on every new bar in 5 minutes chart,  previous price is moving more than previous 5 moving average
  • I also want to check that at the point of time 4 hours time frame, current RSI price is lesser than 70.

The criteria checking is depending on your trade strategy.  It is on your research and study, which indicators will give you more profits.


Design strategy for trade exit (take profit or stop loss)

Now, once your trade is entered, you also could write the trade strategy for your take profit and stop loss.

Normally the once the trade is executed, you will check on the condition of your trade in every price changed.

On each price changed, you can take action as below

  • Change your trades through modifying the take profit or stop loss
  • Close your trade in critical condition

Again, you could write your strategy for these actions.


Win to Loss Ratio and Profit to Loss Ratio

This is very important that you need to consider on the risk management:

  • Win to loss ratio
    • This is the ratio how many times you win versus how many time you lost
    • i.e. I win  8 times out of 10 times, loss 2 time. The win to loss ratio is 80%
    • i.e. I win 2 times out of 10 times, loss 8 time. The win to loss ratio is 20%
  • Profit to loss ratio
    • This is the ratio of profit versus loss in a single trade
    • i.e. I win 50 pips averagely in a time, but if I loss 20 pips averagely in a time. Then the profit to loss ratio is 250%. This also means, if I win one time, basically I could cover 2.5 times of lost.
    • i.e. I win 20 pips averagely in a time, but if I loss 50 pips averagely in a time. Then the profit to loss ratio is 40%. This also means, if I lost one time, basically I would need 2.5 times of wining to cover my lost.

Both ratio carries different weights. You will still lost in total if you didn't calculate correctly.

For example

  • If my win to loss ratio is 50% (10 times of trade, 5 times will win, 5 times will loss)
    • I will loss in total if my profit to loss ratio is less than 50%, meaning I need more wining trade in order to cover my losing trade
    • However, if my profit to loss ratio is more than 50%, then I will win in total.

This is to show you how important that you should understand the ratios and design your stop loss and take profit correctly.




Test your strategy

Lastly, you should test your strategy for goes into live. There are two ways you could test your strategy.

  • First: build an EA and test through MT4 Strategy Tester. With this, you could get 100% of accuracy whether your trade strategy is working or not, whether will loss or win through the past history. Robot will not tell lies.
  • Second: You need to do the back test one by one through Metatrader 4 past history. You need to be honest to your self and only follow the strategy that you have defined, else you will not get the 100% of accuracy and know the result of trade strategy if it is working.

So, this is the end of the post. I hope you have learned the knowledge of how to design your trading strategy.

By now, you should be clear the trade considerations that you need to think when design a trade. These all will eventually affect your result.

I hope it will help you to improve your trade.

Happy learning ^^

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