We have already gone through the basics points you need to keep in mind when buying or constructing a currency trading system. Here we want to look at the elements that go into making the best currency trading systems.
While the best systems all have differences in the indicators used and their trading styles, they tend to all share common elements that allow their users to achieve long term currency trading success.
First we will look at these common elements and then give some general guidelines if you are considering building your own currency trading system.
Simplicity
The best currency trading systems all tend to be simple.
One of the biggest myths of currency trading system design is the more complex you make it or the more work you put into it the more likely it is to be successful – this is simply not true.
Simple forex trading systems work best, because they tend to be very robust in the face of ever changing brutal market conditions.
Make a system too complex and it will have too many elements to break. Generally a good currency trading system will contain just a few parameters or rules, to generate forex trading signals.
Logic
Most of the best FX systems will use support and resistance and a breakout methodology as a base and look to follow trends - either of an intermediate or long term nature.
They will identify areas of support and resistance and use momentum or leading indicators to confirm trades and execute correct market timing - when support or resistance has been proven to hold or break.
The best currency trading systems tend to react to currency prices and act upon the reality of price change - they do not try and predict the future.
Generally the best systems are trend following and aim to keep losses small and run profitable trends. The ratio of profit per trade against loss per trade varies but is normally at least 3:1.
There is of course a variance here, depending on whether the system is involved in forex swing trading or long term trend following.
Drawdown & Recovery
All the best currency trading systems have these and if they do not, then their simulated or hypothetical track records that have NEVER been traded for real.
The fact is in forex trading, risk goes with reward and drawdown is a natural consequence of taking risk. Even the best trading systems can lose 20 – 30% and have drawdowns of several weeks or months – this is simply the nature of currency exchange markets.
Many trading systems are based upon sound logic but fail because they do not have correct money management. In many instances they try so hard to restrict risk they actually create it.
Money Management
Is critical to the success of any forex trading system and money management does not mean just placing a stop - it means having a money management plan for the whole account.
All the best currency trading systems have well thought out money management rules – the key with any system is play great defence and protect what they have as a first priority.
Objectivity
The best currency trading systems work to a set objective rules to determine the execution of trading signals and exact market timing.
Objectivity and rules mean - anyone can operate the system, if they know the rules.
We see many trading systems which leave so much subjectivity up to the user (good examples are Elliot Wave, cycles etc) that they are not systems at all and success or failure depends on the forex traders judgement.
What Can You Expect In Terms Of Forex Profits?
Without taking excessive risks then we would say that over a 3 – 5 year period, the best currency trading systems can generate compound growth of between around 30 – 50%, with drawdowns in the region of 15 – 25%. If you can find a system that can achieve this, you are will have one of the best currency trading systems.
Building Your Own
While many traders think building their won system and making it part of their forex trading strategy is hard but it’s actually quite simple with today’s online trading platforms and currency trading software.
The points you should keep in mind are:
1. Decide your time frame depending on your trading personality.
2. Use support and resistance and breakout methodology as a good base.
3. Be selective and only trade valid support and resistance.
4. Use a few confirming indicators (such as RSI, stochastic, ADX, MACD etc) to execute your trading signals and confirm your entry points. This will help you keep your trading system robust and avoid curve fitting.
5. Test it on back data going back 5 – 10 years the longer the time frame the better.
6. Make your rules as objective as possible to stop your emotions getting involved.
7. Study standard deviation of price and make sure your stops take into account volatility. Put a stop to close and market noise will stop you out and to far behind and you risk a wipe out of equity. Stop placement and trailing is critical to your forex success.
8. Construct a money management framework for the overall account.
9. When you have done all the above make sure you know you’re “trading edge” This is the factor which will enable you to enter the elite 5% of winning currency traders, who make consistent forex profits.
If you don’t know your trading edge then you don’t have one!
So it’s back to your forex education and building another system.
Final Words…
Get the right currency trading system either from a vendor or if you build one yourself and you can enjoy currency trading success for very little effort and have your own fund management system to build long term wealth for you.
