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There are so many different trading systems you could
use to trade the forex market, some better suited to
certain people than others. For example some people may
find it easier to comprehend and take into account
fundamental factors as opposed to looking at a screen
covered in technical indicators, and vice-versa.
The first logical step in determining what type of
trading system would best suit you is actually being
aware and understand the widely known methods of
analysis used in trading the currency market. Once you
are aware of the tools that are available, you can
generally tell what type of analysis suits you. For
example some of the main technical analysis methods
which are popular include:
Pivot points
Chart patterns
Candlestick patterns
And some fundamental factors which are widely used
include analyzing:
Interest rates
Trade balances
Unemployment rates
Gross domestic product (GDP)
You may now actually be able to develop your own system
by combining certain methods of analysis together,
giving you a method which you are comfortable with. On
the other hand you may decide that you would like to
trade someone else’s system, either way, that brings us
to the next step which is determining the profitability
of a trading system.
Determining Profitability
Most people would think that back testing is the best
way to determine a systems profitability. However back
testing doesn’t always give you a true idea of how
profitable a system is. The reason for this is because
when you’re back testing your system on historical
charts, you are only seeing the obvious setups which
have occurred, and not always seeing the ones that are
less obvious. These less obvious ones sometimes can
produce losses, which is why back testing isn’t always
the best method to implement.
A better method of determining profitability is by
trading your system in real-time with a demo account.
This would give you a true understanding of what your
system is capable of. This would also allow you to
familiarize yourself with your trading platform at the
same time. When determining profitability you must look
at it in terms of expectancy and opportunity.
Expectancy & Opportunity
These two factors together will be able to tell you what
you could expect to make over a period of time.
Expectancy is calculated with the following formula:
(Probability of winning × average win) – (Probability of
losing × average loss)
This will give you a figure which is the average amount
you can expect to make per trade. This shouldn’t be a
negative amount, if it is you should look at some other
method of trading since you cannot make money on a
system that produces a negative expectancy. Obviously
the higher this figure is the better. Now to the
opportunity factor.
The opportunity factor is how often you are able to
trade using your system. By multiplying your expectancy
figure with your opportunity factor it will tell you how
much you could expect to make over a period of time. The
more opportunity you have to trade, the more money you
should expect to make. This now brings us to the last
component of a trading system, money management.
Money Management
Without proper money management you will end up as a
statistic. In other words one of those 90%+ of traders
who loose their money. Money management tells you how
much of your account balance to risk per trade. The
whole point of money management is to ensure your
survival over the long term, and to preserve your
capital.
The most common form of money management is the percent
risk model which tells you not to risk more than x
percent of your account balance on any one trade. A
range between 1-3% is generally an accepted amount which
has been a reliable percentage to use in order to make
money in the long term.
Conclusion
By taking into consideration the above factors you will
be able to determine if a trading system best suits you,
and with some simple mathematical calculations you will
be able to determine its profitability.
You Can Succeed
Making Money Online
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