7 Keys To Choosing A Good Forex Trading System.
By Mark Hamburg
So you want to choose a good system, one that will be worth your time and effort learning how to trade?
Well, there are a couple of key points to keep clearly in mind, even before you go out hunting for a system to learn.
Firstly, realise that some systems perform better or are more consistent than others. Yes, it's true that this in itself is in the eye of the beholder, as everyone is different. But say you're comparing two daily systems, and they're very similar in time required to trade it, but the first has better profitability and better consistency, with a smaller drawdown, then for most people, the first is a system that may be more attractive.
The second point to consider is that systems differ vastly in the amount of time that's required to trade it. Some systems are take less time to trade, while some require you to be at the screen several times a day, or more. This is a question therefore about what suits your lifestyle.
What we're looking for is a currency trading system that's profitable enough - and this is different for everybody, that has an acceptable drawdown, and that actually fits into our daily routine!
This is important, as when any of these factors are not there, we'll find ourselves unable, or unwilling trade the system.
By the time you've read this article, you'll know how to choose a system that's worth the time and effort to learn as prosper from!
So here are the 7 power points when checking out a system or training course that you've found:
1.The profitability of the system.
This is shown as either pips per month, or when assuming a certain float amount, the dollar amounts per month.
These profit figures are often quoted in pips per month, as it's one way of comparing trading systems, despite the fact that people are trading different trade sizes.
However, when looking at pip profit figures, just be aware that if you assume a fixed risk model, that the average face value that people will trade with any given float, will depend on the average risk per trade. This in turn, depends on the average stop loss distance for that system. But the stop loss distance is not often quoted.
As an example, say you want to trade with a 2% fixed risk model. If the average risk per trade in the first system is say 30 pips, and in the second system is 60 pips, then the average face value would be twice the size in the first system for any given float. If both systems produce the same average pip profit per trade, say 100 pips, the first system will, in terms of dollar amounts, produce the higher profit.
If on the other hand, we're assuming a fixed dollar risk model, then the amounts you put in will depend on the size of the float.
2. The maximum drawdown either historical or based on real trading.
The maximum historical drawdown of a system is the largest decrease in equity that has happened in the past during backtesting or real time trading of the system.
When comparing drawdown between systems, you can either look at pips, or if using a assumed float, look at the dollar value. Then with this dollar value, express it as a percentage of the cash float used. For example, if the maximum historical drawdown was $6000 based on a $10 000 cash float, then the drawdown is 60%, expressed as a percentage of the cash float.
As well as using this drawdown figure to compare systems,
you can also use it to figure out the amount of funds you'd need to start trading the system.
In the example we just mentioned, you'd need at least $16 000 in the beginning ideally, to trade the system. That is $10 000 float plus backup of $6000. This is in case a drawdown occurs when you first start trading, not months or years after you start. It's wise to be prudent and to have backup.
3. What's the win loss ratio of the system?
The win-loss ratio of the system, is the percentage of winning trades compared to losing trades. A high win-loss ratio is a bonus, in that the system may be psychologically easier to trade.
But more ultimately, you need to look at both the win loss and profit loss ratio, which we come to now
4. The profit-loss ratio of the system.
The profit-loss ratio is the average size of winning trades compared to losing trades.
A high ratio means that the system is pretty robust. And this is a strength.
So if the profit-loss ratio multiplied by the win-loss ratio is greater than one, then you're on the right track, that is, the system is profitable. You'd want this ratio to be 2 or 3 or more, not just bordering on one, which means that the system is profitable with a good edge.
5. The consistency of the system, by month and by year.
If you can find a profitable system, with a reasonable drawdown, and is very consistent, then that's great. Look at the monthly, quarterly and yearly results to best tell this.
Some people won't mind a slightly higher drawdown and less consistency, if the profitability was much higher. However, others depending on their circumstances and personality may want consistency more than profitability, to an extent. There's a different sweet spot for everybody! What's your sweet spot?
6. How much time do you need to trade the system each day?
Some systems require about 15 minutes a day to trade, and these are usually daily systems. And others need a few hours per day to achieve similar returns.
On a slightly different note, some systems trade the major economic announcements. In these systems of course, you know exactly when you need to be at the computer. Do you want to be a day trader, or do you prefer to trade a short time a day and then focus your day on other businesses?
7. Is the system quite systematic, quite discretionary, or a combination of the two?
A mostly mechanical system is an advantage in that they're teachable and learnable. There's less need to learn discretionary skills that come from real-time paper and live trading, although it's rarer to find systems that are 100% mechanical.
For example, when putting in your support and resistance lines, does the course give you clear rules so that your lines, and therefore your trading decisions will be close to that of the person that's teaching you, or the mentor that developed the system.
Even better, do they have weekly examples of how they draw their lines to fine tune your drawing of these lines?
So when checking out course, keep these points in mind.
And have some practice looking at various strategies for yourself so you get familiar with what's around.
You want a system that was worth learning and trading, not one that causes frustration!
Now you have some tools under your belt to help you properly look at systems.
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