The effort you put into choosing or developing a currency trading system, will be well rewarded in terms of profit - if you choose the best currency systems or maybe you can build one yourself!
While the best systems all have differences in the indicators used and their trading styles, they tend to all share common elements that allow their users to achieve long term currency trading success.
First we will look at these common elements and then give some general guidelines if you are considering building your own currency trading system.
Simplicity
The best currency trading systems all tend to be simple.
One of the biggest myths of currency trading system design is the more complex you make it or the more work you put into it the more likely it is to be successful – this is simply not true.
Simple forex trading systems work best, because they tend to be very robust in the face of ever changing brutal market conditions.
Make a system too complex and it will have too many elements to break. Generally a good currency trading system will contain just a few parameters or rules, to generate forex trading signals.
Logic
Most of the best FX systems will use support and resistance and a breakout methodology as a base and look to follow trends - either of an intermediate or long term nature.
They will identify areas of support and resistance and use momentum or leading indicators to confirm trades and execute correct market timing - when support or resistance has been proven to hold or break.
The best currency trading systems tend to react to currency prices and act upon the reality of price change - they do not try and predict the future.
Generally the best systems are trend following and aim to keep losses small and run profitable trends. The ratio of profit per trade against loss per trade varies but is normally at least 3:1.
There is of course a variance here, depending on whether the system is involved in forex swing trading or long term trend following.
Drawdown & Recovery
All the best currency trading systems have these and if they do not, then their simulated or hypothetical track records that have NEVER been traded for real.
The fact is in forex trading, risk goes with reward and drawdown is a natural consequence of taking risk. Even the best trading systems can lose 20 – 30% and have drawdowns of several weeks or months – this is simply the nature of currency exchange markets.
Many trading systems are based upon sound logic but fail because they do not have correct money management. In many instances they try so hard to restrict risk they actually create it.
Money Management
Is critical to the success of any forex trading system and money management does not mean just placing a stop - it means having a money management plan for the whole account.
All the best currency trading systems have well thought out money management rules – the key with any system is play great defence and protect what they have as a first priority.
Objectivity
The best currency trading systems work to a set objective rules to determine the execution of trading signals and exact market timing.
Objectivity and rules mean - anyone can operate the system, if they know the rules.
We see many trading systems which leave so much subjectivity up to the user (good examples are Elliot Wave, cycles etc) that they are not systems at all and success or failure depends on the forex traders judgement.
What Can You Expect In Terms Of Forex Profits?
Without taking excessive risks then we would say that over a 3 – 5 year period, the best currency trading systems can generate compound growth of between around 30 – 50%, with drawdowns in the region of 15 – 25%. If you can find a system that can achieve this, you are will have one of the best currency trading systems.
Building Your Own
While many traders think building their won system and making it part of their forex trading strategy is hard but it’s actually quite simple with today’s online trading platforms and currency trading software.
The points you should keep in mind are:
1. Decide your time frame depending on your trading personality.
2. Use support and resistance and breakout methodology as a good base.
3. Be selective and only trade valid support and resistance.
4. Use a few confirming indicators (such as RSI, stochastic, ADX, MACD etc) to execute your trading signals and confirm your entry points. This will help you keep your trading system robust and avoid curve fitting.
5. Test it on back data going back 5 – 10 years the longer the time frame the better.
6. Make your rules as objective as possible to stop your emotions getting involved.
7. Study standard deviation of price and make sure your stops take into account volatility. Put a stop to close and market noise will stop you out and to far behind and you risk a wipe out of equity. Stop placement and trailing is critical to your forex success.
8. Construct a money management framework for the overall account.
9. When you have done all the above make sure you know you’re “trading edge” This is the factor which will enable you to enter the elite 5% of winning currency traders, who make consistent forex profits.
If you don’t know your trading edge then you don’t have one!
So it’s back to your forex education and building another system.
Final Words…
Get the right currency trading system either from a vendor or if you build one yourself and you can enjoy currency trading success for very little effort and have your own fund management system to build long term wealth for you.
The effort you put into choosing or developing a currency trading system, will be well rewarded in terms of profit - if you choose the best currency systems or maybe you can build one yourself!
