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There are many FX trading systems on the market as well as free ones available on the internet. The problem is always how to know which could be profitable, taking into account your own financial circumstances and your favorite trading style. For instance there is not any point in getting into a scalping system, regardless of how much money it has made for somebody else, if you panic under stress.  

Another kind of system that need to be avoided is the kind that compounds the risk according to whether the last trade was worthwhile or not. No variable risk plan can transform a losing system into a winning one. It's a statistical impossibility. The sole way to profit is to get a moneymaking FX trade system.

This means both testing any new forex trading system and analyzing the results of the test. This can be done by working out the system's edge. Edge is a measure of returns over a period of time. It's a straightforward formula that looks like this:

Edge = (chance of win x average win) – (probability of loss x average loss)

This is a good way to compare 2 systems that could be very different in practical terms. For example, let's take a scalping system that only makes a tiny average profit on each trade, say twenty pips. The hit rate is high with an eighty percent win rate. However , when it loses, the loss is significant – say 30 pips. The fringe of this system is (20 x eighty percent) – (thirty x 20%) = ten pips.

Another system is set up with a 10 pip stop loss that's often triggered, so that many of the trades lose, say 60% of them. However when it wins, it wins more … Forty pips on average . The edge here is (forty x 40%) – (ten x 60%). Again it comes to 10 pips.

So these two completely different systems have the same edge. Which one is best? The answer depends on the individual trader and their trading style. Many factors will come into play,eg how much time the person has available for trading, how they respond to stress, and whether or not they can psychologically handle a system that makes more losses than wins.

Provided you end up with an edge that is positive instead of negative, you have a winning system. Knowing this will significantly increase confidence and therefore, success. So it is handy to calculate the edge of any system that you are testing, and use this to compare FX trade systems that may be very different in other respects.

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