Some beginner Forex traders believe that there is some sort of secret trading system that successful traders use to make profit. There is no secret Fx trading system but there is a secret that makes a system profitable in a long run. I will not discuss here the factors like discipline and trader's mindset. I think they are pretty obvious reasons for trader's success of failure.
What I want to discuss here is what most traders call "the edge" of trading system. It's also called mathematical expectation. You can have a strategy with a positive mathematical expectation then your equity curve will be increasing after many trades. If you happen to trade a system with a negative expectation it will slowly but surely blow your account.
How do you calculate the expectation of your system? First what you should do with any system is back test it on available historical data. The second thing is to test your system paper-trading on a demo account. Let's say you are testing a system that makes 20 pips if the trade is a winner and loses 50 pips if it's a loser. After the test you find that this system wind 80 times out of 100 and looses 20 times. So the expectation of this system is 20*80/100-50*20/100=6 pips. That means this system brings you 6 pips on average on each executed trade. Now if you find that the system wins only 70 times and loses 30 times then expectation is 20*70/100-50*30/100=-1. It loses only one pip per trade on average but it's enough to loose your entire account in a long run.
That's why I always recommend testing any system. Execute it over and over again. Make it a second nature to you. Doing this you will accomplish two things. First you will be able to see the signals of your system more clearly and act upon them immediately. Secondly your practice will also give you necessary data to calculate the expectation of your system. If it is positive after large number of executions then keep trading it. If it is negative then switch it to something else.
I don't know about you but in my experience I met people who trade a system without a slightest idea what the edge of their system is. Even worse some of them trade a system with a negative edge. Don't be one of them. Forward test your trading system over and over again. Keep track of the mathematical expectation of your system it must be positive over a high number of executions.
Albert Schmidt is a part-time currency trader. After quite a long time of struggle he learned to make consistent profit trading in Forex. Review a trading strategy he successfully uses in his trades. |
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