One of the main differences between the professional and the amateur is that every action the professional takes is directed towards achieving clearly defined goals.
I have noticed that, while this may seem simple on the surface, getting this correct requires a fair amount of work… and mistakes are common.
So here are a few pointers.
The base components
Firstly, when you build your Forex trading system you should have at least the following objectives
- Return objective
- Drawdown objective
- Number of trades (opportunities)
- Win rate
- Risk/reward ratio
If you have these in place, you can trade with purpose and discipline, and have strict control over your risk.
Your objectives should be asymmetrical
When trading, as much as possible, you want your risk to be skewed so that your losses are smaller than your winners.
You want to keep your downside limited and with the potential for a much larger upside.
So when you are setting your return and drawdown objectives, you want the maximum drawdown to be much smaller than your targeted return.
For example, if you are targeting 5% a month, then you want to keep you max drawdown to less than 5%. Even better it could be less. In this example, 2.5% might be a good number.
Define what you want your system to be
Instead of looking at an existing system (or your current rules or performance) and trying to understand what it produces, we want to be defining what we would like our system to be.
You are not trying to analyze a system, rather you are creating a vision. It is a subtle but important difference.
You start with the goal first and then you build the system or refine your current system to achieve that goal.
Let’s look at a brief example so you can see how this is beneficial.
If you decide that you want a win rate of 50%:
- You can adjust your exit methodology and the quality filters on your entries so about 50% of trades are winners.
- If, when trading live, you have a win rate of 40%, you can constantly be asking yourself, “what do I need to know/have/do to increase my win rate from 40% to 50%”
This is a very different mentality from having a set of rules that produce X% win rate, and then simply accepting those results.
Start by thinking about what type of system you want to have, and what specific objectives you would like to achieve.
Come up with a starting point
Setting objectives can be hard. The main thing is to come up with a starting point.
You will have an idea in your mind about what type of trader you want to be. For example, do you want to be a long-term trader who trades once a week, or a short-term trader who trades several times a day on the London open for example?
You will also have an idea of the kinds of returns you want to achieve from trading. Are you looking to make 20% a year, 10% a month, or something in between?
You will likely have something in mind about what you want to make. Start with that.
It’s the same with drawdowns. You will have an idea of your risk tolerance. Could you handle a 20% drawdown in order to achieve your goals? What about a 50% drawdown?
I’m not saying it’s going to be easy, but it really is just a matter of having a go and doing what you can. Get something down, which can be refined later. It’s ok, it does not have to be perfect.
It takes some soul searching
Setting objectives correctly can take time. You may need to find a quiet place, sit back, brainstorm and think about what you want to achieve.
It is not a competition either. You will have a different level of background and experience to the next trader, so your objectives will look different.
That is ok. Just do the best you can, and as you learn more, and improve your skills you can revisit and redo.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.
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