3 Common Mistakes to Avoid When Constructing a forex Trading System

Forex trading systems seem to be all the rage today. The fact is, trading systems have been around for decades. Traders have been using systems to profit in the forex market since the late 70's and early 80's. While trading technology has improved over the years, the rules of successful systems haven't changed all that much.

With the introduction of increasingly complex and powerful technology, many individual forex traders are turning their attention to creating their own trading systems. Furthering this trend is the recent move by currency dealers to market systems and the software to build systems.

Unfortunately there is a lot of misinformation about systems being passed around. The below list contains three of the most common mistakes I see among the systems that are being created and marketed today.

High probability trading is almost impossible for individual forex traders. It seems forex traders don't like the idea of taking losses and want to find a system that produces few, if any, losing trades. Forex traders are looking for systems with 90% win/loss ratios. Unfortunately, this isn't reality in the forex. Losses can and will happen. Trying to develop a no-loss system will eventually lead to failure.

Too many new system traders rely heavily on historical observations to construct entry and exit rules. The set-ups are clear with the benefit of hindsight, but are nearly impossible to achieve in real time. This problem usually stems from relying too heavily on technical indicators to generate buy and sell signals.

A lot of forex traders seem convinced that the only way to riches in the forex market is via very short-term, or day trading. What most new currency traders fail to realize is that the forex market is an expensive one and that day trading exacts a hefty toll in terms of transaction costs. Sure, we don't pay commissions in the forex market. But we do pay the spread, which can be five pips wide among the active currency pairs. Every time you click an order, you're paying the spread. The more you trade, the more expensive it becomes, and the less likely your system is going to be profitable over the long haul.

Between the attempts to avoid losses altogether, the overuse of technical indicators, and the desire to day trade, it's a wonder that any systems actual profit in today's forex market. But there are profitable systems that consistently make big gain in the forex market. Most of these systems haven't changed all that much over the years. These systems rely on common sense and universal trading rules such as following trends, minimizing losses, maximizing profits, diversifying, and managing risk.