There are many trading strategies available on the internet. But how do you know if a trading strategy is profitable or not?

A trading strategy is considered profitable if it has a positive result in backtesting and/or forward testing. The results have to meet the return requirements of the trader, and go through a series of filters to be sure that the results are an accurate representation of real world trading conditions. 

That's a mouthful, so I'll break down everything in this tutorial.

I'll get into how to define a profitable strategy and how to do the testing to figure out the performance of a trading strategy.

Then you'll put those 2 elements together to find out if a trading strategy really is profitable or not.

Backtesting

The fastest way to figure out if a rules-based trading strategy is profitable is to backtest it. 

Backtesting can be done in any trading market.

When you can see that a trading strategy has a profitable track record over a long period of time, that's the best indication that a strategy is likely to work now and in the future.

Some people think that you need to know how to code a computer program to backtest.

That's simply not true.

You can do both manual and automated backtesting.

Anyone can backtest.

This software makes manual backtesting easy.

You can also use free charting platforms to backtest.

It's just a matter of which one is easier for you.

All profitable traders look for trading strategies that have a historical edge in the markets. 

Once you've proven that a strategy would have been profitable in the past, you'll also have key data on how that strategy performs.

You'll know things like…

• The maximum number of losing trades in a row
• The average monthly return
• The biggest drawdown
• Market conditions when the strategy works and when it doesn't
• And more

All of these data points allow you to make important decisions about the trading strategy, which I'll get into more detail later in this tutorial.

Think about cars…

We all know that certain makes and models of cars last a long time and others break down quickly.

The reason we know this is because we have historical data that shows the reliability of these cars.

For example, Toyotas are generally very reliable cars.

On the other hand, Fiats are notoriously unreliable. So much so, that many people say that Fiat stands for “Fix It Again Tony.”

If you purchased a car from a company that just started producing cars last year, you wouldn't know how reliable those cars are because they don't have a track record.

So you're taking a big risk.

In a similar way, you need to know the track record of a trading strategy before you risk real money. 

Again, backtesting is the best way to do that.

If you've never backtested before, this beginner's guide will show you how to get started and the best tools that you can use.

Backtesting also gives you one of the most important traits that a trader can have…resiliance. 

When you take a trade, you have a high level of confidence of your probability of having a winning trade.

You won't know exactly how each individual trade will work out.

But you'll know that if you take a lot of trades, X% of your trades will be profitable. 

The fastest way find that X% probability and your expected return is through backtesting.

Knowing the backtesting statistics of a trading strategy also helps you when you're on a losing streak.

All trading strategies will have a losing streaks, but you want to be able to separate a normal losing streak from a situation where your trading strategy may have stopped working.

For example, let's say that you had a maximum of 7 losing trades in a row in your backtesting.

That's normal for that strategy.

But when some traders start trading live, they freak out when they have 3 losing trades in a row and think that their system is broken.

If they have backtesting data and they reviewed their maximum losing trades in a row, they would realize that 3 losing trades in a row is well within the normal parameters of the strategy.

There's nothing to be worried about.

The same thing goes for the other data points you get in backtesting.

Therefore, having this data gives you the confidence to keep trading when you hit a rough patch. 

Forward Testing

Another way to figure out if a trading strategy is profitable is to forward test it.

This basically means that you open a demo account or “paper trade” to build a track record on a trading strategy.

Never risk real money when forward testing. 

The primary advantage of forward testing is that you'll know if a trading strategy works right now, in real-time.

On the downside, it can take a long time to collect enough data to determine if a trading strategy works or not.

I see so many new traders making the mistake of forward testing a trading strategy that they just learned, with real money and a full-sized account.

They believe that a trading strategy works because someone told them that it works.

Then they wonder why they lose money.

Never take someone's word that a strategy works, always test and verify.

If you're only going to forward test, then you need to have enough trades to give you confidence that a strategy is profitable.

Some people online say that the minimum number of trades that you need to have a properly tested system is 100 trades.

That's not true.

I talk about how to figure out the minimum number of trades in this video.

The video talks about backtesting, but the same concept applies to forward testing.

Alright, once you have a number of trades that you're comfortable with, then it's time to move on to the verification stage.

Double Check the Results

Once you have data on your trading strategy and it's profitable, then it's time to take a step back and consider if you're missing anything.

There can be assumptions that you made in testing that would not carry over to live trading.

