Finding a successful Forex trading system

This article is the first in a series on how to develop a successful trading system and profit from the Forex markets. It is meant for traders of all levels of experience not just beginners.

The first step is to choose a trading strategy. The choice of strategy is critical for success but it is often overlooked. This is unfortunate because it is one of the most important factors in trading successfully.

There are many different strategies available to prospective traders, including mechanical strategies which monitor price action; technical strategies which use technical analysis and fundamental strategies which rely on economic news to generate trading opportunities.

Important things to consider when selecting a strategy are whether it is profitable, whether it suits the traders’ interests and whether it dovetails harmoniously with his or her lifestyle.

Profitability is not necessarily the most important factor for success. Successful implementation is arguably more important. This is because the chances of making a profit are greatly enhanced if the strategy can be implemented correctly. If there is a way of automating execution then that is even better as it will further minimize implementation problems. Human error, slippage, missing trade set-ups and making errors are all risk factors which erode profitability.

There are four factors to consider from the point of view of the individual trader when assessing potential strategies:

  1. Lifestyle
  2. Temperament
  3. Risk tolerance
  4. Preferences

When it comes to lifestyle, the trader needs to decide whether their lifestyle will enable them to  be able to execute each and every trade set-up which occurs for a given strategy. It is better for a trader to take every set-up rather than just a few because if he or she cherry picks a few they may be more of the losers which could affect his or her emotional equilibrium.

It is important to consider whether the trader’s existing daily routine, dependents and responsibilities will adversely impact on their ability to monitor the markets and take action when required. It is best to choose a strategy which fits harmoniously with the trader’s lifestyle rather than try to change the lifestyle in accordance with the strategy as this will likely cause more tension and impact on the trader’s emotional equilibrium.

Temperament is also important and mainly relates to issues around patience. For a strategy to work for a trader it needs to be in harmony with his or her temperament. There is little point in an impatient trader trading a longer-term positional strategy as he will not be able to tolerate all the waiting.

Risk Tolerance is a sub-section of temperament and relates to how much the trader can risk before fear and greed begin to impact on implementation.

There is no point in trading outside of your risk comfort zone, even if you need the money. A trader out of his or her depth is more likely to interfere with an open position before it has reached its target or its stop which interferes with the goal of pristine implementation. If a trader cannot tolerate large trade sizes than he or she may wish to consider widening the number of strategies traded to make up for the lower returns from each trade.

‘Preferences’ relate to how much pleasure and satisfaction the trader gains form the activity of trading. Traders need to enjoy what they do for the activity to be sustainable. This need not mean the pleasure derived from trading – although it usually does – but also that trading fulfils the individual’s needs.  A masochistic spirit may actually actively seek out more challenging strategies but in this rare case such behaviour would be positive as it would be in harmony with that trader’s temperament.

Some examples of trader/strategy issues

Trader A goes on an expensive course and decides to trade the strategy he was told was highly profitable by the course provider. He begins trading this system but soon finds he is not making any money from it. After some analysis he discovers the reason why, is that he is not taking every trade set-up which develops. This is because he gets distracted by his other job. He discovers, moreover that the system is profitable but because of implementation problems he cannot trade it successfully. The problem is that the system requires more vigilance than he has time for; the solution is that he should find a strategy which requires less vigilance.

Trader B learns to trade a long-term position strategy but finds he gets impatient waiting for the set-ups to reach their target so he has a problem of always exiting trades too soon. The strategy has been back-tested and proven profitable but Trader B cannot profitably trade it. In this case the problem is that there is an ill-fit between the trader’s temperament and the requirements of the strategy. The solution is for the trader to find a strategy which is shorter term and enables him to enter and exit trades more quickly. It is quite possible an intraday or short swing strategy might suit him better.

Trader C has a patchy trading record despite using a profitable-on-paper trading system. The problem is that she cannot stop herself interfering with trades before they have reached their predetermined stop or profit levels. This is because she has so much money riding on each trade that she is often tempted to close losing trades too early for fear of losing. She also closes winners out before they have reached their target because she fears they will not reach their targets. After some analysis she realises the root problem is that she is trading too large positions and needs to scale down the position sizes so she can remain in control of herself and let the trades run.


The bottom line when assessing how to trade the markets – what strategy, what timescale, what analysis techniques and what money management, is to be realistic about the long term suitability of the strategy to your individual lifestyle, habit, temperament and risk tolerance.

Traders should aim to be as honest as possible from the start. How much time do they think they will be able to spend studying the markets? What are their likes and dislikes? Do they like trading large amounts or small? Do they mind waiting for their profits or are they impatient by nature? Do they like certain analysis techniques more than others?

The more honest they can be in putting up a mirror to themselves the quicker they will find a strategy they can implement successfully. This is because successful application is being able to follow the paper results as closely as possible.

The first lesson in trading is find a strategy you can live in harmony with because every conflict created by trading and life results in a material loss or a sacrifice. It is up to each individual trader how they wish to construct this payoff, but possibly the best way may be to maximize the gain for the minimum of sacrifice by finding the strategy with the best fit.

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