Lesson 4: The Simple Truth About Profitable Forex Trading Systems
How can you recognize a good forex trading system from a bad one? What does it look like and how will you know? It’s a minefield out there!
Some forex system sellers try and entice forex traders with statistics like “90% winning system”, as though the high winning percentage makes it better than other forex trading systems. You don’t ever hear traders’ shouting from the rooftops about winning 35% of the time or any other low figures that may scare the living daylights out of an unaware forex trader.
It’s important to realize that a 90% winning system may still be unprofitable, whereas a 35% winning system may be profitable and even more so than a 90% winning system.
When designing your own forex trading system or following the system of another forex trader, it’s important not to get sucked into thinking that a high win rate is the goal. It’s riches we’re after.
It became liberating with less confusion once I realised this and understood the truth about profitable forex trading systems.
Profitable Forex Trading Systems Made Simple
You can only assess your performance over a sample of trades. I like to use 50 or more. It’s a case of the more, the better. The larger the sample, the more accurate the results are likely to be. So while reading further, it should be applied to a large sample of forex trades.
We’re usually happy if we’re profitable, right! Well I certainly am.
Here’s an important graph that simplifies profitable forex trading systems. Above the line the trader is profitable (happy), below the line the trader is unprofitable (unhappy). At the line it’s breakeven territory.
The further your forex trading system plots above and away from the line, the greater is the profitability.
You can clearly see that for a higher sized average win versus average loss (win/loss ratio or reward/risk) on the x-axis you can achieve profitability from a lower winning percentage (win rate) on the y-axis.
So there’s no right and wrong answer with what win rate your forex trading system has, just that in relation to it’s win/loss ratio it’s greater than the minimum for breakeven.
This is liberating news and helps a trader stop searching for some idealistic holy grail. Wow, forex trading profitability is that simple to understand and these are simple metrics we can monitor!
Forex trading profitability is about understanding the relationship between the win rate and the win/loss ratio.
A forex trader’s loss tolerance is unique to them and can change over time as the forex trader is influenced by:
- Different experiences in trading and life;
- Increasing their understanding about forex trading and probabilities and internalising this understanding;
- Having changes to their comfort zone towards taking risks, that are hopefully only to expand it;
- Changes to their monetary commitments that affect their tolerance to risk.
What might seem untradeable because you can’t handle the losses at one stage in your forex trading journey, may be ok for you later on.
A tolerance towards risk and losses is something that’s very personal to each of us. Many traders sell systems that others learn and trade. It can be difficult for a forex trader to stick to the system of another forex trader if it’s not compatible with their own risk appetite.
My Personal Experiences
For myself, early on in my trading I found that I was more comfortable with a higher win probability system that gave me mostly winners. It felt good and the pain of losses was infrequent.
As I developed and became a more experienced trader, I was keen and more comfortable to incorporate high risk to reward systems into my trading that can be highly profitable over the long term.
I found it liberating to learn that there are no wrong answers with the win rate of a forex trading system. Many systems work and that’s great news.
- A systems win rate alone doesn’t determine whether it’s profitable or not.
- It’s important to match a system’s risk profile to your own risk profile for you to have success trading it.
- A trader should work to expand their comfort zone towards risk.
- What risk profile suits a trader may change over time.
- It may be difficult for a trader to trade someone else’s system if the win rate’s not comfortable for them.
- Profitable forex trading systems come in all shapes and sizes.
Forex trading is a journey that changes us. Change takes time and experiences.
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About the Author: I’m Rachel Hunter, TraderRach, a Forex Trader who helps traders achieve the life they love with forex. Be strategic and design your trading business for sustainable success and have fun! That’s my mission. Join many traders’ gaining the edge with “10 Powerful Lessons for Forex Trading Success” plus other goodies. Years of precious learning specially packaged up for you. My background before trading is as a Chartered Accountant and Chief Financial Officer. I know what it takes to make a trading business rock on. It would give me great pleasure to make a difference to your success.