Monday, August 31, 2009

Currency Trading Systems – Essential Tips For Choosing One

Using a currency trading system to make profits from online forex trading is an option more traders than ever are considering.

Cheaper and more powerful computers and software, combined with the rise of the Internet have made online currency trading systems within reach of all traders.

The theory is simply buy a system, follow signals, sit back and start making regular profits.

The vast majority of systems you can buy are simply not worth paying for - and they’ll actually ensure that you lose money.

Taking some time to choose carefully, is essential to get one of the minority that can and do make big consistent profits.

So why do systems lose lets look at the two main reasons.

1. Curve Fitting Data

Whenever you see a hypothetical track record, you need to see if it has been curve fitted or optimized.

These systems always give extraordinary performance in back testing - because the rules and parameters have been tweaked to fit the data.

This was once described by a trader as shooting at a barn door, and then drawing circles around every hole later, so that each shot scored was a bull’s-eye!

We can all make a track record look good if we know the past data and you never see a hypothetical track record that does not make profits.

However hypothetical track records rarely show the same results in real time.
Clues to an optimized system are those that use, different rules and parameters for trading different markets or different contracts.

If the system is based on sound logic, then it should work in any market, without the need for optimization or curve fitting to fit the data.

1. Black-Box Systems

Most systems that are optimized fall into this category.

The definition of a black box system is one where the logic is not revealed to the buyer.

Even if a forex system is based on sound logic, the trader must have confidence in it to trade it with discipline.

Of course for this, he needs to understand exactly how and why it works.

If you don’t know the logic of the system, you won’t have the confidence and discipline to continue to follow it, when it suffers a period of losses.

Discipline is an essential ingredient of currency trading success.

Here are some tips to help you separate out the systems that are likely to lose, from the ones that could make you big profits:

1. The Methodology is Revealed
You can only have confidence in a Forex trading system if you know how it works.

As you will have the confidence and discipline to follow it until it makes a profit and be able to taking losing periods and remain disciplined.

Discipline is essential to success and comes from confidence

2. Track Record
Has the system made money in the real time and is there a track record for you to look at?

This is a question many traders never bother to ask.

They simply accept a hypothetical track record, which as we have seen is fraught with danger.

A real time track record, won’t guarantee Forex profits, but it will at least show the system is based on sound logic.

If there’s a hypothetical track record and you want to buy the system, make sure it’s audited in real time with all transaction costs deducted.

Many vendors do this to test their systems.

While the track record is still hypothetical, the fact it’s traded in real time, gives you confidence in its ability to perform.

3. Simple Systems Are Best

Simple systems tend to work best - as they tend to be more robust in the real world of trading, with fewer elements to break than complicated ones.

Simple systems tend be easy to understand, easy to apply, and generally more profitable and most of the top systems contrary to popular belief are actually simple.

4. The Vendor
You should research how much support the vendor offers - and a bit about their background – like are they a trader?

Many systems are simply sold by marketing organizations that use hypothetical track records and enticing sales copy – don’t fall for this ploy.

Look for a money back guarantee – this will show the vendor is putting his money where is mouth is and has confidence.

If you do your homework, it could help you find a forex trading system that will help you build long term capital gains and is time well spent.

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