Forex Trading System Design 101-Part 2

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Just another quick ‘tip’ for when you are designing your forex trading system.

It is important when you design your trading system that you understand results you are getting from backtesting or even forward testing properly.

There seems to be a current trend to just look at the bottom line and not how you got to that bottom line figure. Obviously if the system is profitable it is profitable but there are other considerations to take into account.

You need to think about drawdowns obviously, but you also need to understand the pyschological effects of a string or losses. You ideally want a smooth equity curve. It will make you more confident in your trading system. Also smoother equity curves will make for a more consistant, predictable trading system.

So when you are doing your spreadsheets, working out the P&L for you trading system. Make sure you have an accurate accumulation column so you can plot a nice equity curve. What you do with it and what importance you read into it is up to you.

If you are look at other peoples forex trading systems it is important to check out their equity curve.eq You will see this example equity curve for a trading system. The problem I want to highlight with these systems is clearly seen in this image. You can see how the line rises quite steeply initially and then flattens out. This is most likely because the steep part of the curve is what the the system was based on and backtested on. Then the shallower section represents the forward “testing” or trading of the system.

It is very hard to not optimize a trading system when designing it. But a decent collection of data and an equity curve will allow you to spot a system that won’t work as well going forward as it did in backtesting.

Forex trading system design 101: Part 1

2 Responses

  1. R6 lady says:

    Why jesus allows this sort of thing to continue is a mystery.

    Sent via Blackberry

  2. Jason says:

    Probably because Jesus was a trader:-)

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