|
How to Select a Forex Trading System That Works and Suits You
by: Bret Freak
There are so many different Forex trading systems you could use to trade the Forex market, some better suited to certain people than others. For illustration some people may find it easier to understand and take into account fundamental factors as opposed to looking at a screen covered in technical indicators, and vice-versa.
The first reasonable steps in determining what kind of trading system would best suit you is really being aware and comprehend the commonly known methods of analysis used in trading the currency market. Once you are aware of the tools that are obtainable, you can generally tell what kind of analysis suits you. For illustration some of the major technical analysis methods which are popular include:
• Chart patterns
• Pivot points
• Candlestick patterns
• Fibonacci retracements
And some fundamental factors which are widely used include analyzing:
• Trade balances
• Interest rates
• Gross domestic product (GDP)
• Unemployment rates
You may now really be able to build up your own system by combining certain methods of analysis together, giving you a method which you are comfortable with. On the other hand you may come to a decision that you would like to trade someone else’s system, either way, which brings us to the next step which is determining the profitability of a trading system.
Determining Profitability
The majority of people would think that back testing is the most excellent way to determine systems profitability. But back testing does not always give you a true idea of how profitable a system is. The explanation for this is because when you are back testing your system on past charts, you are only seeing the obvious setups which have occurred, and not always seeing the ones that are less obvious. These less obvious ones sometimes can generate losses, which is why back testing is not always the finest method to put into practice.
A better method of determining profitability is by trading your system in real-time with a demo account. This would give you an exact understanding of what your system is capable of. This would also allow you to familiarize yourself with your Forex trading platform at the same time. When determining profitability you must look at it in terms of expectancy and opportunity.
Expectancy & Opportunity
These two factors jointly will be able to tell you what you could wait for to make over a period of time. Expectancy is calculated with the following formula:
(Probability of winning × average win) – (Probability of losing × average loss)
This will give you a figure which is the typical amount you can expect to make per trade. This shouldn’t be a negative amount, if it is you should look at some other method of trading since you cannot make money on a system that produces a negative expectancy. Obviously the higher this figure is the better. Now to the opportunity factor.
The opportunity factor is how frequently you are able to trade using your system. By multiplying your expectancy figure with your opportunity factor it will tell you how much you could expect to make over a period of time. The more chances you have to trade, the more money you should expect to make. This now brings us to the final part of a trading system, money management.
Money Management
Without correct money management you will end up as a statistic. In other words one of those more then 90% of traders who loose their money. Money management shows you how much of your Forex trading account balance to risk per trade. The whole point of money management is to ensure your continued existence over the long term, and to protect your funds.
The most ordinary form of money management is the percent risk model which shows you not to risk more than x percent of your Forex trading account balance on any one trade. A range between 1-3% is commonly an accepted amount which has been a reliable percentage to use in order to make capital in the long term.
Closing moments
By taking into consideration the above factors you will be able to decide if a trading system best suits you, and with some uncomplicated mathematical calculations you will be able to find out its profitability.
|
