How to Differentiate Good and Bad Trading Strategies

Do you want to become a successful forex trader? You must be able to distinguish between good and bad trading strategies. While the most obvious way to measure success in forex trading is to look at the profits and losses columns for any given strategy, here are few things to consider when choosing a trading strategy.

  • Trading strategies should be personal.

 Because the markets are very volatile and very emotional at times, a lot of traders implement risky trading strategies, and that might not be the best option for you. Therefore, if you’re considering copying someone else’s trading strategy, you should look at the strategy thoroughly and consider the risk management aspect as well to determine if it’s right for you.

  • Be honest 

If you are not comfortable hanging onto a trade in the strategy or placing the trades according to any rules that are part of that strategy, it doesn’t matter whether this strategy has a longer-term profitability expectancy or not. In essence, it will be difficult for you to follow the rules, and you will not achieve optimal results.

  • Understanding expectancy

Expectancy is a word that you should often use, especially when determining whether a trading strategy is good or bad. A trader will understand that the system that they trade has a good chance of making money over the longer-term based upon this figure. Expectancy is figured by taking a calculation to the results to figure out the average profit for each trade place. If it is negative, the strategy is a loser. If it’s positive, then that strategy is a winner. The calculation combines how many trades are typically one with the average loss on losers and the average gain on winners being the formula.

The mathematical formula to calculate expectancy is:

(Win % x Average Win Size) – (Loss % x Average Loss Size)

It gives you an idea of how much you can expect to make per trade.

  • Markets change

One of the things you should keep in mind is that markets change. Sometimes it is the overall trend that changes. Many long-term traders are very hesitant to change a strategy that’s used daily, but realistically speaking, sometimes the situation demands that you do so. That is why you should always be looking for potential changes in the performance of any trading strategy. A perfect strategy will adjust to new market conditions, while a bad strategy might continue to run when it’s not appropriate.

For example, markets may suddenly become quiet for several days in a row, and you need to understand how to trade this. A longer-term trend following strategy is not going to function as well in this scenario. Because of this, most traders will need to have a couple of different systems, but you should recognize that it’s essential to use the right system in the right scenario.

In conclusion

systems are like tools. In other words, you should be able to apply the correct tool for a specific job. I also believe that there is no magic in trading, so you should be cautious about thinking along those lines. Any trading strategy can be good or bad, depending on how and when it is implemented. Keep this in mind.