1. Risk Reward Ratio.
The risk reward ratio of your system should always be 1-2 or more, for example if you are risking $1 then you need to get $2 back or more. If your risk/reward is 1-1 or less then you have to win more than %50 of the time just to break even let alone make any money! However if you raise the risk/reward to 1-2 then you now only need to have 33% winning trades to break even. Are you starting to see how important this is in the long run?
2. Win/Loss Ratio
The win/loss ratio is how many winners you get for every loss on average, this goes hand in hand with risk/reward. You should expect at least 1-1 win/loss ratio or more in a good system. Any less that 1-1 and you would need a higher risk reward ratio to make the system viable.
3. Drawdown.
The drawdown of your system is the number of consecutive losses in a row you will encounter. Hopefully this should not be more than 3 on average. However again if you have a very high risk reward ratio then you would be fine with more losses.
4. Past Performance.
Getting data on past performance of your system is vital to your confidence and your trading account. Knowing that it performed well over the last 10 years would be sufficient.
5. Average Trade Drawdown.
Although this is not vital it helps to know how far a trade will go against you on average before moving into profit, in your testing if you find that your trades retrace often you may find it more profitable to set your entry at the retrace.
You may be thinking "how do I go about finding this information about my system?" well its really simple, you don't need complicated software or anything like that. All you need to do is have your trading system rules in front of you and move forward candle by candle on your chart and make notes of your entries and exits, profits and losses. You will soon see if you system has stood the test of time.
Once you have a trading system that you are confident has passed all the above points then you can feel sure you have the best chance of success trading it. Be sure to stick to your rules and trade the system as you have tested it, now you have a good feel for how your system should perform on average you can soon see if you are making mistakes in other area's.
I hope this article helped you to choose a forex trading system or helped you accessing your current system. If you have any questions don't hesitate to contact me, I will reply as soon as possible.
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