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Day Trading, Forex or Currencies Back Testing – A Way to Improve Your Trading Score
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You can draw some useful parallels between running a businessand Day Trading, Forex or Currencies trading. For instance, mostsuccessful businesses keep statistics on everything from theirconversion rate, to their average dollar sale, to the number ofpeople that come in the door. Businesses do this to keep on topof how they are doing on a day to day basis and businesses mustfirst take score before begining to improve on that score. Usinga Day Trading, Forex or Currencies back testing plan in yourtrading works exactly the same way.
Now that you`re looking at Day Trading, Forex or Currenciestrading as a business, you need to learn some valuablestatistics about your system so you can improve it`sperformance. You would use a Day Trading, Forex or Currenciesback testing method. You can`t improve your system unless youhave something to measure it against. How could you expect toimprove your trading unless you knew what it was you werelooking to improve? You can discover these measurements andother valuable information about your trading system, by using aDay Trading, Forex or Currencies back testing plan.
There are two ways that you can use a Day Trading, Forex orCurrencies back testing plan to back test a system. You can doit manually, which can be a drawn out and labour intensiveprocess, or you can do it with the aid of some softwarepackages. Unfortunately, I recommend you do it by hand when youfirst start out. You`ll get a much better feel for your system,and you`ll understand exactly how using a Day Trading, Forex orCurrencies back testing plan works in all its intricacies. Onceyou have the Day Trading, Forex or Currencies back testing planand the in depth knowledge, you could look at finding a softwarepackage that does it for you.
There are a few major statistics on your Day Trading, Forex orCurrencies back testing plan that you need that you will uncoverthrough back testing. The first statistic you need to becomefamiliar with is the R multiple principal. R stands for risk,the risk you take on any trade when you enter the market. The Rmultiple of a trade is the ratio of the profit or loss comparedto the amount of money risked to make the profit or loss.
Therefore, if you risk $200 dollars in your initial purchase,and you make a profit of $1,000, you have made five times theamount you risked in the trade. You have an R multiple of five.This statistic gives you a good idea of the relative size ofyour profits to your losses. You can compare the average size ofyour winning trades with the average size of your losing trades.
The next statistic you`ll find useful is your win to loss ratio.This is how many times you get a winning trade in proportion tohow many times you get a losing trade. For example, if you hadten trades, four of those trades were winners, and six werelosers, your win to loss ratio is simply four to six. This isyour hit rate; you`ll get 40% of your trades correct.
With these two simple statistics, you can calculate the averagesize of your profits and of your losses, multiply these figureswith your win to loss ratio, and calculate on average how muchmoney you make with every dollar you risk.
For those of you who think this sounds like a too much work,particularly using a Day Trading, Forex or Currencies backtesting plan that you need to do to uncover these statistics,consider this scenario: Imagine yourself trading a system thatyou knew had a win to loss ratio of 60/40. You made profit onevery six trades and lost one out of every four. How do youthink you would feel, where would your confidence level be,after you traded the system for a little while and you receiveda string of 11 losses in a row?
Now, you know that this system has a win to loss ratio of six tofour. Would you have the confidence to open another trade ifyour system brought up another buy signal after getting 11trades wrong?
Unless you use Day Trading, Forex or Currencies back testingplan to back tested your system, I doubt that your confidencelevel will remain high. That trading system may be a fantasticprofitable system. However, since you didn`t use your DayTrading, Forex or Currencies back testing plan to back test it,you don`t know that historically this system received up to 13losses in a row, but was still profitable.
Here`s another point you may not have picked up unless you usedyour Day Trading, Forex or Currencies back testing plan. Onceyou`ve set your money management rules and you begin to trade,you will likely experience a string of losses. Countless times,I`ve had clients who get disheartened by this fact because theydon`t understand the nature of setting good management. Ifyou`re adhering to the rules of cutting your losses short andletting your profits run, because you`re cutting your lossesshort, those trades are going to last for a shorter amount oftime.
This means once you begin trading the odds of getting lossesearly in the game are much higher than getting a winning trade.This is particularly true when you consider that many successfultrading systems run on a 40/60 win to loss ratio. However, youwill never know the intricacies of your system unless you use aDay Trading, Forex or Currencies back testing plan and back testit.
Using a Day Trading, Forex or Currencies back testing plan, willhelp you to understand what works and what doesn`t. It will giveyou the statistics to gauge the effectiveness of your trades. Itfills in your scorecard, and allows you to make improvements.But, you shouldn`t simply believe everything I`ve told you.Instead, you need to prove it to yourself by using some DayTrading, Forex or Currencies back testing plans and back testyour system.
David Jenyns, leading expert in designing profitable tradingsystems, offers a huge free collection of trading related tipsand tricks. http://forexcurrencytradingsystems.com/index.php
About the author:
READ my articles; you’ll FIND the most powerful insider tradingplans & tips ever put together. Searching for these on your own,is a needle in a haystack (hard to find). I trade everyday & myprogressive efforts found the perfect trading card, a set system& plans that really work. These online trading systems areunbelievably powerful, lucrative, reliable, yet simple to use.Until recently, I’ve kept this formula to myself. NOW, I revealall.
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