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FOREX trading tutorials - How to Evaluate
a Forex Trend
Trading
Strategy
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In this tutorial we will
discuss how to evaluate Forex Trend Trading strategies. Before you
start trading a forex system, you should have a basic idea of what to
expect when trading. Forex trading systems have different
characteristics and always two systems may both be profitable, one
system may suit one type of person more than another. Many people only
look at the winning percentage and the total profit, but there are
other factors that are also very important to consider when evaluating
a forex trading strategy and deciding which one is best for you to
trade.
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Forex
Trading Strategy Evaluation
1. Winning Percentage
This is the first thing that many people look to to evaluate a forex
trading strategy. Although you would naturally feel more comfortable
with a system that has a high winning percentage, a system with a low
winning percentage but a high profit to loss ratio and that has a
higher number of trades will be more profitable. Trend following
strategies will typically have a low winning percentage, but if you
have trading a trend following system, you need to understand that is
the nature of trend following, as you have a number of false signals
until you catch one of the few true signals that mark the beginning of
a profitable trend trade.
2. Profit to Loss Ratio
This is the average profit to average loss ratio. For example if you
have 10 profitable trades, with an average profit of $100 per trade and
20 unprofitable trades with an average loss of $50 per trade, your
profit to loss ratio is 2:1. Obviously the higher the profit to loss
ratio the better. A trend following system should have a high profit to
loss ratio, as it will generate a few highly profitable trades and a
high number of small losses, making the average profitable trade much
higher than the average loss.
3. Number of trades.
This parameter is often overlooked when evaluating a forex trading
strategy. The number of trades is the number of opportunities to make
money trading. If you are comparing two systems, one with a lower
profit to loss ratio and one with a high ratio, but the first one
trades more often, you may prefer the first system, because over the
same period of time, it will generate a higher profit.
4. Maximum Consecutive Losers
It is important to have an idea of how many losing trades there may be
in a row. It is important for two reasons. One is to make sure you have
sufficient capital to sustain a number of losses. Of course with a
sensible risk management and position sizing strategy this should not
be a problem. The more important reason is psychological. It is easy to
look over historical results that have 5, 7 or even 10 losing trades
before a winning trade appears. But, in reality how would that feel?
When would you lose confidence in the system and start to question if
the system has busted. Some people are just not suited to strategy that
have a low winning percentage and a high number of consecutive losses.
5. Maximum Drawdown
This is the maximum amount that the system has moved from a peak in the
equity to the lowest point. It gives you an idea of the minimum capital
requirements to trade the system.
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