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Forex Trading System
The forex trading system was first created in the 1970's, and is where the different currencies of the world are freely bought and sold on the market. The system involves trading some of the world's most major currencies. These are the Dollar, Yen, British Pound, Swiss Franc and the Euro. The way the exchange rates of these types of currencies change is based on economic growth, and determined by the forex trading system. As an example, the Dollar was once worth more than the British pound because the United States was in a period of economic growth while Britain was on the decline. This can be because the unemployment rate was declining in the United States, while on the rise in Britain. Another example is of the increasing export rate in Asia raising the value of Yen in comparison to that of Swiss franc where the export rate was down. Economic growth changes daily, so the values of these currencies change daily. You need to learn to watch for these changes in order to make any money in the forex trading system.
One must ultimately try find a forex trading system that is profitable enough (and this is different for everybody!), offers an acceptable drawdown and suitably fits into the daily routine. When any of these 3 factors are not there, we find ourselves not able to trade in the forex trading system.
What must be done is to choose a forex trading system based on some important principles to ensure we actually benefit from trading, rather than causing frustration and lost time.
When looking at a forex trading system, the followings must be considered closely.
Profits are most commonly quoted in pips per month. The reason why this method is popular is that it is one way of comparing between different forex trading systems, though people may be trading different face values.
What you have to be careful of when looking at the pip profits per month, however, is that the face value traded with any given float will depend on the average risk per trade, which in turn depends on the average stop-loss distance for that forex trading system, if a fixed risk model is used. And this determines the dollar profits that will result from any float.
Say you want to trade with a 2% fixed risk model. Suppose the average risk per trade in one forex trading system is 30 pips and 60 pips in a second forex trading system. The average face value would then be twice the size in the first system for any given float. If both of these forex trading systems produce the same average pip profit per trade, say 100 pips, the first forex trading system will, in terms of dollar amounts, produce the higher profit.
This may be expressed as pips, or as a percentage of the cash float used when testing the forex trading system’s performance. For example, if the maximum historical drawdown was $2000 based on a $10,000 cash float, then the drawdown of this forex trading system is 20% (as a percentage of cash float).
The maximum historical drawdown of a forex trading system is the largest decrease in equity that has occurred in the past during back-testing or trading of the system. You can use the drawdown to compare between forex trading systems, but you can also use the drawdown to figure out the amount of funds you'd need to start trading the system.
In the example above, you'd need at least $12,000 in the beginning in case a drawdown occurs when you first start trading, not years down the track.
This is the average size of winning compared to losing trades. A high ratio here signifies a degree or robustness in the forex trading system, but this figure should always be looked at together with the “win-loss” ratio of the forex trading system, which is the percentage of winning trades compared to losing trades.
A high win-loss ratio for a forex trading system is a bonus in that the system may be psychologically easier to trade. Ultimately though, it's the combination of both that counts. That is, if the “profit-loss” ratio multiplied by the “win-loss” ratio is greater than 1, then the system is profitable. Ideally you'd want this ratio to be 2 or 3 or more to ensure that the forex trading system is significantly profitable, not borderline.
If you can find a highly profitable forex trading system that has a reasonable drawdown, and is very consistent, then this is ideal. There's a sweet spot for everybody. You may accept a slightly higher drawdown and slightly less consistency, if the profitability was significantly higher, while others may prefer a different combination of the above. Look at the monthly, quarterly and yearly results to best tell this.
Some forex trading systems take only 15 minutes four times a day, while others need a few hours. Other forex trading systems, however, trade only at certain known times, such as when major economic announcements occur. So you know in advance when you actually need to be at the computer. This ultimately depends on how much time you have.
Now this is where you may have a preference depending on your past experience as a trader. Some traders mostly or fully prefer mechanical systems where there's not much room for discretion. The advantage of mechanical systems is that the analysis may be simpler, and there's less need to learn discretionary skills that come from real-time paper and live trading. However many systems that are very profitable can't be made into a completely mechanical forex trading system. Finding the type that suits you is important here. Some people who are used to trading 100% mechanical stock or CFD systems find they need some adjustment time to get used to these kinds of forex trading systems!
So there you have it. This is some food for thought when looking at a forex trading system and choosing between different ones. If you know what you're looking for, you'll save time and effort later on as you would have chosen a forex trading system that was worth learning and trading!
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Copyright 2006. © Forex Trading System |
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