Forex Profit Testing In The Profit Lab
One of the major focuses with TradeLikeAnExpert is to prove profitable trading strategies and systems. Forex profit is without a doubt a difficult thing to achieve.
The nature of the trading industry is to fill your inboxes with garbage. If you have any interest in trading I guarantee if you check your SPAM filters, you have 'trading' related junk in there. And all these messages will claim forex profit, stock or some other profits. Lookout for "Binary Options" - the latest of these scam emails.
But there are diamonds in the rough. The problem is it's so difficult to find the wheat amongst the chaff. The old needle in the haystack conundrum. Except that in trading even when you find the needle, it can go rusty after a period of time.
Forex Profit: Isn't Everyone Making Good Profit?
Nope. Not even close. What most new traders are doing is testing one theory, system or strategy. They then find that their chosen tool is not profitable over the short term, and decide to move on. You must avoid this at all costs.
Flip-flopping between trading strategies is the fast track to losing your account.
Many traders will "back-test" these systems and strategies. The vendors make bold claims about their "robustness". The ability for these tools to withstand "draw-down". The supposed fact that their respective systems won't go bust.
I have personal experience with many systems and strategies. I have both managed to double accounts, and blow accounts. And I have been guilty in the past of running short term live tests, then quickly moving on.
Forex Profit: Greed Will Do That To You
Many traders talk about the lack of staying with one system when seeking forex profit. In fact it's common to hear that failure is not due to the system. Failure is due to the lack of sound money management. Failure is also due to the greed that we all experience from time to time. Wanting more, faster.
Failure comes from chasing the market. Looking for better ways to do things before you properly tested the system or strategy you are currently using. Time is also against us all. We need to profit today, not tomorrow, or next month or next year.
Or do we? I often talk about the need to "make it big" most traders have (especially when they start out). Quickly. Or else! And I often draw the comparison to leaving your money in the bank.
Banks rarely go tits-up (that's slang for going 'bust' or becoming 'irreversibly insolvent'). Banks pay a small (but safe) interest rate on money you have in your savings account(s). There is little if any risk involved here. But the return is negligible.
Today, if I was earning 5% per annum on my savings, I'd be doing well. After adjusting for inflation and consumer price increases, it's more like 0 to 1%. But hey, it's risk-free, right?
Forex Profit: Understanding A Little Is A Lot
Question: how much do you need to make? What is an effective rate of return on your money? Consider the risks you are taking trading your money as opposed to leaving it in a bank.
I would consider an effective rate of return and something to aim for is in the vicinity of 30-40% per annum.
This is my personal target with anything I test.
This allows me to say that the system, strategy or tool is an effective vehicle for me to make a return. I must also consider the risks. I must also consider my acceptable level of drawdown. This is compulsory. I do this with any trading vehicle I choose to use to earn forex profit.
As for the maximum drawdown (see definition below) I would be comfortable with? I am OK with 40%. This means I am OK with 40% of my capital at any one time tied up in running losses on my account.
I accept that a drawdown of up to 40% is acceptable.
Without prior independent analysis how can a claim be trusted?
Drawdown: the reduction in account equity from a trade or a series of trades.
Max drawdown: an indicator of the risk of a portfolio chosen based on a certain strategy. It measures the largest single drop from peak to bottom in the value of a portfolio (before a new peak is achieved).
Forex Profit: So Many Vendors...Who Do I Choose?
If you spend anytime at all browsing the internet, you will find "profitable trading strategies". Let's face it, no vendor is going to tell you that their system or strategy is not profitable. After all, how would they make any sales?
There are products that cover every possible trading style. Super short term scalping tools that trade all day every day. Medium term swing trading systems that trade less frequently. Longer term position trading systems that trade infrequently. These are just a few examples.
Some are completely manual. They rely on the trader to be "at their desk" when a signal comes through in order to take the trade.
Others are fully automated. Plug and play. Just setup your broker account, buy the plugin and install it, and away it goes. Win or lose. Roll the dice.
The inherent problem is - how do you actually know that the vendor claims are in fact legitimate? In my experience this is the single hardest factor to prove.
You can certainly place these tools, systems or strategies on a demo account. This will prove that they can make forex profit in a simulated environment. But as you should know by now, demo accounts and live (real money) accounts are very different.
- Demo accounts don't feature the same conditions as a live account
- The spreads are different
- Demo accounts do not requote. Slippage is non-existent in a demo account
- Demo accounts also lack emotional commitment (no real money on the line) which can lead to an unrealistically positive trading environment
- There is no real consequence for not following your trading plan
- The temptation to overtrade a demo account or not bother evaluating risk is tempting
So then you are left with having to place these tools, systems or strategies on live money accounts. Not knowing which ones have a better propensity for forex profit. Risky business. Almost gambling in the hope of forex profit?! Maybe, maybe not. There are a few schools of thought on this one.
And how long do you run these trials for? Do you let them run into oblivion, hoping that they prove profitable? Do you pull your money as the sound of defeat plays? Just in time to save some of the account balance. For what? Another trial?!
It can be soul destroying seeing promises of great forex profit performance only to witness account destruction.
Forex Profit: Welcome to the "Forex Laboratory"
So this brings me to the conclusion. Walking the talk so-to-speak. How else am I going to talk volumes about forex profit, drawdown, max drawdown and risk? Funnily enough in this case, the conclusion is just the beginning.
Enter...the "Forex Laboratory". My own lab for testing all things forex profit and trading related. I'm going to run a handful of methods and strategies. And then I'm going to publicly report on the results.
I'm not going to make any wild promises here. My aim is that over the year in 2018, I can hopefully learn some lessons that are worthwhile sharing. And maybe make a few observations, And perhaps the odd discovery or two. If I can finish 2018 with a profit on my account of >30% I will consider this experiment a wild success!