A Winning System

Characteristics of a Winning FX Trading System

Hello Everyone

I would like to take this opportunity to share with you what I feel are the characteristics of a winning FX trading system.

As noted in my previous post a winning system should be making more "pips" then what it is losing, therefore over time you backtesting results and your "pip balance" should be looking something like this:

Diagram 1.0: Profit Balance

This diagram is a visual representation of  the profit potential of the system I am trading if I was to trade that system without error (which of course is very difficult but more about that later). As you can see from this diagram the profit balance (in pips) is 0 as at 31/08/2011. The diagram clearly demonstrates an increase in the profit balance over time. As at 29/08/2012 the profit balance (in pips) stands at 11,119.

From the diagram above, you can clearly see that the sloping line is jagged in nature, meaning that the system I am trading is winning and losing trades all the time, however the fact that the line is upward sloping indicates that we are winning more "pips" then we are losing over time. When backtesting your system you should aim to have your Profit Balance look something like the Diagram 1.0.

Note: The diagram above only demonstrates the profit potential of the trading signals given by my trading system. The actual Profit Balance or the number of pips that will end up in my account from above solely depends on my ability to execute the trading signals given by my trading system with minimal error. However it goes without saying that the greater the profit potential the greater the probability that you will be able to capture some of these sweet pips for yourself.

Furthermore, as mentioned in my previous post a winning system should have a favorable Win/Loss ratio. Here are the backtesting results for my trading system for the period 31/08/2011 to 29/08/2012:

Diagram 1.1: Win/Loss Ratio

From the diagram above, out of the 466 trades made for the period, 251 were winning trades and 216 were losing trades giving us a Winning Ratio of 53.86%.

The general rule of thumb is that the higher this ratio the better. Although 53.86% is not a bad ratio I would have ideally loved for this ratio to be somewhere at 60%.

Finally, in a winning system your average "Wins" must exceed your average "Losses". Here are the backtesting results for my trading system for the period from 31/08/2011 to 29/08/2012:

Diagram 1.2: Average Win v.s. Average Loss

From the diagram above, you can clearly see that the average winning trade (61 pips) is much bigger than the average losing trade (20 pips) when using my trading system.

Diagram 1.3: All Trades

The above diagram is a visual distribution of my winning and losing trades. From above you can clearly see although the losing trades are as frequent as the winning trades, I let my winners run and I cut my losses short giving the averages as detailed in diagram 1.2.

It is these backtesting results that have given me the courage to take a career break and dedicate myself to trading full time over the next 12 months. I am not sure where this road will take me but I do hope it’s on a white sandy beach in the pacific islands next to a bar full of pina coladas :-).

I very much welcome you thoughts on the above.

In my next post i will begin posting and commenting on trades i am taking and the end results.

Stay tuned...

Jovan

The Essentials

"The Essentials" of a winning FX trading system

Hi guys here is what I believe are the "Essentials" of a winning FX trading system, please tell me what you think:

1. Make sure that your system is consistently making more "pips" then what it is losing. No matter how obvious this sounds the fact that some 92% of new traders entering the market wipe out their accounts within the year is testament to how unprepared many traders really are.

2. Less trades and more profits. Your trading system needs to give you the greatest bang for your trade, that is, a trading system that is positive 1000 pips per month with 5 trades is much better than a trading system that is positive 1000 pips per month with 50 trades. More trades means more risk, more admin costs, more time in front of your un-emotional computer screen and greater opportunity for human error.

3. You must have a favorable "Win/Loss" ratio. You need to make sure that your system produces more winning trades then losing trades, that is, out of a 100 trades you make, you need to ensure that the number of winning trades is greater than 50 and the number of losing trades is smaller than 50. When combined with Essential #4 you have a winning system.

4. Your average "Wins" must exceed your average "Losses". If your average wins, let’s say 60 pips per trade, exceeds your average losses, let’s say 20 pips per trade, and your system makes more winning trades then losing trades from Essential #3 then you would have no reason not to make money in the FX market.

5. Your system must only ever risk 2-3% of your capital per trade. That is, without a proper risk management strategy in place you will wipe out your account with bad trades before you even get to warm up your trading chair. By risking only 2-3% of your capital per trade, you are able to absorb a number of losses in a row without doing too much damage to your capital, allowing you to keep trading until you catch that one big win that will make everything better.

6. You must have a profit target. By establishing a profit target you are able to determine other essential details such as, the number of pips required over a defined period of time to achieve your profit target (is your system up to the task?), breakeven levels (how far along are you allowed to deviate from your system before you start losing money), Room for error (how much room for error or slippage you are allowed before you won’t be able to achieve your profit target etc.

I believe that is all for my second post. My next post will detail the backtesting results of my trading system and then I will start posting up and commenting on the trades I am taking and tracking the results of my trades on this blog.

Till next time...

Jovan

Hello World :)!!

This is the part where I introduce myself.......

Hi guys! My name is Jovan and I am a FX day trader (at least I like to think so). I am also many other things, I am a son, a brother,  a  friend, a judoka, an accountant, a kitesurfer, a camper, and I really like cats.

It would be a grouse abuse of your trust for me to say that I am anything more than a beginner at FX trading but in saying that, I have a strong belief that I have backtested my way to a trading system which promises the most important gift any FX trader can hope for and that is Freedoooooom (in the words of Braveheart)!!! Financial Freedom, Location Freedom and Personal Freedom. I have started this blog not to convince you of the virtues of my discoveries; I will let the results speak for themselves, but rather to share my FX journey with you, the ups, the downs, the wins, the losses, the lot!

So I hope you can join me on my FX journey, comment on my posts and help me turn this space into a melting pot of ideas!

In the words of some guy that got really rich doing something... "Whatever you are doing in life make sure it’s profitable"

Cheers

Jovan