From setting up the time frame to figuring out the best entry and exit levels, here are the 6 steps to build a winning trading system according to XM.
As you gain more experience and develop your trading skills, you might want to build your own trading system that fits your trading style, goals, and risk tolerance. This is highly crucial in online trading because it can limit your losses, minimize emotions like greed and fear, and help you make better trading decisions.
According to XM broker, there 6 important steps to build a winning trading system:
- Define the time frame
- Figure out the market trend
- Determine support and resistance levels
- Find the entry level
- Find the exit level
- Use multiple time frame analysis
Now let's break them down to get what they really mean.
- Step 1: Define the Time Frame
- Step 2: Figure Out the Market Trend
- Step 3: Determine Support and Resistance Levels
- Step 4: Find the Entry Level
- Step 5: Find the Exit Level
- Step 6: Use Multiple Time Frame Analysis
- The Bottom Line
Step 1: Define the Time Frame
If you don't have much time to watch the market all day long, you're naturally a long-term trader. In this case, you can choose to use either daily or even weekly time frame. The benefit of being a long-term trader is that you will make fewer transactions and pay less spreads. However, keep in mind that you might only get a few signals in around a month, so a lot of patience is needed to make this work. Other than that, you will also need bigger accounts to avoid margin calls because long-term strategy needs bigger stops.
If you are impatient and have all the time in the world to watch market movements, then you should be intraday trading. Use lower time frames like 15-minute or even 5-minute chart to build your strategy. This way, you'll get more trading opportunities each day. The benefit of using this method is that you can avoid overnight risks and reduce trading costs. However, you'll need more stamina to watch the market and remain focused most of the time.
If you are somewhere in the middle, you can easily be a swing trader. Use hourly charts to make short-term trades that can last from hours to a few days at most.
Step 2: Figure Out the Market Trend
The next step is to identify the position of the market. Since XM broker is using the trend-following framework, you'll need to trade in the same direction of the market trend. Generally speaking, there are three types of trends, namely uptrend, downtrend, and ranging. Take a look at the example below.
The above illustration shows an example of an uptrend, which is characterized by higher highs and lows. The above uptrend has a total of 5 waves:
- 1st wave: A to B
- 2nd wave: B to C
- 3rd wave: C to D
- 4th wave: D to E
- 5th wave: E to F
You might notice that waves 1, 3, and 5 are moving upwards, whereas waves 2 and 4 are moving in the opposite direction of the overall trend, so they are called corrections. The same concept also applies to other types of trends.
To identify the trend, XM broker mentions the help of technical indicators such as MACD, 20-EMA (Exponential Moving Average), and 25-RoC (Rate of Change). Note that in ranging markets, only RoC can be used. Meanwhile, to identify the direction of the waves, you can use indicators like RSI (14), MACD, 20-EMA, and Stochastics.
Step 3: Determine Support and Resistance Levels
The main idea is actually pretty simple. When it's an uptrend, open a buy position. When it's a downtrend, open a sell position. The question is when exactly should you open the order? Before you answer that, you should be able to identify support and resistance levels on the chart.
There are several options that you can use to spot support and resistance. To simplify your choice, XM broker introduces these methods:
Peaks and Troughs
Basically, all you need to do is mark each peak and trough using a horizontal line. In a downtrend, every lower peak is a resistance level and every higher trough is a support level. Meanwhile, in an uptrend, every higher peak is a resistance level and every higher trough is a support level.
Using Previous Time Frames
Open higher time frames than the one you're using and find the levels from there. So, if you use the 15-minute chart, you can look at the 1-hour chart and incorporate the support and resistance levels into the 15-minute chart. Then, look at the 4-hour time frame and put the levels in the 15-minute chart as well.
If the levels from higher time frames match the support and resistance levels on the lower time frame, it means that the levels are stronger and more reliable for your trades.
Moving average is a popular technical indicator that can be used for various purposes, including identifying support and resistance levels. The concept is pretty simple. In a downtrend, the MA acts as support, while in an uptrend, the MA acts as resistance. You can use different periods of moving averages, like the 20-MA or 55-MA. Both Simple and Exponential Moving Averages are acceptable.
Fibonacci Retracement is another popular indicator that you can use to do the task. The most common levels used are 23.6%, 38.2%, and 61.8%. Typically, after a big up/down movement, the price will retrace a good length of the original move. As this happens, support and resistance levels usually occur at or near the Fibonacci Retracement levels.
Last but not least, you can use trend lines. In an uptrend, the price stays above the line which acts as the support level. In a downtrend, the price stays below the line which acts as the resistance level. Please note that the line has to have at least two points, either two peaks or two bottoms. A valid trend would have three or more points. So, the more points a trend line has, the more accurate and important the line becomes.
Step 4: Find the Entry Level
To gain profit, you need to enter the market at the right time. After identifying support and resistance levels, it's time to determine your entry level. There are three methods that XM broker mentions in its tips, namely:
- Trading the Bounce
The idea is basically to buy on the dips (the pullback) during an uptrend and sell on rallies (after the price temporarily bounces back before continuing to drop) during a downtrend. In an uptrend, the first step is to wait for the price to move downward and reach the support level. Wait for the bounce to happen before entering the market. Make sure that the RoC (7) and MACD are both on the oversold side, further confirming that the support will hold. Don't make the mistake of opening the order too soon. It's better to wait for the price to bounce instead of buying when the price is right at the support. Also, don't forget to set a stop loss a few pips below the support level just in case the price moves against you.
