Lesson 11 Building a Rule Based Practice Setup

Convert an idea into reproducible entry, exit, and invalidation rules and identify conditions requiring no trade.

A hypothesis needs operational rules

“Buy a strong market on a pullback” leaves too much unspecified. A testable setup states its instrument, chart data, timing, conditions, execution model, size, and exits. Someone else should be able to follow it without knowing the outcome in advance. The following training setup is unvalidated and may lose money. It exists to teach specification and testing. Its parameter choices are not recommendations or evidence of an advantage.

The course practice setup

1. Market and data: EUR/USD hourly bid candles aligned to UTC. Use completed bars only. SMA20 and SMA50 use the latest 20 and 50 completed bid closes, including the signal candle. Require at least 50 completed bars of warmup data. If your chart cannot align to UTC, use the paper case or document a distinct test version. 2. Direction: Long only. On the completed signal candle, SMA20 must be greater than SMA50; its low must be at or below SMA20; its close must be above SMA20 and above its own open. Equality fails any rule requiring “above” or “greater.” 3. Time: Signal candle opening time must be 09:00 through 14:00 UTC, inclusive, Monday through Thursday. The entry is at the next hour’s opening ask, so eligible entries are 10:00 through 15:00 UTC. This is a fixed classroom window, not a claim about the best trading hours. 4. Filters: No position may already be open. Maximum two entries per UTC day. No entry within 30 minutes before or after the specified news events for either currency. Skip when the applicable spread exceeds 2 pips, required calendar information is unavailable, or the demo loss thresholds have been reached. 5. Stop and entry: Set the stop at the signal candle’s bid low minus 2 pips. At the next hour’s available opening ask, calculate the distance to that stop. Enter only if the distance is between 10 and 50 pips inclusive and the size and margin checks pass. A gap or filter failure cancels that signal; do not enter late. 6. Size: Use the Lesson 7 cost aware formula with a maximum 0.5% of current demo equity. For the classroom model, assume a 7 USD round trip commission per lot and a 2 pip adverse slippage allowance. Round down to the permitted increment. Skip if the minimum size exceeds the budget. Model margin at 5% of USD notional and require used margin after entry to be no more than 50% of equity; this extra margin limit is a teaching constraint. 7. Target: Place the target at entry ask plus twice the price distance from entry ask to the stop bid. This is 2 to 1 on price distance before separate charges, not necessarily 2 to 1 on net cash risk. 8. Management: Keep the original stop and target. No additions, partial closes, trailing stop, or stop widening. Exit at the first stop, target, or 16:00 UTC time exit on the entry date. Close a remaining long at the bid. An account loss threshold can require an earlier exit under the plan.

Make historical execution assumptions explicit

For a bid only classroom dataset, assume a constant 2 pip spread: ask equals bid plus 0.0002. Enter at the next bid open plus that spread; long exits use bid. Fill stop gaps at the worse available bid open rather than the skipped stop price. Credit a target only at its specified price, even if the opening bid is better. Use the bid close of the 15:00 candle for the 16:00 time exit. If an hourly bar touches both stop and target and there is no finer data, record the ambiguity and assume the stop occurs first. Do not use candle colour to invent the path. Deduct the stated separate commission. The 2 pip sizing allowance is not automatically a realised charge: actual model fills determine realised slippage. Add a separate sensitivity test for worse execution in Lesson 12.

Worked signal

Assume a valid Tuesday 09:00 signal candle opens at 1.1000, has a low of 1.0990, and closes at 1.1008. Its SMA20 is 1.1000 and SMA50 is 1.0980. All the signal conditions pass. Assume all filters pass and the next bid open is 1.1008. Entry ask is 1.1010; stop bid is 1.0988; distance is 22 pips; target bid is 1.1054. With 2,000 USD equity, the loss budget is 10 USD. Estimated loss per standard lot is 220 + 7 + 20 = 247 USD. At 0.01 lot increments, size is 0.04 lots, estimated risk 9.88 USD, and indicative margin about 220.20 USD at 5%.

Practice

Copy the rules into your workbook and give them a version number. Mark five eligible or rejected historical signals, showing which rule decided each case. Include at least one rejection. If the dataset produces no eligible signals, record that finding and extend the date range without changing the rules.

Check your understanding

After the four lessons in this module, complete Module 3 knowledge check from the course overview. It contains the three questions from each lesson with feedback after submission. Keep written calculations in your workbook.

Glossary

Ask: Price at which the customer can buy the pair
Bid: Price at which the customer can sell the pair
Commission: A separate trading charge under the provider’s terms
Equity: Account value including open profit or loss and applicable adjustments
Gap: A jump between available prices that skips intermediate prices
Long: Exposure that benefits from a higher pair price before costs
Lot: A position volume convention; verify base units for the instrument
Margin: Collateral required to support a position
Notional: The underlying value of a position’s exposure
Pip: A conventional exchange rate movement unit
Slippage: Difference between a reference price and the actual execution fill
Spread: Ask minus bid