Best FOREX trading systems

How to determine the best forex trading system(s)?

This is the 1 million dollars question as they say.

This is the first and most important question that you should ask yourself before starting an automated forex strategy. Because anything  else depends on how you make your judgment. Not knowing that this is the main question is a big error.

Very often novice traders or bot buyers will look at the return, the backtest return or the recent out of sample return. These numbers are very often the only thing that people look at.

The truth of the matter is that these are not the correct numbers to consider when evaluating forex trading systems.

Here is a back of the envelop list of some of the elements to make your choice:

  1. Currency diversity: does the system trade one or more currency pairs?
  2. Sharpe ratio: this is a much better statistics than return;
  3. Length of back-test: obviously the longer, the better;
  4. Length of out of sample: the longer the time since release, the better;
  5. General/Specific: is the system designed for specific market conditions?
  6. Drawdown: what is the worse case scenario?
  7. Reputation: who is the designer and what is his knowledge?

Looking at past return of recent returns is the most misleading idea. Past backtested returns are easy to manipulate. Recent returns are too short to have any statistical significance. Additionally leverage can also improve these apparent returns. Curve fitting weights is another way to play with returns.

More serious considerations used to find the best forex trading systems start with the Sharpe ratio. Whatever weakness one can find in the Sharpe ratio, it is without a doubt infinitely more potent than a return, which is just a floating number without an anchor whilst the Sharpe ratio is a return anchored by its  volatility.

The Sharpe ratio is just the beginning of a thorough analysis of any system. Drawdown is a complementary measure which is a conditional type of return, the worse return during the period under review. Stress testing and scenario analysis is a more sophisticated type of analysis.

What is the big difference between a backtested track record and a real money trading record? In the first case, a drawdown seems like the drawing of a  little roller-coaster on a sheet of paper. In the second case it feels like you are sitting NOW in the steepest descending part of a real roller-coaster.

The other elements in the list will help to strengthen your decision. Double up your caution and halve your optimism.  Many people are looking for the best trading system, but few find it. Ask your forex broker if they offer any trading system.

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2 Responses to “Best FOREX trading systems”

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  2. Billy Oong says:

    I am new to all that. Thanks for the overview.
    Bill O.