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Choosing a Currency Trading System
Posted: 1 March 2008
Choosing a Currency Trading System
What is a currency trading system? A currency trading system is a method that another trader has invented that’s proven to make currency trading a success for anyone, as long you follow the system. You can find a multitude of these systems for sale all over the Internet, so how do you know which ones are actually worth the price tag?
The high-quality ones are gold if you can find them, and can help you make a tidy profit in the forex market – here are some tips to help you separate the good from the bad.
- Search for a currency trading system with a real track record for success. How do you know that a system works? Just follow the money, as the popular saying goes. Research the system and find out what money it has made and through what trades. Although past successes don’t necessarily lead to future profit, a solid track record does offer some accountability.
- If you can’t find a currency trading system with a real track record, it’s sufficient to look at a system’s simulated hypothetical track record. Although these are not as reliable as real records, they may give you an idea of what the system can do for you. Simulated track records are put together with full knowledge of closing prices. This is called back testing – it can work well if executed properly.
- Watch out for curve fitting. There’s nothing stopping a currency trading system from lying about track records and changing the system to match the data after the fact. If you come across a track record with large gains and low drawdown, buyer beware – the vendor is probably dishonest. To avoid systems that fail to tell the truth, view the system rules and stay away from systems you don’t understand. In most cases excellent systems are simple and straightforward. Simple logic works in real time - curve fitted systems don’t have the same success.
You can uncover curve fitting in several ways. Look for systems with a large amount of rules, separate rules for certain trading conditions, and different rules for each currency. Curve fitting is why so many currency trading systems fail.
Some vendors don’t even realize they are changing the system to fit the data as it comes in, but many do so with intent. Of course, the reason is to advertise track records that seem amazing. If it’s too good to be true – it is. Unfortunately, many investors fall into the trap of curve fitting because they are blinded by dollar signs. A currency trading system with a real, proven track record is always the way to go. If you come across a currency trading system that promises you the world, be wary.
It’s not worthwhile to purchase a currency trading system that won’t make you any money. The purpose of getting into the forex market is to make money, not end up broke.
If you want to make money with a currency trading system, you have to be disciplined and understand the logic of the system from the inside out. This is the only way to determine if a currency trading system is something you should buy. A currency trading system that you understand will make it easier to trade even when you seem to be losing because you’ll have knowledge of the basic premise at work.