Using a currency trading system to make profits from the online Forex markets is now more popular than ever. Powerful personal computers and the Internet have made online currency trading systems an attractive option for all traders.
The money making concept is appealing – buy a system, plug it in and start making profits.
There are some good systems that you can buy, that can generate enough profit to pay for themselves many times over. However, the vast majority of systems are simply not worth paying for – and they’ll actually ensure that you lose money.
There are two main reasons why most currency trading systems lose:
1. Black-Box Systems
These are systems where the logic is not revealed to the buyer.
Even if the system is based on sound logic, the trader must have confidence in it – and for that he needs to understand exactly how and why it works.
If you don’t know the logic of the system, you won’t have the confidence and discipline to continue to follow it when it suffers a period of losses. If you don’t have the discipline to follow it, then you don’t have a system at all!
2. Curve Fitting and Optimization
Another factor to look for in a currency trading system is curve fitting – or optimization.
Whenever you see a hypothetical track record, you need to look and see if it has been curve fitted or optimized – and chances are it has been. These systems always give extraordinary performance in back testing – because the rules have been made to fit the data, and produce profits.
This is similar to shooting at a barn door, and then drawing circles around every hole after the event, to make sure that each shot scored a bull’s-eye.
We can all make a track record look good if we know the past data, but the problem is we don’t have the luxury of trading in the past. This is why most hypothetical track records NEVER show the same results in real time trading, as they did in their hypothetical simulations.
Avoid any system that offers different rules and parameters for trading different markets or different contracts. If the system is based on sound logic, then it should work in any trading market, without optimization or curve fitting.
Here are some tips to help you separate out the systems that are likely to lose, from the ones that could make you big profits:
1. The Methodology is Fully Explained
You can only have confidence in a Forex trading system if you know how it works. Then, when a trading system suffers a string of consecutive losses, you’ll still have the confidence and discipline to follow it until it ultimately makes a profit.
2. A Real Time Track Record
Has the system made money in the real world of trading?
This is a question many traders never ask – they simply accept a hypothetical track record. The trader then thinks they’ll achieve the same results in their FX trading – and they’re surprised when they don’t!
Look for a real time track record over the longer term. It won’t guarantee Forex profits, but it will at least show the system is based on sound logic.
If there’s a hypothetical track record and you want to buy the system, make sure it’s audited in real time with all transaction costs deducted. Many vendors do this to test their systems. While the track record is still classed as hypothetical, the fact it’s traded in real time, can give you an indication of its profit potential for the future.
3. Simple Systems Beat Complicated Systems
There is no correlation between how complicated a system is, and its profit potential. In fact, simple systems tend to work best – as they tend to be more robust in the real world of trading, with fewer elements to break.
Simple systems tend be easy to understand, easy to apply, and more profitable than complicated systems.
4. The Vendor Guarantee
You should research how much support the vendor offers – and a bit about their background. See if the person behind the system is real – and a trader.
Many systems are simply sold by marketing people, who use hypothetical track records – which as we’ve already seen, doesn’t guarantee profits.
Also look for a money back guarantee – this will give you confidence, as you know that the vendor himself has total confidence in his system.
Choosing a currency trading system requires common sense – and the time to do the research. If you do your homework, it’ll be time well spent – and it could help you build long term capital gains with your ideal currency trading system.