Would you know a good Forex Trading system if you saw one?
When I started in Forex, I wouldn't have known a good Forex trading system if it had walked up and slapped me in the face. Would you? Many traders I talk to have studied trading for many years, have taken expensive courses on how to trade, spent more money on trading systems, read many books, traded hundreds of hours if not thousands and still lost money.
My first question to them is, "What makes a good trading system?" Most of the time they really don't have a specific answer. They will say something like, I traded Fibonacci Ratios for a while then I tried Elliott Wave, etc. But those are ways that people trade and they don't answer the question of what makes a good trading system.
Let's break this down by asking a few core questions.
When do you trade?
This is important because if you don't trade when there is momentum in the market you will have more problems trading because you will have to build into your trading system the randomness of the market, more than someone that trades in times where more momentum occurs.
What kind of signal makes the most sense?
Let's assume that you trade during the London or New York session when there is both volatility and momentum. You must find a signal that locates a trade in the direction of momentum and after the volatility. This is a tall order because most trading systems don't take into account either of these two variables. Last, the entry signal must be algorithmic, it can't be subjective. If it is then there is a good chance that the direction of the signal will be subjective as well. This is a recipe for disaster.
How is the stop determined?
This is the question that I hear most, where should I put my stop? Most trading systems place there stops arbitrarily to avoid the noise and random movement of the market. This is also a recipe for disaster because it is purely guessing. The only way to know where to place a stop is to determine it through statistical studies of an algorithmic signal. In other words, if I can say based on statistical studies that for this particular trade signal 47% of the trades are successful with a 10% draw down and that the Reward is 7 times greater than the Risk, then I have a reason where to place my stop. All else is guessing.
Is the target specific or subjective?
Before you trade you need to know the projected target, where the trade is going. Without it you cannot predict your position size. So, whether your system gives you an actual price or your system can specify the odds of a certain Reward to Risk as mentioned above, then your system has a weakness.
Are you able to determine the Risk and Reward before you enter?
This is the bottom line. You must know what your RR is before you trade otherwise you cannot know what your maximum position size will be. And without knowing this you are not trading in the most efficient way possible to maximize your profits.
If you are looking for a system that will make your money make sure the system has all of these attributes. If you do you will find that you have a leg up on the competition.
Questions and Answers
When I first started trading Forex I spent hours drawing trend lines trying to figure out what price was going to do. I read everything I could about trend lines but no matter how I drew them or how many I drew, prices never seemed to obey them.
I trade Forex everyday and I teach Forex everyday and the most significant thing that helps losing traders become winning traders is reducing the number of indicators on their charts, learning to trade 4 RSI signals and understanding that a trade without momentum is not a trade.
Can you imagine trading and seldom getting a trade wrong? Can you imagine that it happened at about the same time each day so you didn't have to sit in front of your computer and watch hour after hour? Better yet can you imagine trading and getting the direction of the trade right more often than you got it wrong and that when you entered a trade momentum in the market immediately moved price in the direction of your entry and put you in profit?
What do you know about the indicator or set of indicators that you use when trading Forex? Have you actually made a list of the things that they tell you about what price is going to do? When was the last time you knew with a better than 70% chance that price was going to go in the direction you predicted and you knew why?
Is it possible to trade one hour a day in Forex and make money? Many people who want to trade Forex don't have the time to trade all day or even part of the day. So can you trade one hour a day and make money, perhaps enough money to live on?
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When I first started trading Forex I spent hours drawing trend lines trying to figure out what price was going to do. I read everything I could about trend lines but no matter how I drew them or how many I drew, prices never seemed to obey them.
What do you know about the indicator or set of indicators that you use when trading Forex? Have you actually made a list of the things that they tell you about what price is going to do? When was the last time you knew with a better than 70% chance that price was going to go in the direction you predicted and you knew why?
Not everyone plays baseball that trades Forex but they have a lot in common. To become a good trader in Forex you have to think like a good hitter. Good hitters have a "best" pitch to hit. They also have a pitch that is "almost best" and then it goes down from there.
Depending how you started in Forex and depending on your method of trading, you may have begun to trade live already. But if you haven't traded live and you are wondering when the right time would be, perhaps this article will be of help.
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