Forex Trading System Design 101-Part 1

Love Trading Buy/Sell Arrow Signals? Try This!

This is a bit of a blog post really. I know I have touched on it before in other articles but I cam across a few posts on a fourm yesterday that just got under my skin a bit. Although it was not a forex trading system I think it applies to most trading systems.

The posts were about some form of ‘trading the open’, which as it happens is a trading system type that I believe in. Anyway the issue that got to me was that someon posted something along the lines of (off the top of my head) “ah, -45pt..would have been okay if it were not for the GDP data will look into miving stops up before data”.

Immediately I thought…NO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!.

The simple fact is a forex trading system or any other trading system that is based on mechanically entering and exiting a trade based on price action should not be played with once designed. Natually you should spend some time trying to develop it further but the result will be a different system.

The problem lays in the fact that you will only know in historical testing if your trade was a winner or loser. You won’t know why, what or how it resulted in that win or loss. So suddenly trying to move stops before data, as an example, could completely skew your life trading results.

Imagine you have a forex trading system where you win 30pts when you win and lose 20pt when you lose. Moving up stops before data may save you a loss of 20pts but what about the times you made 30pts from a winner. You start turning those 30pts into zero pointers and your system return will drop dramatically.

Once you a have designed and tested your system you have to trade it as is.

Another point to think about is ‘missing trades’. There have been times when, trading a FTSE breakout, I haven’t been able to get a trade on for one reason or another and missed a winner. If that happens two times in week or so you could suddenly be missing half your monthly profit through missed trades.

When this happens I would advise waiting out that trading period before starting to trade again. That is to say, your trading system trades daily then you could wait until the end of month to start trading again. You will find that a daily trading system should see you profitable most months, bar maybe 1 or 2 a year. So waiting for the end of month before trading again will give you a chance to start afresh with better odds of success.

Also there maybe a string of losses that you would not be trading which will allow you to get back on board should the forex trading system running total drop back by the level of those missed trades. This does happen sometimes.

Either way you have to very careful not to play with such mechanical trading systems. The results you get in testing are based on absolutes. i.e knowing your absolute stop, entry, trade management and thus the resulting P&L. PLaying with any of these will just effect your P&L……and not for the better.

Forex trading system design 101: Part 2

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