- Trading the Breakout
In this strategy, you'll have to wait for the price to break through the support or resistance level. In an uptrend, open a buy order when the price breaks a resistance level. In a downtrend, open a sell order when the price breaks a support level. To ensure that the breakout is strong enough, open the 1-minute chart and wait for two bullish candles to appear above the resistance or two bearish candles to appear below the support level.
- Trading the Trend Reversal (Failure Swing)
A failure swing indicates the trend is about to reverse, providing a good opportunity to enter the market. This usually happens when the trend weakens and the price is unable to make higher highs in an uptrend or lower lows in a downtrend. For instance, if the price fails to swing lower than the lower low in a downtrend, followed by an upward movement that breaks the resistance, then it's a good entry signal.
Step 5: Find the Exit Level
Determining the exit level is just as important as finding where to enter the market. There are two kinds of exit levels that you can use, namely stop loss and take profit.
- Stop Loss: Stop loss is used to limit your losses. The placement should depend on your entry level. Don't place it too close or too far from the entry price. The ideal condition is to set it close enough to prevent you from getting too much loss, while at the same time, far enough to allow price corrections.
- Take Profit: Instead of limiting loss, take profit is used to lock in your profit. Here's an example of the placement. Close 50% of the position at 161.8% Fibonacci extension level and shift the stop loss of the remaining at the open price. At the next resistance, close 50% of the remaining position (25% of the original position) and move the stop loss higher. At the next resistance, close the remaining 25%.
Step 6: Use Multiple Time Frame Analysis
To increase your chance of winning, XM broker highly recommends traders to use multiple time frame analysis. This means you don't just use one time frame to make a trade, but several. You will need to confirm signals that you found on your preferred time frame with the higher/lower time frames so that you can get a broader perspective of the market.
The reason is that the direction of the trend may be different in each time frame. So, what you see on the chart does not necessarily reflect the whole reality of the market. For example, the GBP/USD could be an uptrend in the 1-hour chart and a downtrend in a daily chart. This is why using multiple time frames to analyze the market is a great way to minimize losing trades as you will be able to see your position in relation to the bigger picture.
The Bottom Line
If you follow the six steps above, you'll be able to execute your trade based on technical analysis and thorough research. Don't forget to test your strategy on a demo account before risking real money into it, though. Then, once you execute the real trade, make sure to keep a record and evaluate your performance. In this case, you can make use of XM demo account then move to the broker's real account to implement the trading system.
XM Group is a group of regulated brokers and it is owned by Trading Point Holdings Ltd. Entities under XM Group have significant experience as financial services providers worldwide.
Trading Point of Financial Instruments Ltd was established in 2009 with headquarters in Limassol, Cyprus, Trading Point of Financial Instruments Pty Ltd was established in 2015 with headquarters in Sydney, Australia, XM Global Limited was established in 2017 with headquarters in Belize and Trading Point MENA Limited was established in 2019 with headquarters in Dubai.
XM Group is regulated by the CySEC (Cyprus Securities and Exchange Commission) - Trading Point of Financial Instruments Ltd, FSC (Financial Services Commission) – XM Global Limited, the ASIC (Australian Securities and Investments Commission) - Trading Point of Financial Instruments Pty Ltd and DFSA (Dubai Financial Services Authority) - Trading Point MENA Limited.
XM is one of the more experienced brokers in the world of online forex trading today. Since its founding, the broker has experienced a lot of changes, including the addition of the Ultra-Low Account and Webinar feature that is accommodated in 19 different languages with 35 native instructors for each language.
In terms of trading instruments, XM is a well-known diverse class assets provider, varying from Forex, Commodities, Equity Indices in CFDs, Precious Metals, Energies, to Shares. XM prides itself to be the ideal broker in trading execution, offering a stat of 99.35% orders to be executed in less than 1 second. Trading in XM would be also provided with a strict no requotes policy, no virtual dealer plug-in, no rejection of orders, real-time market execution, and the choice for traders to place orders online or by phone.
Spreads on all majors can reach as low as 0.6 pips in Ultra-Low Account, while spreads on other accounts usually start from 1 pip.
To protect the client's fund in the event of extreme volatility, XM presents each account type with Negative Balance Protection. The deposit starts from $5 in Micro and Standard Account, while Ultra-Low Account requires a minimum deposit of $5. Traders who open accounts in XM are enabled a condition similar to a Cent Account environment in the Micro Account, in which the Contract Size for every lot is only 1,000 units. If it is applied with the smallest lot size in the MetaTrader platform which amounts to 0.01, it means that traders can go as small as 10 units per trade.
For the deposit, XM applies zero-fee deposits in most of its available payment methods. Traders can choose to fund or withdraw their accounts via wire transfer, credit card, as well as the most favorable e-payment choices like Skrill, Neteller, and FasaPay.
To give their clients the best experiment in trading, XM has given access to both MT4 and MT5 platforms, each is available for more than 6 display formats (PC, Mac, Multiterminal, WebTrader, iPad, iPhone, Android, and Android Tablet).
All in all, there is no doubt that XM has gone global with its deep commitment to providing trading services in more than 15 languages around the world. Aside from easing traders' experience with mainstream trading platforms and high-quality trading execution, XM is open to various types of traders, from small capital traders to the more experienced ones with big deposits at the ready. Traders are even provided with a Cent Trading environment should they choose to register under Micro Account.
For their global approach, XM has ensured that traders from various countries could access their service easily. This results in the provision of different domains specified for traders in certain jurisdictions. For example, traders from Indonesia could access XM via this link.
XM broker is an established international firm and has become a true leader in the trading industry. Founded in 2009, the company works with the main principle of being "fair, trustworthy, and dependable". XM claims to support no re-quotes and real-time execution, where traders can choose from 10+ trading platforms suitable to any device.