Believe it or not, choosing a good forex system takes a bit of patience!
Although there are many good forex systems available, there are two things to consider and think about, even before actually trying to choosing one.
The first thing to consider is that some systems perform better than others, simple as that. Some systems have better profitability and lower drawdowns than other systems by far.
And of course there are a few good systems that have similar profitability and drawdown, and are very good in these respects, but differ vastly in the amount of time it takes to trade and the complexity of the system. Again some systems are simpler and take much less time and produces similar, or often much better results.
That is, we want to ultimately find a currency trading system that's profitable enough for us (and this is different for everybody!), that has an acceptable drawdown, and that actually fits into our daily routine!
When any of these 3 factors are not there, we find ourselves not able to, or want to trade the system.
The aim therefore is to choose a forex system based on the following principles we're going to discuss, to ensure that we actually benefit from trading, rather than resulting in frustration.
So by the end of this article, you'll know how to choose a currency trading system that's worth putting in the time and effort in to learn!
When checking out a forex system or training course that you've found, consider closely these following important points:
1. How profitable is the system, as shown as either pips per month, or dollar amounts based on a certain float size?
Commonly, profits are quoted in terms of pips per month. The reason for this, is that it's one way of comparing between systems, despite the fact that people are trading different face values.
What you have to be aware of when looking at the pip profits per month however, is that the face value that's traded 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, if a fixed risk model is used. So the trade sizes used (which is related to the typical stop loss sizes) determines the actual dollar profits that will result from any float.
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 is 60 pips in a second system, 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.
2. What's the maximum drawdown of the system either historically or based on real time trading?
Drawdown may be expressed as pips, or as a percentage of the cash float used when testing the system performance. As an example, if the maximum historical drawdown was $3000 based on a $10 000 cash float, then the drawdown is 30%, expressed as a percentage of cash float.
By the way, the maximum historical drawdown of a trading system is the largest fall in equity that has occurred in the past during backtesting or trading of the system. You can use this drawdown figure to compare between systems, and 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 $13 000 ($10 000 float plus backup of $3000) in the beginning in case a drawdown occurs when you first start trading, not years down the track.
3. What's the "profit-loss" ratio of the system?
This is the average size of winning compared to losing trades.
A high profit loss ratio means a degree or robustness in the system. This figure though should always be looked at together with the "win-loss" ratio of the system, which is the percentage of winning trades compared to losing trades, which we some to next.
4. What's the win loss ratio of the system?
Note that high win-loss ratio for a forex system is a bonus, in that the system may be psychologically easier to trade.
Ultimately though, it's the combination of both the win loss and profit loss ratios 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 system is significantly profitable, not just borderline.
5. How consistent is the system's returns?
The ideal situation is that you can find a highly profitable system that has a reasonable drawdown, and is very consistent.
There's a different sweet spot for everybody. You may accept a slightly higher drawdown and slightly less consistency, if the profitability was significantly higher. However, others may prefer a different combination of the above factors
Look at the monthly, quarterly and yearly results to best tell this.
6. What's the amount of time it takes to trade the system each day?
Believe it or not, some systems take only 15 minutes once a day top trade, while others need a few hours per day to achieve similar returns. Other forex systems on the other hand, trade only during major economic announcements, and thus know in advance when you actually need to be at the computer. This really depends on how much time you have and if you prefer to be a daily trader or a day trader.
7. Is the forex trading system quite systematic, or quite discretionary or a happy medium between the two?
Finding the type of system that suits you is important here. This is where you may have a preference depending on your past experience as a trader. The advantage of mostly mechanical systems that are teachable and learnable, 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.
There's usually some discretion required such as the drawing of support and resistance line, but then there can be clear rules and guidelines on this, so that most people will consider significant resistance at similar points. Note that many systems that are very profitable can't be turned into 100% mechanical systems.
Now that you know these keys to assessing a forex system, go on and have some practice looking at various forex strategies for yourself.
You'll save effort and frustration if you choose a system that was worth learning and trading!
Those who have traded say stocks, CFDs or options will have experienced many of the points above and are in a better position to know what they're looking for.
If you're a beginner to currency trading, then at least you have learnt these important points above, that you can keep in mind from now on when looking at forex systems.
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