Forex Trading Strategy Evaluation Methods

Forex Trading Strategy Evaluation Methods

If you want to maximize your forex trading strategy to get maximum effectiveness; it is important that you develop a system and process to evaluate your performance. I will outline the exact steps I use to help me improve the performance of my strategy optimization techniques. The article will cover the design, testing, and optimization of trading systems
Step 1 Outline your Forex Trading Strategy Entry Criteria
Before you start changing the guidelines of your strategy, you must know if the forex trading strategy that you are currently using works. Therefore it is important to have clear guidelines and steps so that you know how to measure your trading performance.
My Forex Trading Strategy Rules:
Objective:

Use Strike 3.0 Software to find accurate trading strategy entries that are within the daily trend. The aim is to get into a trade and let the trade momentum push the price action of the trade into a larger target than my average loss. It is also important to determine the chart time frame you will be trading on, and for me, I am going to be using a 15-minute trading strategy.

Goals: For My Forex Trading Strategy

Since I am going to be testing a new forex trading strategy, I want to have goals in place before trading starts, in this trial my goals that I have set is the following:

Goal 1. A risk to reward ratio of 1:2 or better. The risk to reward is important to me because I know I can make profits in the market if I can find trades where my winners will be twice as large as the losing trades.

Goal 2: A winning percentage of 50% or better I will make profits in the market if I enter with the strike 3.0 software which is a very accurate forex indicator; and I can win 50% and also achieve the goal above of 1:2 risk to reward ratio.

Goal 3: Maintain discipline follow the plan. If I can’t follow the rules, there is no reason to even have a forex trading strategy in the first place.

Goal 4: Maintain a stop loss of 10 pips or less.

Note: Notice I did not have a goal of make 50 pips a day or even make a specific dollar amount such as make $100 per day. The reason I didn’t have financial goals or pip count goals is that if I can accomplish the first three goals, then I will be guaranteed to make a profit. Another reason is that the market goes up and down and I know that I cannot be guaranteed to hit specific goals like that each day I must take only what the market gives.

Forex Trading Strategy Entry Requirements.

  1. Add the Strike 3.0 tools to my chart ( this can be any tools or indicators that you use including just price action) I use Strike 3.0
  2. Find a momentum Trade Setup using the scanner.
  3. Identify trade and ensure that I am trading within the daily trend.
  4. Find the optimized trading strategy entry.
  5. Plan targets and stop losses.
  6. Execute the trades.

It seems very simple when you look at the above list, but let’s take a look at an image we can see the forex trading strategy in action.

Forex Trading Strategy

Image of Forex Trading Strategy Rules:

When I get a green or orange arrow that tells me a trade could be ready to enter and that I need to pull up the chart.

Next, I will do the analysis and make sure that it is within the trend see image below.

Forex Trading Strategy

Now that we have the direction and momentum in play the next step which is extremely critical is to find the most accurate trading system entry that we can which will help me hit my risk to reward ratio goals as well as my goal of winning 50% of my trades.

Forex Trading Strategy

The key here is to not just enter on the signal but to wait until it is pushing up into a resistance level, this is done to ensure that I can get the most amount of profit on my trades. Doing this enables me to have a tight stop loss, and my goal is less than ten pips. Waiting for the best entry also gives me the ability to find excellent follow through trades. Where sometimes I can have a ten pip stop loss and end up hitting a 50, 60 or 70 pip trade which would be a 7 to one; and that is way better than the 1 to 2 risk to reward ratio.

It is important not to just enter on the signal but to wait until it is pushing up into a resistance level, this is done to ensure that I can get the most amount of profit on my trades. Doing this enables me to have a tight stop loss, and my goal is less than ten pips. Waiting for the best entry also gives me the ability to find excellent follow through trades. Where sometimes I can have a ten pip stop loss and end up hitting a 50, 60 or 70 pip trade which would be a 7 to one; and that is way better than the 1 to 2 risk to reward ratio.
 Strategy Stop Loss Placement:
If we look up at the image above the orange levels would be the entry, and I place my stop ten pips below that.

Forex Target Strategy Rules:

I put my goal at 20 pips initially, but if I get price action that indicates a strong push, then I will lower it to key trading price levels such as the 00 the 50 the 20 and 80. Those are critical levels that price many times will see slowdowns and reversals.

Part 2. The evaluation and optimization of trading strategies.

Now that I have all of my goals and rules in place next I will take a block of trades 20 or more so that you can analyze the effectiveness of the strategy. Taking a sample of trades with my forex trading strategy will not only measure the efficiency of the strategy but also how well you as a trader execute the strategy and trade it.

Once you take the trades, make sure you log everything with detailed information so you can evaluate.

I recently finished a block of trades using the strategy I detailed above the next part is to analyze the results of the trading period examined.

I took a total of 27 trades during that time, so I have enough data to do my analysis.

