Importance of Forex Trading Systems
Trading forex without a tried and tested forex trading system is like going to war without a battle plan, or worse, maybe even without ammunition. Forex trading systems are the lifeblood of any forex investment since it would direct how the investment would prosper.
Therefore, it is extremely important for you, as a forex investor, to learn how to evaluate forex trading systems and to be able to choose correctly which forex trading system would fit you in your quest to profit from forex.
Evaluating Forex Trading Systems
The initial step to be able to properly evaluate forex trading systems is to first establish your trading goals and investment objectives. This shall be the yardstick to which you shall measure every forex trading system that you test. Although some of you might raise your brows and think that isn’t every forex trader’s goal is to achieve profits? This might be true, but it should be pointed out that even if every trader wants profits, the kind of profits, the way the profits are obtained and the speed at which they were achieve may vary from one investor to another. Establish it in a way that you can easily quantify. For example: I want to be able to make at least five trades in one week with a profit target of 1% per trade with a total investment goal of 10% per month. You may also establish the maximum amount of drawdown that you are willing to endure as a measure of your risk factor.
Having done that – establishing your trading goals and investment objectives – it may now be time to introduce how to technically evaluate forex trading systems. The profitability of any forex trading system is one thing; the ease of use and complexity of the forex trading system is another. There are forex trading systems that are ornamented with lots of bells and whistles – a whole barrage of technical indicators and even a few customized indicators just to tell you when to open a trade, and another set to determine how to close a trade. While these technical indicators are tools to help any forex trader make educated decisions with their trading, it should be noted that it does not necessarily mean that the more technical indicators you use, the more accurate the system is. The reverse can actually be more true in fact. Less indicators may actually allow a forex trading system to be quicker and more responsive to market stimulus since it takes fewer factors to make a forex trading decision. Although some would say that fewer indicators would sometimes trigger false breakouts and give false signals, they can be remedied with safeguards in closing profitable positions. The simpler a forex trading system, the easier it would be to find out how to finetune it since there are few factors to tinker with.
Aside from backtesting a forex trading system to have a gauge of its profitability based on historical data, it would be more beneficial to forward test it to monitor exactly how it does in real market situations. And for the test to be more conclusive, try evaluating more that one forex trading system at one time. Maybe forward test three trading systems all at the same time, and see how each one of them reacts to different market conditions. There may be a lot of things to learn from this kind of a testing. For instance, you may find out that one particular forex trading system works extremely well during ranging market situations, while the other one works best with trending markets, and the third one produces most during volatile markets. Based on the results of these forward tests, you may be able to determine which forex trading systems to employ for different types of market environments. Also, evaluate how the results compare when viewed against your objectives.
It may also help you to do some research in the various forex review sites, especially if the forex trading system has already been developed for quite some time. Visit some forex forums and see what other users have to say about the different forex trading systems. They may provide you some valuable info about your forex trading system that you may not easily find out by yourself.
Lastly, in trying to valuate the overall profitability of forex trading systems, the measure that can most help you with this is the system’s profit factor. Profit factor is defined as the value produced by dividing the number of profitable trades by the number of losses generated by the trades. Any trading system with a profit factor of anywhere from 2 to 4 is profitable. The higher value may not always be the better since an extremely high profit factor may sometimes signify that the system is taking too much risks by allowing huge drawdowns and not closing losing trades that have already accumulated significant losses. Evaluate the profits factors of forex trading systems against the trading goals and investment objectives that you established earlier. Do they fit with your objectives?
Never trade without objectives and goals. They are the measures by which you shall evaluate the different forex trading systems. Evaluate objectively. A forex trading system is only as good as the profits that they produce for you. Use those forex trading systems as tools to boost your forex account’s profitability.
