The best forex systems aren’t the ones that win every time, but rather the ones that minimize risk and effectively preserve capital. For it is through capital preservation that a trader can continuously participate in the forex market long enough for them to realize gains. The challenge most newbies face is creating a system that works for them. Here’s a guide to forex trading system – how to create the best.
Elements that Make Up a Good System
Risk management. If a system can manage risk, it is a good system. The most basic example is a trend-riding strategy with a 2 to 1 reward to risk ratio, meaning that for every $1 you risk, you stand to gain $2 back. Risk management is unarguably the most important element in forex trading.
Measurable. A system that can be back- and forward-tested for its future performance has potential. Measure capital drawdown, most effective time frames and currency pairs to trade with, and best TP and SL ranges to set with the system.
Adaptive. When learning forex trading system – how to create the best, understand that the market is constantly moving. It enters into different market cycles and patterns, primarily trending, consolidation, and reversal. Your system must adapt to these changing conditions to be able to consistently capture profits and minimize risk.
How to Build a Good System
Figure out if you’d like to trade with a manual vs automated system. Manual systems require more energy and attention towards the system. Automated models, on the other hand, are more efficient and remove the emotional burden of the business. Of course, each type has its own pros and cons.
Next, use a demo account to measure the system. Demo accounts allow you to trade risk-free and with large amounts of fake capital. This enables you to gauge your system’s performance as rigorously as possible without even risking a dollar of your money. Submit the system to at least 6 months of testing before considering using it for live trading.
Thoroughly analyze the data you capture back from your tests. Observe of patterns that repeat itself and holes that expose your capital to unnecessary risk. After which, make the necessary adjustments. Refining your system is a long-term process that can last for months. The general rule of thumb is, if your system doesn’t make money after 3 years, it’s best to move onto another system.