Everybody is looking for the perfect forex trading system, but how can you judge which will be the best? It seems that either you have to test it for months using a demo account, or you have to risk real money without really knowing if the system will work for you. Isn’t there a better way?
The problem is often knowing where to start. There are so many possibilities out there. There are free online trading systems, those in books or ebooks that you pay for, and automated forex trading systems in the form of expert advisors and other software or robots. Whatever you plan to use, you should try to ensure that it includes the following three factors.
1. Following a trend
Most of the best forex trading methods will be focused around identifying and following medium to long term trends. This is not the only way of making money with currency trading but for a beginner it is the best way to go because it does not involve you in high stress situations or a big time commitment. You do not have to watch prices all day. You can spend your time on learning more about the market.
2. Simple and clear
If you are just starting out, look for a system that is easy to follow. It does not have to be complex to be profitable. There are many forex indicators but you should not have to check them all for every trade or you will become confused. Three indicators should be fine.
It is also important that the rules are clear and inflexible. There should be no room for doubt about when to place an order, position size, where the stop goes and when to close a profitable trade. It is very important that you have a clear trading plan and that you stick to it. If there are fuzzy edges you will be left to make decisions that will not always work out well.
You should not expect every trade that you place to be a winner. The aim is to have overall profits. This means that a forex trading system must be tested over a period of time, so that you know what results to expect. Then you will not be discouraged when you have a few losing trades.
You can often see published results for a system but you still do need to test for yourself any method that you plan to use and one way is to use back testing. Back testing just means looking at past charts of price movements, applying the system and checking what would have happened. This can be an effective way of testing and of course it is much quicker than watching the prices in a demo account to wait for a trading opportunity to arise. With back testing you can scroll through charts for a whole week in very little time.
Back testing is not a good basis for developing a system, because you may just end up with something that works for the particular set of price movements that you were looking at. However, it is fine for testing a system that is already developed. Just keep in mind that future results will not always follow the same patterns as in the past, and using a forex trading system in real time can be very different from analyzing historical charts.