5 Steps To Learning A Trading System
Learning to trade binary options is already challenging enough, but many of us actually have to learn how to learn. What do I mean by that? If you have been in this game for a while, even as a beginner, you probably have started to figure out that binary options trading is not as easy as it looks. Or rather, it may be easy to trade, but it sure is not easy to win consistently enough to become profitable. For that you need a trading system. But even with a great trading system, it still can be hard to win, because it can be hard to learn how to trade one the right way.
Use these 10 Steps to Becoming a Profitable Trader
Part of the problem for many traders comes from a desire to rush on ahead and get to the goal. While motivation is good, we often skip steps in the process. Some steps are more obvious than others, too. For example, it is pretty obvious that to succeed, you need to backtest and demo test. But what about the steps within steps that you have to take to be really good at those two things before you go live? If you are struggling and running up against the same walls again and again, here are some steps that will hopefully help you to succeed.
1. First, learn the basic structure of the trading system.
If you find a trading method that interests you, then as a first step, get the entry and exit rules down. Understand any technical indicators you will be using, price action if applicable, and fundamental analysis. Learn how the different elements of the system interact, and what order things need to happen in for you to have a potential setup. Discover which assets or timeframes the system was created to be used on. This will all get you started on the right track.
A lot of traders make the mistake of thinking that this is all that learning a system entails. They then go straight to live trading—which always ends in catastrophe. But they still tell themselves, “I have done more than 90% of other traders already! I have an edge.” And while this is true on both counts, that does not mean that they have done enough.
The next mistake is to go straight onto backtesting. This is what most other newbie binary options traders will do. And you are right to want to go on to testing, but not yet. There is an intermediary step which almost everybody skips the first few times around, but it is an essential one.
When you do start testing use this as a guide to see if you are over-testing.
2. Learn every element individually and together.
You have to break down the system you choose and learn to recognize the very best examples of each of its components, and then learn to recognize the very best setups which include all of those components. This is how you learn to tell a good trade from a bad trade. Even the best trading systems give a lot of false setups, especially in choppy markets. If you have not learned yet how to recognize different market situations (trending, sideways, choppy, etc.), that is something else you will have to learn to identify.
So for example, let’s say you are planning to trade price action with Fibonacci retracement levels and divergence for confluence. It is one thing to understand what that means in a basic sense, but quite another to learn to recognize the very best trade setups. Open your charting software, scroll back in time as you would if you were going to be backtesting. But instead, start looking for each element of your system one at a time. If you are going to be trading inside-4-bars and bullish and bearish outside bars, for instance, go back and circle every inside-4-bar you see. Look at which ones worked, and at which ones didn’t. Save screenshots of the best ones.
Then go back and do the same thing with the bullish and bearish outside bars. But do one thing at a time. Once you have done that, go back and look for divergence. Then try setting up Fibonacci retracement lines to get the hang of that. Identify swing highs and swing lows. Once you start doing this, you not only will be great at spotting all these elements, but also recognizing patterns between the best setups—the ones which would have led to wins instead of losses. Now you are ready to go onto step 3.
3. Backtest your system.
Next you need to go back in time on your charts and test your trading method. Pretend that you are trading in real-time, and scroll your chart forward one bar at a time. Do not look ahead. When you see a setup (a really great setup, like you learned to identify in the step above, not a mediocre one), write down in an Excel spreadsheet where you would have entered into the trade. Step the chart forward one bar at a time (F12 in MetaTrader) and see how the trade plays out.
Unfortunately with binary options, this step is not entirely reliable, being as you may not have control over your expiry times in real life (solve this problem the easy way and choose a broker that gives you that control). But if you can use Option Builder and early close, you can select and modify your own expiry times on your binary options platform. That means that while you are backtesting, you can have exit criteria to get out of a trade at a profit or a loss. Record those profits and losses accurately, take plenty of notes, and see how things unfold. You can read more about this process at this link.
4. Demo test your system.
Once you have proven to yourself that your system could have achieved good results had you been trading it historically, you have a good foundation to believe that your system could continue to perform well in the future. At this stage you may again feel tempted to go straight to live trading with real money, but that is another mistake. There is a difference between theory and practice, past and future, and demo testing is to ensure that you and your trading method can both survive the changeover.
Demo testing allows you to:
- Make sure your system thrives in current market conditions.
- Test out your binary options platform and broker to make sure you have chosen a trustworthy company with an effective, easy-to-use platform.
- Discover all the ways in which trading in real-time is different from backtesting. Does it interfere with your schedule? Is it hard to maintain the same mindset while you are in a trade? There is a huge difference between something taking seconds or minutes and something taking hours (or even longer, if you have a platform that supports interday and position trading).
I highly recommend that you demo test for at least several months, and that you only go live once you have achieved consistently profitable results for at least that length of time. You do not need to win every trade, but your account balance needs to be consistently, steadily rising. About 4-6 months minimum is required before you go live.
5. Go Live.
When you reach this step, I also suggest you finance your account with only about half of whatever you were originally planning to use. Once you have done that and remained profitable for another several months, only then should you fund a full account. Why? Consider this to be one more testing phase. Trading with money on the line is yet another psychological hurdle, and it can change the way you trade. It is better to deal with those changes with only half of the amount on the line and not the full amount.
Have a great money management plan and follow it to the letter. That is something you will start learning how to do in the demo phase with virtual money, but you will need to put it into play in real life when you start trading with real money. Always invest the same percentage of your account, and keep that percentage low—5% at the absolute outside. Two to three percent would be much better. A lot of traders think that 10% is okay, especially if you have a small account and need to “build it up,” but this is a recipe for disaster. Just work at it slowly in the beginning. Things will speed up later down the line—but only if you can make it long enough without blowing your account to get there. And that will not happen with poor money management.
Use Bankroll Tips to prevent poor money management. Learn how here.
When you are looking forward to investing and building up your account with binary options, it can be difficult to restrain yourself from diving in headfirst. But these are treacherous waters, and you will achieve the best results if you first build yourself a raft—taking the form of your trading system. The more work you put into that raft, the more solid its construction will be, and the more reliable it will be, even on choppy seas. Your monetary survival in trading literally depends on the quality of the trading method you build and test, so put your all into it.