Day Trade System
You can
draw some useful parallels between running a business and a
day trade system, foreign exchange (FOREX) or
currency trade. For instance, most successful businesses
keep statistics on everything from their conversion rate, to
their average dollar sale, to the number of people that come
in the door. Businesses do this to keep on top of how they
are doing on a day to day basis and businesses must first
take score before beginning to improve on that score. Using
a day trade system, foreign exchange or currency
back-testing plan in your trading works exactly the same
way.
Looking at a day trade system, foreign exchange or currency
trading as a business, you need to learn some valuable
statistics about your system so you can improve its
performance. You would use a day trade system, foreign
exchange or currency back-testing method. You can’t improve
your system unless you have something to measure it against.
How could you expect to improve your trading unless you knew
what it was you were looking to improve? You can discover
these measurements and other valuable information about your
trading system, by using a day trade system, foreign
exchange or currency back-testing plan.
There are two ways that you can use a day trade system,
foreign exchange or currency back-testing plan to back-test
a system. You can do it manually, which can be a drawn out
and labour intensive process, or you can do it with the aid
of some software packages. Unfortunately, it is recommended
that you do it by hand when you first start out. You’ll get
a much better feel for your system, and you’ll understand
exactly how using a day trade system, foreign exchange or
currency back-testing plan works in all its intricacies.
Once you have the day trade system, foreign exchange or
currency back-testing plan and the in depth knowledge, you
could look at finding a software package that does it for
you.
There are a
few major statistics on your day trade system, foreign
exchange or currency back-testing plan that you need and
will uncover through back-testing. The first statistic you
need to become familiar with is the R multiple principal. R
stands for risk, the risk you take on any trade when you
enter the market. The R multiple of a trade is the ratio of
the profit or loss compared to the amount of money risked to
make the profit or loss.
Therefore, if you risk $200 dollars in your initial
purchase, and you make a profit of $1,000, you have made
five times the amount you risked in the trade. You have an R
multiple of five. This statistic gives you a good idea of
the relative size of your profits to your losses. You can
compare the average size of your winning trades with the
average size of your losing trades.
The next statistic you’ll find useful is your win to loss
ratio. This is how many times you get a winning trade in
proportion to how many times you get a losing trade. For
example, if you had ten trades, four of those trades were
winners, and six were losers, your win to loss ratio is
simply four to six. This is your hit rate; you’ll get 40% of
your trades correct.
With these two simple statistics, you can calculate the
average size of your profits and of your losses, multiply
these figures with your win to loss ratio, and calculate on
average how much money you make with every dollar you risk.
For those of you who think that this sounds like too much
work, particularly using a day trade system, foreign
exchange or currency back-testing plan that you need to do
to uncover these statistics, consider this scenario: Imagine
yourself trading a system that you knew had a win to loss
ratio of 60/40. You made profit on every six trades and lost
one out of every four. How do you think you would feel,
where would your confidence level be, after you traded the
system for a little while and you received a string of 11
losses in a row?
Now, you know that this system has a win to loss ratio of
six to four. Would you have the confidence to open another
trade if your system brought up another buy signal after
getting 11 trades wrong?
Unless you use the day trade system, foreign exchange or
currency back-testing plan to back-test your system, it is
doubtful that your confidence level would remain high. That
trading system may be a fantastic profitable system.
However, since you didn’t use your day trade system, foreign
exchange or currency back-testing plan to back-test it, you
wouldn’t have known that this system historically received
up to 13 losses in a row, but was still profitable.
Here’s another point you may not have picked up unless you
used your day trade system, foreign exchange or currency
back-testing plan. Once you’ve set your money management
rules and you begin to trade, you will likely experience a
string of losses. Countless times, there have been clients
who get disheartened by this fact because they don’t
understand the nature of setting good management. If you’re
adhering to the rules of cutting your losses short and
letting your profits run, those trades are going to last for
a shorter amount of time.
This means once you begin trading, the odds of getting
losses early in the game are much higher than getting a
winning trade. This is particularly true when you consider
that many successful trading systems run on a 40/60 win to
loss ratio. However, you will never know the intricacies of
your system unless you use a day trade system, foreign
exchange or currency back-testing plan and back-test it.
Using a day trade system, foreign exchange or
currency back-testing plan, will help you understand what
works and what doesn’t. It will give you the statistics to
gauge the effectiveness of your trades. It fills in your
scorecard, and allows you to make improvements. But, you
shouldn’t simply believe everything said here. Instead, you
need to prove it to yourself by using day trade system,
foreign exchange or currency back-testing plans and
back-test your system.
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