Forex trading System Development

Forex trading System Development

Before going head first into trading the Forex market, you may want to consider whether or not your forex trading system is actually based on sound concepts that will make you money over the long term. The most important aspect of your forex trading system should be the century produced. In the span of your trading system will give you an idea of ​​how much you can expect to make over a certain period of time. This is explained below.

While you should aim at producing high-century trading system, also need to consider exactly what your system is composed of. Most traders would agree that your trading system can not only be composed of mainly "behind" technical indicators, but "leading" indicators such as price action and chart patterns.

The math of trading system

The whole point of forex trading system is to give you as much profit as possible while keeping risk to an absolute minimum. To determine whether or not your trading system does this, a few mathematical calculations can be done to determine how your system will make on average over a period of time. This is often referred to as "age" of the system.

To calculate the lifetime of your trading system will need to consider the following:

1st How often is your system correct? 2nd How much profit compared to your losses? 3rd How often are able to trade your system? And 4) What seems to trade?

This is an example taking these factors into account to determine its life. Assuming the following:

1st The system is exactly 70% of the time. 2) On average profits are 2 times the amount you loose (Yes 80 pips, loose 40 - assume spread cost is taken into account). 3) are able to trade 3 times a week.

The formula for calculating the century is: (probability of winning × average win) less (a loss probability × average loss) × able

Using the above values ​​will conclude: (0,70 × 80 pips) minus (0,30 × 40 pips) × 3 = 132 pips. This means you can expect to make on average 132 pips every week.

Combining the leading and lagging indicators

So why are leading indicators in your trading system? Fact is, the leading indicators have more predictive power, and can predict market moves before they happen. Lagging indicators can not do it, but they still can complement other leading indicators. Some well known leading indicators include: pivot points, chart patterns, Fibonacci retracements and candlestick patterns.

Indeed candlesticks are probably one of the most powerful leading indicators, as observed price action itself. Traders around the world found that candlesticks can add an extra dimension to their trading system. The reason for this may be largely contributed to Steve Nison Japanese Candlestick Charting book techniques. Here's a quote from the book:

"If you are an experienced technician, you will discover how joining Japanese candlesticks with other technical tools can create a powerful synergy of techniques."

Of course, there are many different ways you can engage in the use of leading indicators in forex trading system. Here are aimed at giving you a taste of what is possible. We also recommend you check investopedia lesson on how to develop a medium term forex trading system. This lesson also puts forward some interesting concepts that include leading indicators combined with other technical means.

Conclusion

By including the use of leading indicators in your trading system will be able to add the asset to your system that will allow you to catch trends early, and thus make more money. And by understanding the underlying mathematics involved in determining the profitability of trading systems, you should be able to determine whether or not you have a good forex trading system.