There are a lot of things to consider when choosing a forex trading system to see if it will be profitable for you or not. Today we will look at the Area 51 Forex system and see if it meets our criteria. Keep in mind, there are usually some that you can throw away right off the bat because they are basically like gambling more than a actual trading method or system.
For example, when a system says you need to change your risk according to if you lost or own the previous trade, just run. This is a system that many gamblers use and it never works. They end up losing one way or another and its never pretty in the end. You should always maintian consistent risk through your trading system, one that never risks too much of your account balance. A good number would be 2% of your total account balance.
One of the most important factors in a trading system is the success or failure of the system’s edge. This is computed by a simple equation.
Edge = (average win x probability of win) – (average loss x probability of loss)
For our example we will take 2 very different trading systems. Lets say one wins at a rate of 80%, but only wins about 40 pips or so each time. On the other side, we have high risk so when it loses it loses large amounts. Lets say it loses 100 pips with loss ratio at 20% of the time. The edge on this would be as follows: (40 x 80%) – (100 x 20%) = 12 pips
But we have a second system that wins big on occasion with a lot of small losses. Lets say we have avg gains of 200 pips with only 20% winners. And we have only 40 pips avg losses on 80% of the time. So our edge looks like this (200 x 20%) – (40 x 80%). It comes to just 12 pips again.
Which would you say is the better system? In regards to investment, they are identical. In this case it is other facgtors that would lead you to pick one over the other. For example, how many trades do you estimate you will make per week? If one system provides more signals than the other, you can end up making profits more quickly over the other. Another thing weighing on your decision is your own peace of mind. Can you handle taking loss after loss? With 80% losers? Most forex traders cannot when starting out.The most important factor in choosing a trading system is edge and should be calculated everytime you test or consider a trading system. Most of the time, you can figure this out from the description of the system or they will actually tell you what the edge is. On the other hand, sometimes this is not possible, so you should test the system on a demo account before risking any real money to see if the system truly works. Testing is always required before starting out with real money on a new system.
Source by Brixton Gunner