There are several FX trading systems on the market as well as free ones available on the web. The difficulty is always a way to know which of them might be profitable, taking into account your own money circumstances and your favorite trading style. For example there is not any point in getting into a scalping system, no matter how much money it has made for someone else, if you panic under stress.
Another kind of system that should be avoided is the kind that compounds the chance according to whether the last trade was profitable or not. No variable risk plan can transform a losing system into a winning one. It is a statistical impossibility. The only way to profit is to find a moneymaking FX trade system.
This means both testing any new forex trading system and researching the results of the test. This is often done by figuring out the system’s edge. Edge is a measure of returns over a period. It’s a straightforward formula that looks like this:
Edge = (chance of win x average win) – (likelihood of loss x average loss)
This is a good way to compare 2 systems that might be very different in practical terms. As an example, let’s take a scalping system that only makes a little average profit on each trade, say 20 pips. The success rate is high with a 80% win rate. However , when it loses, the loss is significant – say thirty pips. The edge of this system is (20 x eighty percent) – (thirty x 20%) = 10 pips.
Another system is set up with a 10 pip stop loss that’s often caused, so that many of the trades lose, say 60% of them. However when it wins, it wins more … Forty pips normally. The edge here is (40 x 40 percent) – (ten x 60%). Again it comes to ten pips.
So these 2 completely different systems have the same edge. Which one is best? The answer depends on the individual trader and their trading style. Many factors will come into play, such as how much time the person has available for trading, how they respond to stress, and whether or not they can psychologically handle a system that makes more losses than wins.
Provided you end up with an edge that’s positive instead of negative, you have a winning system. Knowing this will greatly increase confidence and thus, success. So it is handy to work out the edge of any system that you are testing, and use this to compare FX trade systems that could be completely different in other respects.
