Finding the best forex trading system is essential to becoming a successful currency trader. A trading system is a set of rules that reveal entry and exit points for a currency trade, which are known as ‘signals’. The most common method for determining these signals is by using a chart to visually plot the price data in real time so that a trade can immediately be executed when a signal is found. Without a good trading system it becomes more difficult for a forex trader to find profit opportunities in the currency markets. How can you find a good trading system?
Here are some questions you need to ask before making your final choice.
- How profitable is the system? Of course, the main consideration when choosing the best forex trading system is that it will generate profits for you in the market. You can compare the profitability of various systems by using a cash float size to test them and looking at the profits generated as expressed in pips per month or dollar amounts.
- How consistent is the system is at delivering profits? You can determine this by looking at the results from a particular time frame, i.e. monthly or yearly.
- What is the historical drawdown of the system? You should accept that no system has a perfect winning record and will suffer a run of losing trades occasionally. The loss of trading capital following a run of losing trades is called the drawdown. Drawdown is measured in pips or measured as how much of the cash float used in testing the system is lost (expressed as a percentage). To illustrate, if you trade with $10,000 using a particular system and you lose $3,000 then the drawdown is thirty percent. This also means that you should have $13,000 as your cash float if you start trading with this system in order to cover expected losses.
- What is the system’s win-loss ratio? This ratio measures how many winning trades the system is making vs. losing trades. Obviously, you should pick a system that has a high win-loss ratio if you want to make money in the currency markets.
- Does the system trade on a discretionary or systematic basis? A systematic forex trading system trades on an automatic basis with little to no interference from the trader. On the other hand, a discretionary system requires the trader to set the trading parameters it uses to detect signals. Choosing which the best forex trading system is for you should depend on your trading style as well as the level of experience you have as a trader in the equity markets.
- Does it follow short-term or long-term trends? This decision really depends on your particular trading strategy. There are forex traders who use a scalping strategy and like making a series of short-term trades and generating a series of small profits that add up, and there are those who pursue long-term trends in the hope of earning bigger profits. You can choose the best forex trading system based on the trading strategy you use.