EFFECTIVE TRADING SYSTEMS
“Knowing when not to trade can be all the edge you need. In their quest for an edge, traders tend to focus solely on finding additional reasons why they should enter a trade. Knowing when to stay out of a trade is equally, if not more important. As an example, let us say that over 100 trades you have 50 winners and 50 losers. You are profiting 50% of the time on your 100 trades. Now if you could find a slight edge that, while not increasing your number of winning trades, does help you to cut down on your losers. Let’s say that this edge reduces your loses by 15 so that you now have just 35 losing trades. Your winners remain at 50. This very slight edge means that you’re now wining on 59% of your trades. This slight edge can provide all a trader needs to find the consistent profitability that they strive to achieve.” — Nick McDonald
There are thousands of trading systems that work. To play the markets, you need a trading system. But you must make sure that the system you’re using fits you. There’s however, no magical system out there – no system is a Holy Grail. You’ll hardly find a system that’s more than roughly 50% hit rate (although some sly marketers promise up to 100% accuracy). Many scalping strategies (otherwise known as high frequency trading) may appear to have between 80% – 95% accuracy, but their usually worse expectancy makes it difficult for them to survive the markets in the long run. Making money 100 times in a row doesn’t mean anything if you lose all these gains in one bad trade. For such systems to survive, losses must never be allowed to run.
No matter which system you use, you’ll survive on the markets as long as you: (1) give yourself a very good risk to reward ratio (2) apply strict risk management (3) discipline yourself to follow your trading rules and plan. If the 3 principles above are ignored, your trading system mayn’t survive the markets. Your trading rules should be effective in filtering out potentially bad trades.
You need to test any strategy whatever on a demo account for a few months before you decide on the suitability of the strategy. Majority of us don’t have the patience to test systems until we’re sure it can survive the markets. Could the reason be that the hoi polloi prefer instant gratification? But this attitude seldom works in trading. We tend to think we know what we’re doing until realties prove us otherwise. We simply like to test systems for only a few days, and then apply them straight to our accounts. Most don’t even test anything before they put their live accounts at risk. They believe what vendors say and go live; only to regret their actions. Yes it’s dangerous to think we know everything; trading is by far successful when we think we know nothing.
But the most important information a beginner needs is how to become a successful trader. Next Friday I’ll tell you the easiest and the fastest way on earth to become a consistently successful trader. It’s one of the most important secrets you’d ever hear in the world of trading. Watch out for the part 3 of this topic!
Please let me conclude this article with 2 quotes from Dr. Van K. Tharp:
1. ‘I consider a mistake when you don’t follow your rules.’’
2. ‘With a terrible system, you still have the chance to meet your objectives through position sizing. When you have a superb system but don’t understand position sizing, you probably won’t meet your objectives.”
Your questions and opinions are highly welcome.
With best regards,
Forex Signals Strategist, Funds Manager &Coach
NB: There is risk of loss in trading, but it is possible to be a successful trader.
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