Forex Trading System And Strategies
With a trading system that you can trade with, you'll be following a system and its results rather than trying it out on your own with no experience or knowledge of forex trading.
With any trading system, there are going to be both wins and losses.
A system has a win-loss ratio (the proportion of winning trades to losing trades). And the profit-loss ratio (the size of the average win to the size of the average loss) may be say x to 1. You can quickly work out, that it is the combination of the win-loss and profit-loss ratios, called the profitability ratio, that tells you if the system is profitable. When multiplied, the profitability ratio should add up to greater than one, ideally much greater than one.
A system with a high win-loss ratio is "psychologically" easier to trade, though as mentioned above, it is ultimately the combination of this and the profit loss ratio that really matters. If a system has both of these parameters are high, then that’s a bonus.
Forex Currency Trading Systems: What You Need To Know
Let’s now have a look at these three questions related to forex systems in more detail:
Many people, especially if they’re new to forex trading, aren’t sure of how to assess forex systems and strategies, or even know what one really is. Once you’re familiar with the information here, it will be a lot easier to evaluate a forex system that’s in front of you.
What exactly is a forex system or strategy?
A forex system or strategy is a specific set of rules designed by a person or persons, that tells you how to trade the forex market. And it should be teachable.
Specifically, forex trading systems will have rules for:
1. What currency pairs are traded by the system.
2. When to enter of a trade, that is, a) what times of the day are traded, b) the precise rules for entering based on price action and indicators.
3. How to determine the exit of a trade, such as a) initial stops, b) trailing stops, c) breakeven stops, and d) target profit stops.
4. How to apply risk management rules to the system.
5. How fundamental events, such as announcements, affect whether you trade, or whether you exit a trade, during those times.
6. Other rules, depending on the system.
Now you may ask whether rules in trading systems are mechanical, or are mostly mechanical with some open to discretion? This depends on the system of course, though most systems will not leave a huge amount open to interpretation, if at all.
If you don’t understand a rule used in the system, because it’s not explained well by the course, then you’ll need to get this sorted out by getting the author to explain more.
Let’s say we understand the system rules. In this case, what we mean by rules being mechanical, is that an indicator either passes the rule or it doesn’t, such as an indicator has closed below zero, or above zero on a specific chart. This is a mechanical rule. Now, there may be systems where the rules are clear and teachable, but may not be necessarily result in “purely” mechanical trading. For example, with support and resistance lines, there will be clear guidelines as how to do it, but you may draw a line that’s a few pips above or below someone else’s.
Having said this, there are systems where such lines is in fact mechanical, because there’s a precise way of drawing it in the system. System trading is getting more mechanical over time, and thus we can all get good results with the same system. This is one of the best features about the newer trading systems.
What you should do after you’ve learnt a system, is to trade the system on a demo account to ensure that:
1. You know how to trade the system correctly, and
2. Asess your results
What to assess
1. What are the historical results, either as pips per month, or as a dollar amount based on a float. For dollar amounts quoted, you can express it as a percentage of the cash float.
2. What is the maximum historical drawdown of the system, as pips or as a percentage of the cash float used. For example, if the maximum historical drawdown was $2000 based on a $10 000 float, then the drawdown is 20%. The maximum historical drawdown is the largest decrease in equity that has occurred in the past during backtesting or trading.
3. What is the win–loss ratio. That is, the percentage of trades that are winners, compared to those that are losers.
4. What is the profit-loss ratio. That is, the size of the average winning trade divided by the size of the average losing trade.
5. How consistent is the system?
Time to trade?
Here’s an area where most traders new to forex are not aware of, or forget to take into consideration.
1. What is the amount of time needed to analyse the market per day?
2. What are the times of the day that you can apply the systems, and does this suit your time zone?
3. Does the system hold positions overnight or are all exited intraday? Some people prefer systems that exit intraday so they can see what is going on with the chart frequently and with no breaks, whereas for others they don’t mind as long as their stop loss is in place.
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