iExpertAdvisor iBulletin 38: The Basic Rules of Trading FOREX

                        information and ideas about MetaTrader Expert Advisors

Successfully trading FOREX, or any market, is as simple as 1, 2 … well actually, that’s it, 1 and 2. 

These two basic rules are:

                                         (1) Prove that a trading system is profitable. 
                                         (2) Execute the trading system consistently. 

So if trading FOREX is so easy, what happens to 95% of the traders out there? Although there are no official records kept on the subject, it is commonly accepted that at least 95% of new traders fail within their first year. 

Let’s examine each rule for the potential pitfalls. 

• Rule 1- Prove that a trading system is profitable.

This rule implies that a system has been defined. Many traders use a so-called system, but when asked to describe it in detail, they are at a loss. 

The rules that define the system, or trading strategy, must be well-defined and very specific. 

No elements of the trading decision can be left undefined.  Once the system has been laid out in detail it can be implemented and proven to be profitable. The reckless method to prove profitability is begin trading with real money. The prudent method to prove a system’s profitability is to paper trade the system. That is, manually record the buy and sell signals generated by the trading system. It is important to keep accurate records of each trade’s entry and exit price, as well as the commission, slippage, and swap fees. 

Failing to accurately paper trade is a very common mistake.   The trading system must be tested through various market conditions to ensure its future profitability and to gain the confidence of the trader.  Although many traders do not paper trade their system, it rarely prevents them from proceeding. 

Without reliable statistics about how the system performs, the trader does not know what to expect. After a string of a few losing trades, the  trader will become disillusioned with the system.  Most traders will stop trading the system and move on to the next “flavor of the month” trading system. 

Although a trading system may be profitable in general, it is almost certain that, at some point, the system will sustain losses. This is a fact of life.

• Rule 2 - Execute the trading system consistently. 

In order to realize the long-term profitability of a trading system, the system must be applied consistently – through ups and downs. The only way a normal person could execute a system with steady resolve is if they have performed adequate testing and are confident of the system‘s profitability. But the fact remains – the system must be executed consistently. 

Failing to execute the system consistently invalidates the system’s projected profitability.

• Summary - A mechanical system can help.

The Basic Rules of Trading FOREX are short and simple, but they can be incredibly difficult to follow. An automated mechanical trading system, such as an Expert Advisor, helps a great deal in following the Basic Rules of Trading FOREX. 

Most mechanical trading systems, including MetaTrader, support historical back testing. Also, FOREX brokers offering the MetaTrader platform offer a demonstration mode that provides risk free go-forward testing. And, of course, an automated trading system, or Expert Advisor, always executes the system consistently. These features of MetaTrader make following the Basic Rules of Trading FOREX as easy to follow as possible. 
 

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