Written by Fxautomater Team
How to choose a Forex trading system wisely Many traders don’t spend enough time researching the EAs market. Sadly, the EAs market is flooded with SCAMS – 90% of EAs are sold by marketers instead of traders and developers. Because marketers know how to attract your attention with big words and promises, many people fall into this trap. What should you do? Look at the results, do not listen to words only. Backtests are good, but live results are the only thing that matters. Look for third party verified results – is great for this purpose. Look for a long enough performance record – at least six months or more. Pay attention to the balance curve – if it is completely flat, STAY AWAY – it means that this is a “no-stop-loss” system, “martingale”, or just another reckless system! A healthy EA equity curve looks like a nice market trend – it goes up, but has some corrections/drawdown periods as well. Look at the number of trades – less than 100 trades is not representative enough. As a final step, look around in forums to check up on the reputation of a vendor and its products.

The importance of the Risk Management

The risk management is probably the major aspect of the forex trading.Poor risk management couldmade of a profitable trading system a disastrous one, while a proper risk management could transform a poor trading system in a profitable one. Many people start using default 0.1 standard lot on $200 even $100 accounts. Some experienced traders do this with a clear purpose in mind, but most of the inexperienced traders just don’t realize the level of risk involved. In more than 50% of the cases, such a risk level is equal to account loss, that is, even with a great trading system. So, how to manage risk wisely? – Generally speaking, if you are looking for long-term success, you should not risk more than 5% from the account balance in a single trade, no more than 10% on a daily basis, and no more than 20% on a weekly basis. If the trading system opens multiple trades, you should consider this carefully and reduce the risk per trade accordingly. It is very useful to perform backtests and check the historical drawdown of the trading strategy you use. Let’s say that the historical drawdown in a backtest is 500 pips. Double this number, preparing yourself for a 1000 pips drawdown, and calculate the risk level to avoid losing more than 30-40% of your account in such a case. In the best case you will have a system with three or even more years Real-Money Account,  verified performance with a track record of thousands of trades. In this case, you can get all the stats you need and and make highly objective risk calculations. To optimise your risks/rewards, the rule of thumb is to maintain a 5% risk per trade for one-trade-at-a-time systems and a 0.5-1% risk per trade for multiple-trade systems. Remember – the risk level is a relative concept! A universal, one-size-fits-all risk ratio does not simply exist. While a 5% risk per trade sounds perfectly reasonable to retail traders, this level of risk is considered insane by institutional traders. So, give careful thought to the level of risk you are prepared to handle, taking into consideration the importance of the capital you manage. If the funds you manage are of significant importance to you and/or other people, you should by all means reduce the risk you take accordingly. Main points: Use the leverage that the broker provides you with cautiously! The leverage is more of an enemy than a friend. High-leverage trading is the number one reason for bankruptcies.

The “greed-panic” cycle in trading with EAs One of the biggest enemies of the trader is the human nature. The so called “greed-panic” cycle is a psychological phenomenon which lies at the heart of most failures from the time markets and trading started to exist. It is interesting that this phenomenon is one of the reasons why many people fail to gain profit even when trading with a reliable trading system that is profitable in the long run. One of the biggest advantages of trading with automated trading strategies (EAs) is that our mentality is involved to a limited extent. And yet it plays a certain role. Although we may be able to fight the urge to intervene in trades, it is even harder to resist the “greed-panic” phenomenon and here is why. Many traders start using an EA when it is at its peak performance and the equity curve is skyrocketing. Sadly, this is often the exact moment when a drawdown comes in. Even the greatest trading system has its bad periods and when these occur, many traders just throw the system aside, because they are not committed enough to resist the “greed-panic” cycle. A great example in this respect is one of our best-performing trading strategies, “WallStreet EUR33+GBP30”. The latter is positively a very good system with high long-term profitability and uses very reasonable stop loss levels. On the equity curve, we can pinpoint several clearly defined points which correspond to “greed-panic” cycle points. Many of the system’s users started taking unreasonable risks in point 1 and then dumped the system in point 2 just to witness its quick recovery. As our example demonstrates, up to know, this cycle has occurred once more. Despite all that, the system recovers after each bad period and will keep recovering in the future, because it implements a solid trading logic and uses a proper risk management strategy. So, what can we learn from that? 1.    Do not get overly excited when your trading is showing fantastic results. Keep calm and maintain a reasonable risk level, because the “rocket” mode will not last forever. 2.    Do not panic when your system falls into a bad series. If you have a good and reliable trading system, stick with it – it will recover sooner or later and you will be rewarded for your patience and self-control. 3.    Remember! Risk management is the key to successful trading. Wise risk management is what keeps you in the game!

Extra Tips on the go:

  • Happened to find REALLY good performance results /  myfxbook of an newly released system? Don’t get overexcited and jump blindly into the pool. We advise to wait at least couple of months to see how this new EA does on the live market after the actual release to the market. Ensuring it’s live performance as good as the historical performance provided by the vendor.
  • Performance isn’t everything, we always encourage to read and research online as much as possible to find objective reasons why the EA is good and why the EA is bad. As final compare the cons and pros to make the better judgement about the product before rushing and buying it.
  • Always,  ensure your capital is sufficient to handle the EA’s most extreme demands by requiring this information online from trader’s feedback and from vendor it self. If your capital considered as “high risk” due to being too small for the particular EA, we truly advise look elsewhere for an solution that would suit your capital with an lowest risk possible.