Jan 082011
There are a range of factors that go into making profitable forex trading systems, which range from entry and exit signals to risk reward ratios. It’s important to keep in mind that forex trading systems only form a part of your much larger Forex trading strategy. While a system might give you a set of rules to follow for exactly when to enter and exit the market, and can even be made into automated forex trading systems, an entire strategy would include issues such as your risk tolerance and whether you are a day, swing, or trend trader. That being said the following factors are important to consider when building a successful Forex trading system:
1) The system must offer accurate signals for when to enter trades
Most Forex trading systems and especially forex day trading systems are based on technical analysis and involve simply waiting for a series of technical indicators to line up in order to signal the moment to enter the market.
2) Just as importantly, it must be accurate for the timing of market exits
It’s equally important to consider exactly when to exit a trade at the point of profit maximization. An excellent entry can be destroyed by a horrible exit, either by leaving too early and thereby leaving significant profits on the table or holding on too long and allowing all the profits to evaporate, or, worse, turn into losses.
3) The risk reward ratio must be optimized
Any Forex trading system worth its salt must offer reasonable risk reward ratio. It’s important to remember that overall risk and reward is different from the proportion of winning trades. Interestingly, the most successful Forex traders actually lose on the vast majority of their trades, but when they win, they win big, meaning that the actual risk reward of the overall strategy is positive. Most successful strategies are based on taking many small losses while waiting for the few opportunities when huge gains occur.
4) Money management is king
Even if a strategy tells you when to enter and exit accurately most of the time, and has a reasonable risk reward ratio, it’s still easy to blow a Forex account without proper money management. Having strict rules that you are able to follow for exactly when to cut your losses and to let your profits run can allow you to stay in the game long enough to see your account grow rather than blowing it right at the beginning.
Therefore always keep in mind the four critical components of any Forex trading system: entry and exit timing, risk reward ratio, and money management. With even one of these factors missing you will more likely than not lose in the Forex markets. Be especially wary of free forex trading systems and other unproven strategies as well. That’s just the name of the game. With all factors integrated into a strong strategy however, you can greatly increase your chances of beating out your fellow traders.