Forex trading. For instance, most successful businesses keep
statistics on everything from their conversion rate, to their average
dollar sale, to the number of people that come in the door. Businesses
do this to keep on top of how they are doing on a day-to-day basis and
businesses must first take score before begining to improve on that
score. Using a Forex back testing plan in your trading works exactly
the same way.
Now that you`re looking at Forex trading as a business, you need to
learn some valuable statistics about your system so you can improve
it`s performance. You would use a Forex back testing method. You can`t
improve your system unless you have something to measure it against.
How could you expect to improve your trading unless you knew what it
was you were looking to improve? You can discover these measurements
and other valuable information about your trading system, by using a
Forex back testing plan.
There are two ways that you can use a Forex back testing plan to back
test a system. You can do it manually, which can be a drawn-out and
labour-intensive process, or you can do it with the aid of some
software packages. Unfortunately, I recommend you do it by hand when
you first start out. You`ll get a much better feel for your system,
and you`ll understand exactly how using a Forex back testing plan
works in all its intricacies. Once you have the Forex back testing
plan and the in-depth knowledge, you could look at finding a software
package that does it for you.
There are a few major statistics on your Forex back testing plan that
you need that you will uncover through back testing. The first
statistic you need to become familiar with is the R multiple
principal. R stands for risk, the risk you take on any trade when you
enter the market. The R multiple of a trade is the ratio of the profit
or loss compared to the amount of money risked to make the profit or
loss.
Therefore, if you risk $200 dollars in your initial purchase, and you
make a profit of $1,000, you have made five times the amount you
risked in the trade. You have an R multiple of five. This statistic
gives you a good idea of the relative size of your profits to your
losses. You can compare the average size of your winning trades with
the average size of your losing trades.
The next statistic you`ll find useful is your win to loss ratio. This
is how many times you get a winning trade in proportion to how many
times you get a losing trade. For example, if you had ten trades, four
of those trades were winners, and six were losers, your win to loss
ratio is simply four to six. This is your hit rate; you`ll get 40% of
your trades correct.
With these two simple statistics, you can calculate the average size
of your profits and of your losses, multiply these figures with your
win to loss ratio, and calculate on average how much money you make
with every dollar you risk.
For those of you who think this sounds like a too much work,
particularly using a Forex back testing plan that you need to do to
uncover these statistics, consider this scenario: Imagine yourself
trading a system that you knew had a win to loss ratio of 60/40. You
made profit on every six trades and lost one out of every four. How do
you think you would feel, where would your confidence level be, after
you traded the system for a little while and you received a string of
11 losses in a row?
Now, you know that this system has a win to loss ratio of six to four.
Would you have the confidence to open another trade if your system
brought up another buy signal after getting 11 trades wrong?
Unless you use Forex back testing plan to back tested your system, I
doubt that your confidence level will remain high. That trading system
may be a fantastic profitable system. However, since you didn`t use
your Forex back testing plan to back test it, you don`t know that
historically this system received up to 13 losses in a row, but was
still profitable.
Here`s another point you may not have picked up unless you used your
Forex back testing plan. Once you`ve set your money management rules
and you begin to trade, you will likely experience a string of losses.
Countless times, I`ve had clients who get disheartened by this fact
because they don`t understand the nature of setting good management.
If you`re adhering to the rules of cutting your losses short and
letting your profits run, because you`re cutting your losses short,
those trades are going to last for a shorter amount of time.
This means once you begin trading the odds of getting losses early in
the game are much higher than getting a winning trade. This is
particularly true when you consider that many successful trading
systems run on a 40/60 win to loss ratio. However, you will never know
the intricacies of your system unless you use a Forex back testing
plan and back test it.
Using a Forex back testing plan, will help you to understand what
works and what doesn`t. It will give you the statistics to gauge the
effectiveness of your trades. It fills in your scorecard, and allows
you to make improvements. But, you shouldn`t simply believe everything
I`ve told you. Instead, you need to prove it to yourself by using some
Forex back testing plans and back test your system.
Doubles Real Monetary Deposits In Under 30 Days: http://ivyfxbot.url-site.com/
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