Choosing A Forex Trading System - Part 4

In the last part of our series we explored a few key performance measures to help us in choosing a Forex trading system.

Here’s our example:

Let’s take another look at our example:

Trading System A Performance

Number of trades = 1000
% of Winning trades = 92%
% of Losing trades = 8%
Average Winning trade = $180
Average Losing Trade = -$2100
Total Net Profit = -$2,400
Gross Profit =165,600
Gross Loss=-$168,000

I promised you at the end of the last series that we were going to “generate a very important number in evaluating any trading system”. Well now I’ll make good on that promise. This very important measurement is called the Profit Factor.

The calculation of the profit factor is quick and easy:

Gross Profit =$165,600/Gross Loss=-$168,000 = 0.9857

Unfortunately for this trading system the profit factor is not attractive. A profit factor of 1 means that the trading system just breaks even. Any profit factor below 1 indicates a losing trading system. In other words our example trading system would not be worth trading.

Can you tell me how good a trading system would be based on the following simple calculation:

Gross Profit =$1,000,000/Gross Loss=-$1,000,000 = 1

So how good would that trading system be? After all it is showing a million dollar gross profit. If you answered that a trading system with a profit factor of 1 would not be appealing you would be correct.

Even though the million dollar trading system has tremendous profits it also has tremendous losses. Basically this is a break-even trading system. If you ask “What’s the point of trading a break-even trading system?” the answer would be “none. There is no point in trading a system that breaks even. The money in your mattress can break even without any of the risks associated.

We want a trading system with a profit factor great than 1 because that would indicate that we have positive net profit. Some people refer to a trading system with a positive net profit as a system with a positive mathematical expectation. Either way you put it the Profit Factor is a valuable measure for any trading system.

You don’t want to miss the next part in this series. Next up is some information that you positively must know before putting your hard-earned money and time into any Forex trading system.

To Your Forex Trading Success!