Evaluating a Forex Trading Method

admin — Thu, 03 Sep 2009 20:16:13 +0000

One of the questions I’m often asked is what constitutes a good trading method (or how do I know if a trading method is really worth buying). In this article, I’ll show you what most methods look like (and why they are bad) and show you a simple way to evaluate a trading method.

If you take a close look at most of the so-called Forex trading methods and systems on the market, they consistently share the same shortcomings:

They are incomplete. Too many courses teach hours of ‘in theory’ — but spend little to no time teaching a step-by-step plan to help you trade.
They don’t include risk management. This is the number one mistake most traders make — not managing risk in their trades. If the system or method you’re considering doesn’t teach risk management consistent with their method, you would do well to walk away from it.
They focus strictly on fundamental analysis. Methods that focus only on fundamental analysis are incredibly time consuming and subjective and require much deeper understanding of more complex economic and financial issues. If you don’t understand them, you won’t succeed with such methods.
They require you to “day trade”. Many of the methods and systems I’ve seen require you to be in front of your computer nearly 24/7 to be able to ‘react’. Reality should tell you how impossible this is.

What constitutes a “good” method?

Based on the methods and systems I’ve seen over the last several years, I’ve created a simple 4-part measurement that I use to determine if a trading method is good for me:

The method must be complete and teach the setup conditions, entry rules, initial stop rules and exit strategy rules while leaving no decision to chance.
The method must teach and include specific guidelines for risk management and money management in accordance with its method.
The method must utilize technical analysis, but it cannot be a completely mechanical or automated system.
The method must be practical in terms of time spent applying it: I favor methods that only require 20-40 minutes a day.

The steps above have helped immensely in weeding out the ‘pretenders’ among trading methods and focusing only on the ‘contenders’. Methods which provide thorough explanation of how to apply, protect and trade the methods are the only types you should use in your trading.

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Forex trading: Why most amateur traders fail

admin — Wed, 02 Sep 2009 04:00:26 +0000

One phenomenon that derails amateur Forex traders time and time again is method complexity syndrome. They research a trading method, buy it and the minute they receive it, they jump ahead to what they consider to be “the guts” of the method. In doing so, they completely ignore all of the other aspects of trading, including risk management, discipline, and psychology.

They get into the “guts” of the method only looking for that big, mysterious, slap-your-forehead, jaw-dropping “secret” which will suddenly unlock the mysteries of the Forex universe and make them Master and Commander of every Forex pair. All too often, they find themselves completely disappointed or the “guts” reveal something they’d already heard about (but had not practiced). Amateur traders will then dismiss the method as ‘too simple’.

Or, the amateur trader will look for that complicated formula, cryptic combination of indicators and all too often what they actually discover is a set of simple indicators working together in an uncommon way, and they say, “Well I could have done that!” — and they become disappointed or frustrated, because they wrongly assume that any method MUST BE complex, it can’t possible be SIMPLE! So, they shelve the method or return it and complain that it’s “not complicated” enough.

This is a serious mistake – because the amateur trader will then repeat this error method after method and they will never take the time to learn and understand the full process of trading.

Don’t make this mistake. Understand that most trading methods out there are not complicated. They weave a smaller set of rules together in a simple manner (simple enough that anybody can apply them) but apply them in an uncommon way. Complex systems are for computer geeks and big banks — if you can’t understand something, you can’t possibly apply it.

Never skip ahead when learning a powerful new method for trading Forex. Make certain you learn the setup, entry and exit rules (which should exist in a good trading method); that you learn how to protect your trade with stops; and that you learn how to apply your method on a timely basis (be it hourly, daily or weekly) to get the most out of the method and to learn how all facets of what you learn work cooperatively to make you a better trader.

Remember, Simple but Powerful — using just a few indicators or rules applied in a non-textbook approach — is the key to getting an edge in the markets.

So many forex traders are NOT succeeding? Why? Today I had a conversation with Bill Poulos, I posed...

The Trading Forex Blog » entry and exit rules

Evaluating a Forex Trading Method

Forex trading: Why most amateur traders fail