Trading Forex Trading Data Discovered After Analysis:

27 Trades Executed:

Wins 11; Losses 16 for a winning percentage of 43% So I did not achieve my goal of 50% lets see how I did on the other targets.

My average win was $57.74, and my average loss was $30.29 which is a risk to reward ratio of 1.9 to 1. So again I did not accomplish my goal of 2 to 1 however 1.9 is close so I just need to review my trades and see what I did wrong and see what happened with the strategy.

Goal 3 was to follow the rules which I did not accomplish that objective either! I made some bad trades and stupid decisions.

Including taking a trade while driving to work. Not a good idea!

Despite failing at all three goals, I still made some profits, not bad! If I can keep working on this, I should be able to make some great profits with this strategy with a few small changes.

After reviewing my results for the week then I will go ahead and make a trade by trade breakdown.

Evaluation Strategy Trading Optimization

I made 1.45% and $150, and if I tweak that and hit my goals of 50% win rate and 2 to 1, then I should be well on my way to some improving profits.

Here is some more trade data below that we can use to see areas of improvement. I am noticing that despite not achieving the trading objectives, I did make a profit and I had a positive risk to reward ratio. I did not hit the 2 to 1 that was on my goals, so I know I need to make an effort to improve that in my next block of trades.

weekly Forex Trading Data

One good thing in my review was my goal was to have trades less than ten pips for my losers, and I achieved that goal!!! At least I did one thing right.

However if after you do your block of trades that you do not see anything you did well don’t worry just start to improve. One step at a time.If you improve one step at a time before you know it, you will be doing some super fine forex trading strategy techniques. I believe that you will be able to accomplish it so keep me posted.

Forex Trading Strategy Trade Evaluation and Review:

Looking into the individual trades will reveal some significant trading optimizations that can improve trading results, there is going to be a treasure of information that will help me develop the most accurate forex strategy that I can possibly have.

Note: Pay more attention to your losing trades than your winning ones.

Reviewing losing trades will help you find your errors and fix them. Most traders ignore the losers. Therefore, they never improve.

Forex Trading Scalping Strategy

I also went long on a bounce but again based on my strategy the entry should be near the pullback into support instead of the bounce. Look at the image and see the orange box which is a critical support level near the red 100 moving average.

Executing the trade according to the strategy would have saved me 5.5 pips.

Also, this pair has a large spread of 1.8 pips another not good scenario.

I should be trading pairs with a smaller range.

In review, I could have gotten a tighter spread at .3 which would have saved me 1.3 pips plus buying at support which would have saved me 5.5 for a total of 6.8 pips which means that had I performed this better I could have had a winning trade.

If this was a winning trade instead of loser that would totally have increased my performance for the week. Turning one loser into a winner by proper execution is huge. Next week I need to make a note to ensure that I make my entries at a better location so I can win more trades.

Next, we will review a terrible trade! Wow, what did I think when I did this one. These types of trades are painful to look at but if I can make sure this doesn’t happen again next week should be much better.

Accurate Trading Strategy Mistake #1

Forex Trading Mistake

As I said in my first trading mistake was I got in at the top instead of waiting for a pullback. By Examining my trades in this forex trading strategy evaluation, we can see a theme. Two of my losers were because of failure to follow proper entry guidelines. There are more things wrong with this trade lets keep looking.
Mistake # 2 Optimize Trading Strategy
The second mistake here is an unforgivable sin of trading. Ok, I forgive myself but I need to stop making this error, and that is I allowed trade with a goal of 10 pips to become a loser of 32 pips! Allowing losing trades to run is a huge error. Think about this for just a minute if I made profits last week how much better will I do the following week if I can avoid this in the future. Improving this one error alone could give me a 100% return on investment improvement and create the most accurate forex trading strategy.

Take a look at the image.

Make My Forex Trading Strategy Entries Better

Looking at losing trades is painful to do, but the effort will yield massive results. Please take the time to review your trading each day.  I try to do this after every block of 20 trades, to be aware of my trading errors and therefore being able to improve them; you cannot improve if you do not have an awareness of your trading mistakes.

I am going to only show you one more trade here because of time and length of this article, but I do this for all of my trades, and I recommend you do the same thing if you want to become a great trader.

Best Forex Trading Strategy Entry

Since we looked at the wrong trades, It is now time to review the well-executed trades and see if we learn anything.

Forex Trading Strategy

We can see the difference in our results if I execute and get a pullback entry instead of a forex trading strategy entry at the bottom of a move you have a much higher chance of winning the trade.

The next thing is you notice I was able to allow the position to run for a total of 32 pips gain. Letting your trades run for larger targets is another huge trading advantage because with a ten pip stop that is a 3 to one risk to reward ratio.

The only thing I could have improved on with this trade is to allow it to run, had I done that I could have possibly pulled out 60 or 70 pips on this trade.

The more I can let my winners run the more profitable my forex trading strategy becomes in the long term.

Action Steps from the Optimize Trading Strategy Process.

