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You know, one of the most important things to think about, when starting to learn forex trading, is how to choose a good forex system.

Why is this so?

Well it’s because we want to trade a system that’s worth the time and effort. Each forex system is different in several important ways (as you’ll find out), so you want to make sure that it is one that you want to trade, before investing time and money (and effort!) into learning the system.

We ultimately want to find and trade a forex system that’s profitable enough for us (and this is different for everybody!), that has an acceptable drawdown (some have very decent drawdowns - this is vital for most of us), and that actually fits into our daily routine (that is, we can actaully trade and not be stressed!)

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When any of these 3 factors are not there, we find ourselves not able to start or continue trading the system.

In the meantime, we could be making money trading forex if we did have a suitable system!

So what we must do, is choose a forex trading system based on some important principles to ensure we actually benefit from trading, rather than causing frustration and lost time.

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By the time you finish this article, you’ll know how to choose a forex system that you can trade, and that’s sure worth putting in the time to learn!

When looking at a forex system, consider closely:

1. The profitability of the system, shown as either pips per month, or dollar amounts based on a certain float size.

Profits are most commonly quoted in pips per month. The reason why this method is popular, is because it is one way of comparing between systems, though people may be trading different face values.

What you have to be careful of when looking at the pip profits per month however, is that the face value that’s traded with any given float will depend on the average risk per trade, which in turn depends on the average stop loss distance for that system, if a fixed risk model is used. And this determines the dollar profits that will result from any float.

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Say you want to trade with a 2% fixed risk model. If the average risk per trade in the first system is say 30 pips, and is 60 pips in a second system, then the average face value would be twice the size in the first system for any given float. If both systems produce the same average pip profit per trade, say 100 pips, the first system will, in terms of dollar amounts, produce the higher profit.

2. The maximum historical drawdown of the system.

This may be expressed as pips, or as a percentage of the cash float used when testing the system performance. For example, if the maximum historical drawdown was $2000 based on a $10 000 cash float, then the drawdown is 20% (as a percentage of cash float).

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The maximum historical drawdown of a system is the largest decrease in equity that has occurred in the past during backtesting or trading of the system. You can use the drawdown to compare between systems, but you can also use the drawdown to figure out the amount of funds you’d need to start trading the system.

In the example above, you’d need at least $12 000 in the beginning in case a drawdown occurs when you first start trading, not years down the track.

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3. The “profit-loss” ratio of the system.

This is the average size of winning compared to losing trades. A high ratio here signifies a degree or robustness in the system, but this figure should always be looked at together with the “win-loss” ratio of the system, which is the percentage of winning trades compared to losing trades.

4. A high win-loss ratio for a forex trading system is a bonus in that the system may be easier psychologically to trade.

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Ultimately though, it’s the combination of both that counts. That is, if the “profit-loss” ratio multiplied by the “win-loss” ratio is greater than 1, then the system is profitable. Ideally you’d want this ratio to be 2 or 3 or more to ensure that the system is significantly profitable, not borderline.

5. The consistency of the system.

If you can find a highly profitable system that has a reasonable drawdown, and is very consistent, then this is ideal. There’s a sweet spot for everybody. You may accept a slightly higher drawdown and slightly less consistenty, if the profitability was significantly higher, while others may prefer a different combination of the above. Look at the monthly, quarterly and yearly results to best tell this.

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6. The amount of time it takes to trade the system per day.

Some systems take only 15 minutes four times day, while others need a few hours. Some forex trading systems on the other hand trade only at certain known times, such as when major economic announcements occur. So you know in advance when you actually need to be at the computer. This ultimately depends on how much time you have.

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7. Is the forex trading system systematic, discretionary, or part-discretionary?

Now this is where you may have a preference depending on your past experience as a trader. Some traders prefer mostly or 100% mechanical systems where there’s not much room for discretion. The advantage of mechanical systems is that the analysis may be simpler, and there’s less need to learn discretionary skills that come from real-time paper and live trading. However many systems that are very profitable can’t be made into completely mechanical systems. Finding the type that suits you is important here. Some people who are used to trading 100% mechanical stock or CFD systems find they need some adjustment time to get used to these kinds of forex systems!

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So there you have it.

The above points should be kept in mind when checking out various forex trading strategies and deciding which one is worth learning.

If you know what you’re looking for, you’ll save time and effort later on as you would have chosen a system that was worth learning and trading! If you’re inexperienced at assessing systems, keep practising, and you’ll soon get an idea of the actual returns and drawdowns that currency trading systems are capable of (without the hype).

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As part of your Forex trading strategy, you must be able to manage the money that you invest in trades and determine when it is advantageous to enter or exit a trade. Most trading strategies are good for determining when a trade should be entered, but not all strategies establish an exit. If your Forex trading strategy does not provide exit points, you will still need some method of determining when to exit.Profit and Loss (P/L) - Forex trading systems provide one of the easiest forms of executing and monitoring profit and loss (P/L) in investments. P/Ls in the spot market are generally measured in decimal units. A calculation of the long and short position for a leveraged currency pair will easily provide you with the amount of profit and the amount of loss.Gains to Losses - You also need a method of predicting the chance of profiting from your trades in order to decide how much money to invest in your Forex trading strategy. By calculating the ratio of gains to losses you will be able to determine if your trades are providing a higher percentage of gains than losses. If your trades are gaining then you need not invest more money into already winning trades.Risks to Reward - Since Forex trading systems involve risk, you need to able to measure the risk taken as compared to reward received. A risk/reward ratio may be determined by dividing a take-profit spread by a corresponding stop-limit spread. No rollover or interest rate differential is required. You are cautioned against allocating more than 10% of your total investment funds into a single trade as either margin or risk. Your Forex trading techniques should include enough funds to allow you to engage in multiple trades. If some trades result in loss, those losses have the potential to be recovered with other winning trades. If half or more of your trades result in loss, you need to analyze and adjust your Forex trading strategy.Limiting Losses - You may limit the amount of loss by adjusting take-profit and stop-limit orders relative to the entry market price. By raising stop-limit orders and lowering take-profit orders, you may reduce loss potential. If prices create adverse results, you may eliminate any further loss by manually liquidating the trade. If price moves are favorable, you may increase your limits. In some instances it may be advantageous to raise the stop-limit order above the market entry price. This guarantees a profit of at least the originally targeted price and at most, the newly established price.If you have taken a long position, you should avoid lowering stop-limit orders and accept a loss or trade a different currency pair. Take-profit orders should only be lowered in long positions if a reversal is anticipated. Otherwise, you should liquidate. If you have taken a short position, you should avoid increasing stop-limit orders and only increase take-profit orders in anticipation of a reversal. Many large losses are due to moving and removing stop-loss orders. The Forex trading strategy for uncertain traders should be to liquidate trades for small losses or small profits rather than hanging around to suffer a greater loss.With most Forex strategies, stop-loss orders are typically placed below and above previous highs or lows. However, you may find it advantageous to set your stops according to market volatility. Using charts of recent currency pairs you should be able to gauge shifts in volatility. This information could then be used to set stops and price objectives. This method may also be used to establish entry points in the market.—Andrew Daigle is the owner and author of many successful websites including ForexBoost, a free Forex educational site to learn Forex trading strategies and a Free Forex Training blog for keeping online Forex trading records.

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