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How to Select the Best Forex Trading Strategies

With the ever-increasing popularity of Forex trading there seems to be a huge increase in the number of Forex trading strategies as well. A simple definition of a Forex trading strategy is that it is a set of rules designed to trade in the Forex market profitably. Today’s strategies typically come in the form of a software package that can either alert the trader to place to trade or in some cases to automatically place the trade for them.

For those who do not wish to create their own strategy in which to purchase or lease one is extremely important that you know the basics of evaluating a strategy first. Here are some of the basics that will definitely point you in the right direction.

Money required — you’ll need to know the amount of money required for the trading system to operate properly. There may be certain strategies which only function properly with a $100,000 account. Those trading with account sizes and the $5,000 area would certainly not want to use this system. Avoid any Forex strategy which doesn’t tell you how much money you will need to start.

Percentage of account risked per trade — the total amount of your account risked per trade is extremely important. If you happen to be looking at a Forex strategy that risks 50% of your account per trade it’s easy to see that you can be taken out of the game with just a few losing trades.

Total Net profit — this is a strategy performance measure that many use as the sole determinant of whether or not to trade using a certain strategy. This is not to say that the net profit is not important, because it most certainly is. Total net profit is the sum of the profit of all the trades taken over certain time period. This number can be very deceiving if the transaction costs are not taken into account. In strategies and trade frequently such as Forex day trading strategies, the transaction costs can be significant. Make certain that the net profit figure you are looking at has the transaction cost factored into it.

Percentage of winning trades — this is one of the most widely misunderstood performance measures. One important thing that many beginning Forex traders do not understand is that you do not have to have an extremely high percentage of winning trades in order for Forex trading strategy to be profitable. You’ll often times see strategies advertised with percentages of winning trades from 95 to 100%. It is said that such systems are specifically designed to appeal to those people who simply do not know that those figures are unsustainable and profitable long-term trading.

Strategies with a very high percentage of winning trades may look very good on the surface. Typically strategies such as these risked a huge amount to make any very small amount. This gives strategies such as these a risk reward ratio that is likely to eventually lead to catastrophic loss. Many seasoned Forex traders advise beginning traders to avoid such strategies at all costs.

Now you have a few Forex trading strategy evaluation basics. Keep these in mind as you search for the strategy that is right for you. Be very strict in your evaluation and simply pass on those strategies that appear to be too good to be true or get rich quick schemes. When you do find a strategy that you like take the time to test it out using a free Forex demo account before committing any real funds. If after testing on the demo account you are still pleased then you can start to trade the system in your real money account.

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