Would you know a good Forex Trading system if you saw one?

When I started in Forex, I wouldn't have known a good Forex trading system if it had walked up and slapped me in the face

. Would you? Many traders I talk to have studied trading for many years, have taken expensive courses on how to trade, spent more money on trading systems, read many books, traded hundreds of hours if not thousands and still lost money.

My first question to them is, "What makes a good trading system?" Most of the time they really don't have a specific answer. They will say something like, I traded Fibonacci Ratios for a while then I tried Elliott Wave, etc. But those are ways that people trade and they don't answer the question of what makes a good trading system.

Let's break this down by asking a few core questions.

When do you trade?

This is important because if you don't trade when there is momentum in the market you will have more problems trading because you will have to build into your trading system the randomness of the market, more than someone that trades in times where more momentum occurs.

What kind of signal makes the most sense?

Let's assume that you trade during the London or New York session when there is both volatility and momentum. You must find a signal that locates a trade in the direction of momentum and after the volatility. This is a tall order because most trading systems don't take into account either of these two variables. Last, the entry signal must be algorithmic, it can't be subjective. If it is then there is a good chance that the direction of the signal will be subjective as well. This is a recipe for disaster.

How is the stop determined?

This is the question that I hear most, where should I put my stop? Most trading systems place there stops arbitrarily to avoid the noise and random movement of the market. This is also a recipe for disaster because it is purely guessing. The only way to know where to place a stop is to determine it through statistical studies of an algorithmic signal. In other words, if I can say based on statistical studies that for this particular trade signal 47% of the trades are successful with a 10% draw down and that the Reward is 7 times greater than the Risk, then I have a reason where to place my stop. All else is guessing.

Is the target specific or subjective?

Before you trade you need to know the projected target, where the trade is going. Without it you cannot predict your position size. So, whether your system gives you an actual price or your system can specify the odds of a certain Reward to Risk as mentioned above, then your system has a weakness.

Are you able to determine the Risk and Reward before you enter?

This is the bottom line. You must know what your RR is before you trade otherwise you cannot know what your maximum position size will be. And without knowing this you are not trading in the most efficient way possible to maximize your profits.

If you are looking for a system that will make your money make sure the system has all of these attributes. If you do you will find that you have a leg up on the competition.

Would you know a good Forex Trading system if you saw one?

By: Paul Dean

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