This post was most recently updated on May 15th, 2019
As a new trader, you’re probably really excited about getting into the game, even if you’ve been trading for a while, you’re probably just as excited when you hear about a new system that promises winners and trading profits. In either case, never lose sight of the real objective, never lose focus on the ultimate goal of trading. Trading is about making sound disciplined decisions in buying and selling that leads to profitability, not losses.
Here are a few things a forex trader should always be mindful of when trading the Forex market online.
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A Great Forex Trading System – must have a positive expectancy
An automated Metatrader EA(expert advisor), short-term scalping day trades, swing trading, pattern trading, long-term trading on the weeklies. If I asked you how profitable your system and method is, would you be able to tell me? Is your system a trend trading, trend following system? Is it more geared toward ranging markets? How would your system be expected to perform in those markets that are so di
A simple expectancy calculator is a good tool to start with, here’s one. A number of 1 or higher at least tells you the system you’re trading has potential. Some traders love to see double-digit expectancy which of course would be awesome, however for me personally I’d be just as happy with a single digit number like 3 or 4, especially if its long-term. This measure of a forex trading systems profitability is a great indicator of how well your reward to risk ratio is. In a nutshell, it’s telling you whether based on the winning and losing trades your system makes, whether or not your system is getting more return for what you’re risking. Betting 1 to make 2 is always better than betting 2 to get 1. What I’ve always loved about Metatrader was that the Metatrader reports always included the profit factor metric. This is closely related to expectancy and this number should jump out when you read the results of any system, whether manual or automated. You have to be careful though that a positive number doesn’t automatically mean that, that particular system is a winner. A losing system or a dangerous system that applies a Martingale strategy can have a positive profit factor in even the first 20 trades, so this metric means absolutely nothing in the short term. What really matters is how high the profit factor is , and how consistently high it is over time during different market conditions. Often times a trader or anyone selling a forex trading system will tell you that the system makes 80%-90% winning trades. That really can be misleading, because if that system goes all in, takes big losses on the 20%-10% that it losses you’ll end up with less money than you started with or worse case scenario, you blow your whole online forex trading account. Been there done that. So on the current system, you are trading, trade it during good trending markets when the market starts to the range and your system trades ranging markets trade your system as you normally do, then take a look at your Metatrader report. Look at your profit factor, then look at your drawdown. These are 2 very important pieces of information you have to know.
The next question you’ll ask is obvious: How long should I trade, or demo trade a system before I know this system is profitable and know the profit factor is really giving me an accurate read?
The more data you have, the more trades you make, the more time during different market conditions(trending vs ranging) the more accurate assessment you’ll have. 10 trades I can tell you is not going to cut it. If you know you’re risking more than you’re making per trade, betting 2 to make 1 you have to test your system even longer
A Great Forex System – Should Be Sustainable and Dynamic
Will you be able to trade your system a year from now, how about 2-3 years from now? This is not something we normally may ask as traders, whether we’re new to trading or have been trading for years. Believe it or not, it’s not something you want to overlook and I’ll give you real examples from the trading systems I’ve used for the past 10 years. Remember the carry trade? A few years ago when the US Dollar was rock bottom, you actually could apply a variation of the carry trade in forex where you could profit from the interest rates differential with other currencies. Back then I was buying the Euro and shorting the dollar. For over a year, that trade was solid and consistent, it was a type of hedge trade with very little risk. That trading system would not work today with rock-bottom interest rates, not just for the USD but for many of the major currency pairs. Real life example two is related to the first example. Once upon a time hedging was allowed for US traders and their Forex Brokers, after the 2008 collapse, federal regulators thought that by eliminating hedging in a forex account, that would minimize the risks. How profoundly ridiculous when you really think about it. Back to the point. If your trading system has some nuance that can be changed such that the entire system will no longer work, then the system has to be really scrutinized for its viability. Many great forex trading systems can work in any time frame. Pattern recognition trading and pattern theory trading like Elliot Wave theory come to mind, it can work in any market with very little modification. Even better though than these types of systems is when the forex trading system has sound and solid money management planning built into it, this is the type of system I like to look for.
A Great Forex Trading System – Reads the Trend
One of the most important things I’ve learned in all the years I’ve traded is that if you do not understand and cannot identify a trend, trading becomes that much more difficult. Forex trading already is difficult. I do believe the stats I read when they say that over 80% of traders are losers. I was one for many years, and even today with certain systems I trade, I can still pile up some losses. The worst trades I’ve made where I had the largest losses and largest drawdowns were when I traded against the trade and did not get out when I knew I was trading against the trend.
The trend is one of those concepts in Forex trading that is made so overly complicated, such that the confusion that follows often hurts your trading, not helps it. Yet, identifying a trend is one of the most important aspects of being a consistent and profitable trader long-term in the forex market. Depending on the time frame, for a Bullish market, the prices make higher lows, and higher highs, Bearish, lower highs, and lower lows. Seems so simple when you think about it, yet when a new system is put in front of you, you either don’t really care one way or another about this, or you just trade the opposite direction. Sure, you can still be profitable if you do both these things, but from my experiences, trading against where the market is moving increases your risks. For experienced traders, it may not big as big of a deal, but for new traders and even intermediate traders with some experience, I’d just be very cautious thinking you know better where the market is moving, moreso than the market. At the end of the day. Why make things more difficult for yourself when trading is tough enough?
A few years ago, someone shared a book with me written by an institutional trader. A real trader that trades huge accounts. If you liked to trade with indicators, then you would have loved this system, because it had indicators galore. To me it was just one gigantic mess of a trading chart. I still have the ebook somewhere but i wouldn’t even mention the name or share this book, especially with a new trader. Reading the trend doesn’t always have to be about piling indicators on a chart with clutter and like I’ve mentioned over and over again on this blog, reading the trend is HUGE, but what you do after the trade, and managing the trade after its open is the other half of the equation. Do not think that a simple system cannot be profitable. Just know that anything that helps you read the trend is a good foundation, and if anything, at the very least it’s of some value. A system that tells you where to enter, where you have no clue where the market is going should make you cautious.
Even with Forex trading robots, I trade. I can tell when they make the trades automatically without my involvement whether it’s trading against the trend. Of course, I don’t interfere because that’s the whole point of trading the EA robot, automation. Still, I just don’t let it trade without my supervision, I still keep an eye on the progress. Remember, it’s your money, not the robots, you’re the boss, you’re the Dr. Frankentein 🙂
So these are a few things you may want to keep in mind. Always know that the learning never ends in Forex trading. That to me is what made forex so interesting over the years. You’ll never master it, just improve your skills, and hopefully while they improve, you grow in consistency and profitability. Trade safe and have fun.