Best Foreign Exchange Trading Systems for Profit
If we take a scalping system that makes a mean of 20 pips on a rewarding trade and loses an average 30 pips on a losing trade, with eighty percent of its trades being worthwhile and only 20% losses, this is the edge for this system:
Edge = (80% x 20 pips) – (20% x 30 pips) = 10 pips
That would be a profitable system and a very good one to use if you were interested in turning into a scalper. Nevertheless you could find a completely different type of system that had results that were quite as good. For example, you may come across a system that worked the opposite way, with a lot of little losses, say sixty percent losses of 10 pips each time, and then some bigger gains, making say 40 pips average profit on successful trades. For this system,
Edge = (40% x 40) – (60% x 10) = 10 pips
So these two completely different systems have precisely the same results, and the decision on which was the best currency trading system for you’d be totally contingent upon your trading style. At the end of the month you could research the theoretical results from a back test over the month to discover how your own results varied from the back tests.
This would give you an idea of how successful you’d be operating that system for real. This could be a useful comparison when selecting the best foreign exchange trading system from a bunch of systems that are lucrative in principle. You.
First let’s cross out some systems that never earn cash for anybody, at least not in the long term. These are the kind of systems that gamblers infrequently call loss recovery systems. They involve varying the chance according to whether the last trade won or lost. The idea is that if your last trade lost, then your next is likelier to win, so you take a larger position. However this idea is completely wrong. Statistical data disprove it every time. Gamblers lose their shirts on these systems and it might be silly for a foreign exchange trader to utilize a system like that. To do that we will introduce the concept of edge.
Edge is the measure of a system’s returns over a period. It’s a straightforward calculation but you do need a reasonable number of results to measure it from. Back testing is a good method to get those results. Edge is just the chance of a win multiplied by the average profit on a winning trade, minus the likelihood of a loss multiplied by the average loss on a loss-making trade. Results are calculated after subtracting the spread and any other per trade costs.
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