Forex (FOReign EXchange) Systems
Seat Of Your Pants
You know it’s funny in a sad way, but there are a lot of supposed traders out there who just trade willy-nilly. They think the price is going up they buy.
They don’t have stop or profit target. You wouldn’t really think people do that (unless you’re one of them). However, I know people do that (they’ve told me).
What’s even worse is you can make money doing that (for a while). It’s almost as if the market lures them in before taking their money. I know that’s a cynical view, but it does seem that way.
The only way this “on the fly” system could be profitable is if you used a tight stoploss and ran your profits. Then, even though your entries are random, you’d still catch some trends while holding you’ll losses small. It wouldn’t be an easy system to trade. Have your stomach pill handy.
Which brings me to the crux of this discussion. To have long term success trading forex (or any market for that matter), you need to have an edge. You need to have the odds tipped just a little in your favor. How you do that isn’t important just so long as you really do have an edge.
Another interesting thing I’ve noticed in corresponding with traders is many claim to have an edge, but can’t prove it. If you can’t prove you have an edge, you may have one, but how do you know? If you don’t know, how can you have confidence? If you don’t have confidence, how can you pull the trigger to enter a trade? You can’t. And if you can, then you’re a gambler, not a trader.
There are only two ways to demonstrate that you indeed do have an edge with your system. 1) Have long history of success trading it. 2) Show that it would have been profitable over a significant period of time in the past.
Obviously, number two (backtesting) is the best method.
You Can Do It For Free
There are a number of backtesting programs that you get a hold of. Most are quite expensive. However, there is good news. For forex you get use MetaTrader made by metaquotes.net.
As long as you are willing to learn their programming language MQL 4, you can build and test systems (in MetaTrader called expert advisors) all day long.
But suppose you don’t want to do all that work?
Buy A System
Then purchase a system. On this website, I’ve said this more than once. I’m going to say it again. Never spend more than one thousand dollars on a trading system. If you spend more than that, trust me, you are getting ripped off.
When it comes to evaluating a system, only buy one that allows you to return it if it’s unprofitable. If the creator won’t stand behind his system, then be wary. Also avoid anything promising large triple digit returns. I’m not saying that you can’t achieve it, but those system sellers who make that their main focus are trying to blind you with greed. Once they’ve “blinded” you, they will take your money.
Why People Fail
You got a profitable system. Why aren’t you making money now? There are only two reasons why. 1) Market conditions changed 2) Your discipline isn’t good.
Before you assume number 1 is the problem, rule out number 2.
Are you placing stops where they are to go and then leaving them alone?
Are you placing profit targets where they are to go and then leaving them alone?
Are you entering trades as soon as the entry signal is generated?
Are you exiting exactly when you are supposed to?
If you are following all the rules and you still aren’t profitable (and the system was profitable it backtesting), then it is very possible that market conditions have changed. In that case, it is okay to change systems.