Seven Steps To Choosing A Forex Trading System

Are you looking to choose a good forex trading system, one that will be worth your time and effort learning how to trade?

Well, there are a couple of key points to keep clearly in mind, even before you go out hunting for a system to learn.

Firstly, some systems perform better than others in areas such as profitability and drawdown. These are vital.

Secondly, some systems can be taught more easily than others, take less time to trade, as well as suiting your personal daily routine better. You need to ask yourself: Do you want to trade all day long 5 days a week, or trade for 2-3 hours 3 times a week to make the same profit?

So when we're choosing a forex trading system, especially if we haven't had much experience with forex before, we'd want to jump in with some thought and consideration behind it.

We're aiming for this:

We want to find a forex trading system that's profitable enough for us, that has an acceptable drawdown, and that actually fits into our daily routine! If and when any of these 3 factors are not there, we find ourselves not able to continue trading the system.

So continue reading to find out how to choose a forex trading system that's worth putting in the time and effort in to learn!

So here are the 7 power points when checking out a forex trading system or training course that you've found:

1. The profitability of the system.

This is shown as either pips per month, or when assuming a certain float amount, the dollar amounts per month.

These profit figures are often quoted in pips per month, as it's one way of comparing a forex trading system, despite the fact that people are trading different trade sizes.

However, when looking at pip profit figures, just be aware that if you assume a fixed risk model, that the average face value that people will trade 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. But the stop loss distance is not often quoted.

As an example, 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 in the second system is 60 pips, 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.

If on the other hand, we're assuming a fixed dollar risk model, then the amounts you put in will depend on the size of the float.

2. The maximum drawdown either historical or based on real trading.

The maximum historical drawdown of a system is the largest decrease in equity that has happened in the past during backtesting or real time trading of the system.

When comparing drawdown between systems, you can either look at pips, or if using a assumed float, look at the dollar value. Then with this dollar value, express it as a percentage of the cash float used. For example, if the maximum historical drawdown was $6000 based on a $10 000 cash float, then the drawdown is 60%, expressed as a percentage of the cash float.

As well as using this drawdown figure to compare systems, you can also use it to figure out the amount of funds you'd need to start trading the system.

In the example we just mentioned, you'd need at least $16 000 in the beginning ideally, to trade the system. That is $10 000 float plus backup of $6000. This is in case a drawdown occurs when you first start trading, not months or years after you start. It's wise to be prudent and to have backup.

3. What's the win loss ratio of the forex trading system?

The "win-loss" ratio of the system, is the percentage of winning trades compared to losing trades. A high win-loss ratio is a bonus, in that the system may be psychologically easier to trade.

But more ultimately, you need to look at both the win loss and profit loss ratio, which we come to now?

4. The "profit-loss" ratio of the forex trading system.

The "profit-loss" ratio is the average size of winning trades compared to losing trades.

A high ratio means that the system is pretty robust. And this is a strength.

So if the "profit-loss" ratio multiplied by the "win-loss" ratio is greater than one, then you're on the right track, that is, the system is profitable. You'd want this ratio to be 2 or 3 or more, not just bordering on one, which means that the system is profitable with a good edge.

5. The consistency of the system, by month and by year.

If you can find a profitable system, with a reasonable drawdown, and is very consistent, then that's great. Look at the monthly, quarterly and yearly results to best tell this.

Some people won't mind a slightly higher drawdown and less consistency, if the profitability was much higher. However, others depending on their circumstances and personality may want consistency more than profitability, to an extent. There's a different sweet spot for everybody! What's your sweet spot?

6. How much time do you need to trade the system each day?

Some forex trading systems require about 15 minutes a day to trade, and these are usually daily systems. And others need a few hours per day to achieve similar returns.

On a slightly different note, some forex trading systems trade the major economic announcements. In these systems of course, you know exactly when you need to be at the computer. Do you want to be a day trader, or do you prefer to trade a short time a day and then focus your day on other businesses?

7. Is the system quite systematic, quite discretionary, or a combination of the two?

A mostly mechanical system is an advantage in that they're teachable and learnable. There's less need to learn discretionary skills that come from real-time paper and live trading, although it's rarer to find systems that are 100% mechanical.

For example, when putting in your support and resistance lines, does the course give you clear rules so that your lines, and therefore your trading decisions will be close to that of the person that's teaching you, or the mentor that developed the system.

Even better, do they have weekly examples of how they draw their lines to fine tune your drawing of these lines?

Now that you know these keys to assessing a forex trading 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!

So consider the above points when looking at various forex trading system that you're thinking of learning.

If you're a beginner, have patience, as you'll need to learn the basics and then practice assessing a forex trading system for yourself.

If you know what you're looking for, you'll be able to more easily find a forex trading system that suits your daily routine and is profitable, not one that causes frustration!

So have some practice assessing a forex trading system. There may a forex seminar or forex introduction session near you, where you can go and check their system out for yourself.

Mark Hamburg helps you to go from forex trading novice to actually understanding what forex trading strategies are all about. To get more valuable tips, hints and tutorials on successful forex trading, go now to his site on forex online trading to grab your tutorials!

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