Currency Trading – How to Tell the Difference Between a Genuine Currency Trading System and a Dud

Many of the currency trading systems being offered today are nothing more than an entry strategy wrapped in a glossy marketing package. An entry strategy is not a system. To properly evaluate a system you need to ask yourself the 4 questions in this article. If you can answer yes to all 4 questions you have a genuine currency trading system. Of course, that on its own doesn’t guarantee it will be profitable but at least it’s got a chance.Question #1 – Does it include sound trade management rules?A genuine system recognises the critical importance of certainty to a trader by providing exact rules on when you get into a trade and exact rules on when you get out of a trade.Unambiguous entry and exit strategies take the emotion out of the decision which is vital because the harsh reality of live currency trading is that emotional traders lose.In addition, mechanical entry and exit strategies enable consistency which is another key requirement of any successful currency trading system.Question #2 – Does it include sound money management rules?A genuine system recognises the critical importance of position sizing to a trader by providing specific rules on how much you can trade at any one time based on the size of your trading bank.Many systems only discuss trade management but money management is actually more important because poor money management can turn a profitable system into an unprofitable system and good money management can turn an unprofitable system into a profitable system.Another harsh reality of currency trading is the fact that the vast majority of currency traders lose and it’s no coincidence that the vast majority of currency traders only focus on trade management.Question #3 – Does it include sound risk management rules?A genuine system recognises the critical importance of loss control to a trader by providing precise rules on the maximum amount you can lose on any one trade and strict rules on the maximum drawdown your trading bank can experience before you must stop trading and take remedial action.All successful currency trading systems experience losses because the perfect system does not, and never will, exist.However, a professional system treats losses in much the same way that a manufacturer treats raw material costs (i.e. as an unavoidable cost of doing business) and plans ahead accordingly.Question #4 – Does it include sound self management rules?A genuine system recognises the critical importance of psychology to a trader by providing clear guidelines on how you need to think and act when trading.Many currency trading systems ignore this area (because the people marketing them know that most would-be traders would rather not talk about it) but the fact is currency trading is as much a mind game as it is a financial one so disregarding it is currency trading suicide.It is often said that the trader is the weakest link in any successful trading system because successful currency trading is about consistency, discipline, patience and resilience and any trader who does not possess (or can’t learn) these qualities is doomed to failure regardless of the system he or she is trading.ConclusionIn the same way that you wouldn’t consider driving a car unless it had 4 wheels you shouldn’t consider trading a currency trading system unless it covers the 4 areas listed above. The currency market can be just as dangerous a place as the highway in a trading vehicle without 4 wheels.