Escon deOjo's Forex

If we take a scalping system that makes an average of twenty pips on a profitable trade and loses an average 30 pips on a bad trade, with eighty percent of its trades being worthwhile and only twenty percent losses, this is the edge for this system:

Edge = (80% x 20 pips) – (20% x 30 pips) = 10 pips

That’d be a lucrative system and a really good one to use if you had an interest in turning into a scalper. However, you could find a totally different type of system that had results that were just as good. For example, you may come across a system that worked the opposite way, with plenty of small losses, say sixty percent losses of 10 pips each time, and then some bigger gains, making say 40 pips average profit on successful trades. For this system,

Edge = (40% x 40) – (60% x 10) = 10 pips

So these 2 very different systems have exactly the same results, and the decision on which was the best foreign exchange trading system for you would be entirely dependent on your trading style. A good way to test this out is generally to operate both systems in a demo account, say for one month each. At the end of the month you might investigate the unproven results from a back test over the month to find out how your own results sundry from the back tests. This would give you an idea of how successful you would be operating that system for real. Comparing with back test results for a similar period would prevent you from throwing out a system simply because it happened to have a bad month. This may be a handy comparison when choosing the best foreign exchange trading system from numerous systems that are rewarding in principle. You. First let’s cross out some systems that never make money for any person, at least not in the long run. These are the sort of systems that gamblers sometimes call loss recovery systems. They involve varying the chance according to whether the last trade won or lost. The idea is if your last trade lost, then your next is likelier to win, so you take a larger position. Statistical data disprove it each time. Gamblers lose their shirts on these systems and it’d be crazy for a forex trader to employ a system like that. To do that we’re going to introduce the idea of edge.

Edge is the measure of a system’s returns over a period of time. Demo testing is even better because it is nearer to the genuine situation, but it can take a very long time to collect enough results from demo testing so most people use back tests which are faster. Results are worked out after subtracting the spread and any other per trade costs.