Making Money Trading MT4 Expert Advisors on Forex - Part 2

 I hope you've read Part one of this hub and found it interesting now for Part 2

Myth 2: The higher the Percentage Winning Trades, the more likely the system is to make Money

The higher the Percentage of Winning Trades, the easier it is to Trade the system. That’s why People like to see this Ratio as high as possible. BUT, it does NOT guarantee Trading profit, or success.

In fact most good systems have a Percentage of winning Trades of around 48-60% as an average, with the odd DAY at 90% or more.

It is far better to concentrate on the profit factor. If a system has a profit factor of more than 1 it makes money, if it has a profit factor of 2 it makes twice as much money from winning Trades as it loses from losing Trades.

 

So what About MT4 Expert Advisors that push high Percentage winning Trades?

Remember that the higher the percentage winning Trades a system has, the EASIER the system will be to Trade.

However, make sure you look at the Profit Factor, especially in the back test. If it shows a profit factor of less than 1.5, then you can expect to break even in forward Trading at best. Look for a profit factor of 2 or above in back-tests, and 1.4 or above in forward Trading. Anything more than 5 expect curve fitting, or lying…… 

Myth 3: Trade Entry is the most important part of a Trading system

When you first discover a technical Indicator, the first thing you do is look at what entries it will give you, and whether they will pan out and make a winning Trade.

‘We’ all go through this.

It is because of this that ‘new’ Traders develop a need to understand how a system enters a trade over just about everything else.

What if I tell you that one of the best stocks systems I have ever traded, used a random entry pattern……. BUT looked to manage the trade with a two stage protective step / trailing stop and timed exit combined. It averaged a 3.2 profit factor.

Remember Ron in the cartoon above? Well now you know how he could actually make money picking stocks at random … !

How you manage a trade once open is actually more important than the entry.

Firstly, you must look to place a protective stop that is far enough away from the noise to keep you in a Trade, but close enough to protect you from reverse price movement.

Secondly, you must look to trail a stop behind the price action once a trade starts to make profit. How you trail this and when you have to figure out.

Thirdly, a timed exit is also useful. Experience has shown that beyond a certain time in a Trade, it is more likely to hit a stop than a profit exit. So simply implement a timed exit rule (something simple such as if a trade does not exit after 5 Days exit at US open….)

Myth 4:- Stealth Trading Exits bring more profit

Stealth Trading is where a system ‘hides’ its real exit points so a Broker cannot see where your stop loss and profit exits are positioned.

Firstly, Brokers only keep an eye on where the bulk of stop losses are at any one time and may, on occasion, manipulate their price action to hit a group of stops if it is to their advantage. However the larger the Broker, the closer the price action will be to the market, and the less likely they are to manipulate pricing.

In reality a Broker can claw back pips from any exit simply by delaying the trade action (and causing slippage in the process) Stealth exits don’t help here …. !

Secondly, the only way to stealth Trade, is to place a stop loss that is significantly further away than it should be and then close the Trade with an instant action when the real stop loss is hit. The issue with this, is that if your client PC becomes disconnected for any reason, the Trade could go on to exit at the extended stop (or worse still, the system does not place a stop at all when in stealth mode)

Far better to reflect true stops and work the system through the Broker properly.

Myth 5:- Trade Risk is as simple as entry to stop multiplied by the lotsize?

This is a very simplistic view. It is also unrealistic if you are using a multi stage, or trailing stop.

Whenever a Trade has a trailing stop, the average loss over time will be 50% of the maximum starting stop. So if your initial stop loss is 100 pips away from entry, over time you will find that losing exits will occur at 50 pips.

If you use % volatility as a trailing stop, or SAR then this can actually get lower….

The only way to prove the average risk in pips for any losing Trade is to run a back-test and calculate the average loss in pips. Use this as a starting point, and then modify over time with forward Trading. Use this in your money management calculations.

Did you know that…

• "87% of the World's Millionaires have made their money from the Stock Exchange"

• "and that 95% of all investors who invest through the stock exchange lose their Money"

*Source: NYSE

This means that the 5% of Traders who make money trading the stock exchange (or FOREX) are also highly likely to make it as a millionaire too.

However, it is the other 95% that pay for this …..