Assessing the Effectiveness of a Forex Trading System

To realize your goal of profitable forex trading, you will need to come up with an effective trading strategy comprised of some basic rules or guidelines that are easily achievable over the long term.  You also need to have a good understanding of the basic principles of money management which can help you to control and minimize the impact of trading losses.

Some forex traders fail to realize that their chosen occupation or avocation can be a tremendously risky one.  It is essential, therefore, that effective money management skills be developed in order to counter-balance the inherent risk of forex trading and help determine a realistic – achievable – risk-to-reward ratio which will serve to limit the drawdown effect.  The development of an effective money management strategy as a statistical tool can help minimize risk exposure while maximizing profit potential.  Inexperienced forex traders will calculate their profit targets yet may neglect an equally important calculation – the protective Stop Loss.

Furthermore, basic money management principles are essential when determining appropriate Stop Loss and Target limit, which should be done for each trade.  You can judge the effectiveness of your trading system by employing readily available historical data to verify estimated expectancy values and win-to-loss ratios.  Done manually, this exercise can be an arduous task, prone to error.  It is recommended that traders consider automating the process by either using reliable forex trading software or coding their strategy.

The conclusion of the exercise will give traders a better understanding of how their trading strategy will generate the desired positive outcome over a period of time, and should the outcome not be as expected, leaves plenty of opportunity for fine-tuning of your trading system.  You will be able to measure not just the capabilities of your system, but the limitations, as well.  And using historical data to test the trading system allows the novice trader to see how an historical loss might be eventually recouped given consistent trading.  That knowledge will fortify them when it comes time to trade in real time.

Trading of any type in any market is inherently unpredictable, and there is no such thing as a “sure thing.”  In the foreign exchange market, that statement is especially true, simply by virtue of the market’s nature, volatility, size and complexity.  At any given time of the day or night, any number of events can occur that will affect the outcome of a currency pair.

Forex trading lesson:  The absolute basic tenets

Each and every day in forex trading, you will learn something new – you may learn about different indicators, pips, leverage, margins, stop placement, etc.  There is always something new to be learned.  But, truly, the most important forex trading lessons are these – the most basic, common sense, forex tenets, which you should learn now and carry with you through all of your forex trading days.

Forex Trading Lesson #1:

In forex trading, accept that not every trade will result in a profit; losses are inevitable.

Forex Trading Lesson #2:

Learn as much as you can about forex trading; never assume that you know everything (because you don’t).

Forex Trading Lesson #3:

Discover your strengths; use them to your advantage.

Forex Trading Lesson #4:

Understand your limitations; learn how to work around them, with them or change them.

Forex Trading Lesson #5:

Don’t be greedy; quit when you’re ahead (and no moving the Take Profit).

Forex Trading Lesson #6:

Never try to recoup your loss by overcompensating on the next trade; deal with it in the same consistent manner as you normally would.

Forex Trading Lesson #7:

Accept that you can’t always accurately predict the future of the market; while you may get lucky once in a while, no one can do it capably 100% of the time.

Forex Trading Lesson #8:

Accept that the market is a fickle beast; first it’s your friend, then it’s not and it only takes a split second for the market to change direction.

Forex Trading Lesson #9:

Don’t move your Stop Loss again and again, in the hope that the market will reverse; you put your Stop Loss in place for a reason.

Forex Trading Lesson #10:

Spread your risk and optimize your chances for successful trades; activate smaller trades, reduce your leverage and trade different currencies.

Forex Trading Lesson #11:

Trade with your head, not with your heart, and, certainly, not with your gut; emotions have no place in forex trading, and instinct isn’t always right.

Forex Trading Lesson #12:

Stick with the good money management strategy you originally created; changes to your strategy should be well-planned and not a result of impulsiveness.