FX Trade Systems That Actually Make Money

There are many FX trade systems on the market as well as free ones available on the internet. The problem is always how to know which ones might be profitable, taking into account your own financial circumstances and your preferred trading style. For example there is no point in getting into a scalping system, no matter how much money it has made for somebody else, if you panic under pressure.

Another type of system that should be avoided is the kind that compounds the risk according to whether the last trade was profitable or not. No variable risk plan can turn a losing system into a winning one. It is a statistical impossibility. The only way to profit is to find a profitable FX trade system.

This means both testing any new forex trading system and analyzing the results of the test. This can be done by calculating the system’s edge. Edge is a measure of returns over time. It is a simple formula that looks like this:

Edge = (probability of win x average win) – (probability of loss x average loss)

This is a good way to compare two systems that might be very different in practical terms. For example, let’s take a scalping system that only makes a small average profit on each trade, say 20 pips. The success rate is high with an 80% win rate. However, when it loses, the loss is significant – say 30 pips. The edge of this system is (20 x 80%) – (30 x 20%) = 10 pips.

Another system is set up with a 10 pip stop loss that is often triggered, so that many of the trades lose, say 60% of them. However when it wins, it wins more … 40 pips on average. The edge here is (40 x 40%) – (10 x 60%). Again it comes to 10 pips.

So these two very different systems have the same edge. Which one is best? The answer depends on the individual trader and their trading style. Many factors will come into play, such as how much time the person has available for trading, how they react to stress, and whether they can psychologically handle a system that makes more losses than wins.

Provided you end up with an edge that is positive rather than negative, you have a winning system. Knowing this can greatly increase confidence and therefore, success. So it is useful to calculate the edge of any system that you are testing, and use this to compare FX trade systems that may be very different in other respects.