Build Your Trading System, or How to Earn from Forex Knowing Biggest Banks' Behavior


In this article, I would like to explore the issue of trading. My own trading ideas and attitudes that influence decision-making.

In fact, I’m not that experienced to think of myself as an expert in trading, but I have been trading long enough to develop my own view on the issue. I hope it may seem helpful to some of the readers. My key message is that the counterpart of your trading on the broker’s side is people like you who are also enthusiastic about the market, who devote every day to analyzing the price movements and earning from trading.

I believe that an effective trading system should be built on the following three principles:

  1.  Money management
  2.  Determine market conditions
  3.  Determine entry/exit

Let me give you an example, just to be clear what I mean.

For example, you know that the United States adopted ‘quantitative easing’, and so gold is likely to go up. This is a condition that will affect the price.

Follow your rules, and you establish the point on the chart where you plan to open and close the deal. This is a technique of entry and exit.

Before you open a trade you will also have to address the issue of risk control and position volume. Here you are involved in money management.

No doubt all three elements are equally important and need appropriate attention. However, today I would like to talk just about the conditions. I am convinced that it is the core of any trading system.

What are conditions?

Primarily the сonditions determine when and where to open a position.

A couple of examples from my practice:

Until January 2015, for three years there was bind between the Swiss franc and the euro. During this time, many trading systems were built on this idea. Certainly this example has caused many a smile as we all know how that story ended, but I assure you that a lot of people made money on it. More than the rest, it affected the brokers and not the traders.

The following example is a period of low volatility in an early Pacific session, after the closing of the largest venues. This time is often used by algorithmic traders to run their robots.

Even the upcoming British exit from the Eurozone (Brexit) could act as a condition. This fact will undoubtedly influence the value of the British pound against other currencies.

As you can see there are a lot of conditions that affect the price. Some affect the price constantly from day to day, others come and go. Naturally there arises the question of choice. By making this choice, each one of us relies on his own belief system. Someone believes in technical analysis and for him the history of price movement is the most important thing. The other believes the wave theory, etc. In any case, this choice will be driven only by your own belief system.

I stop here, because for the longest time I could not answer this question. What do I believe? What ideas or tools would I trust more than others? And despite the fact that today I have already decided, and with ideas and with tools, I keep asking myself this question in the search for more efficient tools for analyzing markets.

My belief system

As we all know, most traders lose money. Hence there is a small percentage that take all the money. Because if someone lost, someone else won. This is certainly a very simplified model, but it is important to understand that the profit of one of the participants is the sum of the losses of others. When I say loss I do not mean loss in the literal sense, but rather what someone paid for it. Maybe even paid voluntarily and on their own. The result is a certain group that distributes among themselves the loss of all the other participants. Naturally the question arises – who are they?

For me it’s the biggest financial institutions in the world: Deutsche Bank, UBS, Citibank, Barclays, HSBC, Bank of America, Goldman Sachs, JP Morgan etc. I believe that these structures take the entire risk which other participants want to get rid of and are willing to pay for it. Once these financial institutions assume the risk they will do everything possible to avoid a scenario in which they lose money.

On this basis, when I determine the conditions my idea is to open trades in the direction which would correspond to the interests of this group of participants.

The tools I use

At the moment, I use two reports to track the behavior of these participants on the market.

1. Commitments of Traders (COT) 

2. Daily Bulletin of CME                  

In this article I am not elaborating on how you built these reports and what information they contain. Let me just say that on the basis of the first report, I analyze the structure of open interest on currency futures, and on the basis of the second I evaluate the balance of open interest at optional strikes on the same future contracts.

I’d like to emphasize three benefits of using this market data to determine market conditions:

1. Accessibility – this data is free.

2. Regularity – you can build a workflow and track the dynamics of changes in the conditions.

3. Concreteness – we get very accurate and specific information in both reports.

The conclusion: the basis of each system should be the idea that reflects only your own belief system and not someone else’s. That is why it is very difficult to follow a trading system created by someone else, not you personally. And that’s why, when we study the experiences of the best traders of the world, we always see their own individual approach.

If you are wondering how I build my workflow, how I analyze the data and how I interpret it, please leave a comment on this article.

Translated article from S. Shirko`s blog.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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