When you are testing a Forex system or method, you are testing it to see if it can provide consistent, repeatable profits. The only way for you to see this objectively is through statistical evidence. There is a tendency for new traders to assume that there is one all-important statistic which they should work on, but this is not a realistic way of going about developing a system that works. Many people think that if they create a Forex system with a high win percentage, for example, they will be profitable. But what if your losses are all huge and your wins are tiny? You might still have a losing system.
The best approach is to cultivate a number of Forex statistics that provide you with important information about your trading. Well-gathered statistical evidence will not only demonstrate to you whether a system is profitable, but will give you information, which you can use to improve that system. Here are some important statistics to focus on during your Forex backtests and demo tests.
- Win/loss ratio (or win percentage). Obviously you want to get a high percentage of wins and a low percentage of losses. This is one of the most important things you can aim for, but as mentioned already, it is not everything.
- Size of wins and losses. You want larger wins and smaller losses if possible.
- Net pips. How many pips have you made, total, over the course of the Forex test?
- Number of breakeven Forex trades. How many trades did you break even on? The reason this is important to calculate is because you will usually lose a little money on breakeven trades since you must still pay the spread for the trade. You will need to add up the costs of your breakeven trades and subtract that cost from your net profit. It can be significant if you have a lot of breakeven trades.
- Worst losing streak. How many losses in a row did you incur during your worst losing streak?
- Average number of winning trades per day/week/month/year. If you are eventually going to trade for a living, you need to get some feel for how much money your system might actually make you in a given real life time period.
- Number of winning/losing trades for various types of Forex trades. If your method involves multiple entry methods, tally up data on every single one of them. You may also want to take notes on context. You may discover a price pattern or indicator, which works great in one context, works poorly in another. You can then make the adjustment to your next test.
- SOL Quotient. This term comes from well known Forex trader Rob Booker. Your SOL Quotient = your net profit/maximum loss. The resulting number is how many of your worst losing trades you would be able to withstand in a row before blowing your net profit. Naturally, you want this to be a large number.
You can profit with any one of these statistics being poor — if the others make up for it. There is no one golden statistic that determines success — but taken together these statistics can help you to succeed at Forex. If you are using MetaTrader platform to backtest or demo test your trading strategy, you can then use a report analysis tool to calculate all these important statistics.