Forex Trading Systems That Work

I get many questions on what Forex systems work best. In the beginning of my trading career I was looking for a best trading system. After some time I found that the system itself is not the most important thing for profitable trading. I cannot stress strong enough that it's a trader's mindset that makes him a successful trader. The second important thing you need to have is a sound money management system. Only when one resolves the issues with his mindsets then Fx trading systems start to make a difference.

There are different types of trading systems that work for different styles of trading. Fore me the most important characteristic of a trading system is mathematical expectation. Mathematical expectation shows you how much of the risked capital you will earn per trade. There is a simple formula to calculate it for a trading system. All you need to know win-to-loss ratio and risk-to-profit ratio. Expectation should be positive. If it's negative no matter how good a single trade may go, you will loose your account in a long run. And it is not how much it's negative is important. As long as it's negative it will continue to drain your account.

How you know if expectation of your system is positive or negative? The only way to find out is to back test your system first then forward test for some time. If you take 100 trades with your system on a demo account you will have a good idea about what the mathematical expectation it has. If it is positive then all you need is patience to execute your system over and over again and your account will grow gradually. On the other hand if you get negative expectation then switch the system. No matter how huge profit it can give in a single trade overall result will be detrimental to your account.

Just to give you an example let's calculate an expectation of some system. Say you have a system with take-profit of 40 pips and stop-loss of 30 pips. You found that this system wins fifty times out of hundred based on your forward test. So the mathematical expectation of this system is 40*5/100-30*5/100=5 pips. This number gives you and average estimate of your profit per trade. Your equity curve with this system will grow as if you were averaging 5 pips in each trade.

Now let's take a system that have the same profit and loss that are 40 pips and 30 pips. You found through back testing and paper trading that you loose 58 times out of hundred trades. That means mathematical expectation is 40*0.42-30*0.58=-0.6 pip. You lose less than a pip per trade but half a pip is enough to empty your account in a long run.

The bottom line is you need to thoroughly test your system and know exactly what the win to loss ratio of the system is. It amazes me when people know what their profit target and stop loss levels are but fail to find out the win-to-loss ratio of the system. It is not surprising to see most of them fail in trading.