After reviewing last week’s trades, I was pleased with my results however I realize I can continue to improve by fixing a few things. So now I am going to work on these three things for next week and then trade another block of 20 trades and see if I can execute better.

  1. Make sure that I continue to maximize my profits by making sure that my forex trading strategy entries are on a pullback which will give me the most accurate trading strategy that I can have.
  2. Do not under any circumstances allow my trades to run to lose 30 pips on a trade that is too many for this type of strategy.
  3. Make sure that I only trade pairs that have a spread of less than one pip, because with my forex trading scalping strategy I need to have the best spreads so that I can win more trades.

Summary of the Forex Trading Strategy Evaluation Methods Process

This method is an excellent way to improve your trading if you learn how to optimize your strategy using the evaluation process. Most traders will not take the time to do this, and that is one of the reasons they do not improve. Please look at your trading right now and make a commitment to implement this process in your trading so that you will not be one of the many traders who have a forex trading strategy that fails and you become a statistic of being one of the 95% of traders that fail.

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Casey Stubbs is the founder of Winners Edge Trading, which is one of the most widely read forex sites on the web. Winners Edge Trading has trained thousands of people to trade the Forex markets.

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  • Sure just keep reading this blog for tips and ask questions in the comments.

  • Erwan

    Hi Casey. thank you for sharing your article. I am new in this industry, so my question is: Is the method you discussed is the easiest way to understand the pros and cons in Forex? Also, will it help me earn in applying the said method? Thank you in advance.

  • Your welcome if you have any trading questions please let me know.

  • thien kim

    Hi Casey, thanks for your post, it’s helpful and i think you wrote it with all your mind ^^

  • Thanks Benson looking forward to seeing your success!

  • Benson

    Thanks Casey, your answers were helpful. I really like the fourth answer, the way you mentioned taking part of my profit made me realize that is what I ought to have been doing, not that I didn’t know that before though. I guess I kind of have the ” win all and win big or nothing ” mentality. But your mentioning this now made it look as if a light bulb was just put on in my head. Thanks. I will let you know how I am doing afterwards.

  • I will answer your questions by numbering them.

    1. I do not wait I enter at the support, however since this article is more about optimization of a strategy than a strategy you just pick one and test it as I suggested in this article. The point of the article isn’t your forex trading strategy it is the optimization techniques to help you improve.

    2. Same as above, you must decide the strategy questions for yourself, Test it and see if it works.

    3. Benson I recommend that you write your strategy down and answer all of these questions for yourself. Then take the block of 20 trades and see how it works for you. Use very good risk management on these 20 trades.

    4. One option would be to close half of the position and let the other half run or stop out, but again make a decision and then test the results. Come back here and let us know of how it works.

    Thanks for the comment I hope this is helpful and making your strategy better will help you learn how to be a better trader and of course if you need any help please come on here and leave a comment. Thanks!

  • Benson

    Hello Casey, I took my time to study your article very well before dropping a comment. Now I have some questions that I will like you to help me with.

    1) Concerning entering at a resistance or say a support, depending on the direction of the trade, do I just enter straight away once market get to a resistance or support ( after I have gotten a signal on the strike 3.0 or depending on the indicator I am using) or do I have to wait for some sort of candle stick signal as well?

    2) If I wait for candle stick signal at these Critical zones and I get say a Pin bar whose tail is very long or a very big engulfing candle, do I still enter the trade, knowing that the big pin bar or engulfing candle has made my entry far from the resistance or support, thereby making my stop loss larger than 10 pips?

    3) Sometimes, price might get very close to a resistance and support and then turn and start going in the direction you expect it to go. What do I do in that situation, should I just leave it or still enter. This case is similar to the bounce trade you had, it’s just unfortunate that it turned out to be a losing trade, because many times, such trade do turn out to be a winner by an extremely huge margin!

    4) Concerning letting my profit run, I try to do this, but many times the winning trades usually reverse and could turn to a losing trade, or sometimes, I would have been winning by a large number of pips and I move my stop loss above my entry price so as to eliminate risk, and then leave the trade to go hit my target while I go do something else, but on getting back to the trade, I would see that the market had taken me out of the trade and then go in my expected direction, and in fact far beyond my target without me! This situation always make me regret not taking my profit when I had the chance, because most times, such trades are usually with huge lot size. So how do I handle this situation?

    Thank you.

  • yani

    Hi Casey are you doing it live this week? Also I missed Friday’s March 24th 2017 webinar that was at 1pm EST was it recorded???

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  • NathanTucci

    Hi, the high/low/close are the different prices that you can choose for the EMA to correspond with. In other words, an EMA is just a line made from plotting points based on a formula, so depending on what information you are plugging into that formula–in this case high/low/close–you will get different results

  • Buster-48

    Hi ,dont understand what you mean by ema high/low/ close ,surly 10 ema is what it isand only has one level not 3,am I missing something here ?