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