Broker Quotes

For example, if you use data from Broker A, then you start trading live with Broker B, you might get very different results.

The reason is because the Forex market is decentralized.

So each individual broker has slightly different price quotes.

Historical data will affect lower timeframe strategies more. The slight difference in quotes usually won't have a huge effect on trading systems on the daily chart or above.

But shorter term trading strategies are more sensitive to differences in quotes because the margin for error is much smaller.

Stop losses and take profits are smaller and therefore, any deviation in price will have a larger effect on the profit and loss of every trade.

Spread

Another common thing that people overlook in testing is the spread.

This is especially true in backtesting.

If you don't factor in the spread on every trade, your strategy will look much more profitable that it would actually be in live trading.

You might think that this is common sense, but you would be surprised at how many people overlook this.

But don't stop at these 2 examples. Think of all of the things that could be different between your testing and live market conditions.

Once you're satisfied that your testing results are a good representation of live trading conditions, then it's time to ask yourself an important question…

Figure Out YOUR Definition of Profitable

Now we get into the big question…

What's your definition of profitable?

That might seem easy to answer, but it's not.

I'll start with an extreme example to illustrate my point.

Let's say that you backtested a trading strategy over a 20 year period and it made a total of 5%.

So if you started with $10,000, your total profit would be $500, or an average of $25 pear year.

Is the trading strategy profitable?

Of course.

But is it profitable enough to make a living on?

No way.

Therefore, I would not consider that trading system profitable.

I would lose money on that trading strategy, when I factor in the profit that the system produces in relation to the amount of time that I would have to spend on it.

So there are a few elements to consider when creating your definition of profitable.

• Average return per year
• Amount of time you'll spend trading the system
• Drawdown
• Risk of ruin
• Real world performance

It's all a matter of what's important to you, how much risk you're willing to accept and the return you want to make.

Everyone would love to make 800% per year, but could you handle the risk that came with that return?

For most people, the answer is no.

That brings us to another important question…

How Much can You Realistically Expect to Make Per Year in Trading?

When you first get into trading, it can be tough to know what's possible in terms of consistently and return per year.

So the best way to figure this out is to look for as many data points as possible.

Listen to interviews with professional traders.

Take a look at track records of trading systems that are similar to the one you're testing.

That will give you an idea of what's possible and probable.

…and it will give you more confidence.

Final Thoughts

That's the complete guide on how to figure out if a trading strategy is profitable or not.

As you can see, the idea of “profitable” is very much a relative term. 

What you think is an acceptable level of profit could be very different from what I consider acceptable.

You also have to factor in the risk and consistently of the strategy.

So first define the amount of profit you want get out of your live trading strategies.

Ask yourself if that number seems realistic, based on what you've seen from live trading results of similar strategies.

Then test the trading strategy so you have as much data about the strategy as possible.

From there, simply compare the results of your testing with what you feel is an acceptable return.

In real world trading, there is no magic profit number.

It's up to you to make the call.

If a trading strategy meets your criteria, then the next step is to open a small live account and start trading the strategy.

Trade the strategy for a few months to see if your live trading results are similar to your testing results.

Only move the strategy into a full-sized account after it performs well in the small account.

Alright, that's your blueprint, now get to work!

The post How to Know if a Trading Strategy is Profitable appeared first on Trading Heroes.

Out of curiosity, I Googled this question because I wanted to see why people prefer trading Forex or stocks. The top search results for this question were completely ridiculous. So I decided to write a real answer to help you make an educated decision about which market is better for you.

The market that's easier for you to trade will depend on:

• Personality
• Lifestyle
• Knowledge
• Interests 

In reality, one market isn't universally easier to trade than the other. They both require study and practice to master. When someone tells you that a market is easier to trade, they are usually speaking about their personal preference…or they have something to sell you. 

That said, one market may be easier for YOU. 

So let's dive in and take an objective look at each market, so you can figure out which one will be the best fit. Even though this is a Forex-focused website, the bottom line is that I want to see all traders succeed…regardless of which market they trade.

Pros and Cons of Forex Trading

Pros

Limited Number of Currency Pairs

Just focusing on a few markets every week is appealing to some traders. For some people, this is the biggest reason to trade Forex.

You don't have to setup a screener or comb through hundreds of stocks every week.

Market is Open 24/5

There can be plenty of opportunities to trade, regardless of where you live. Of course, the most price movement comes during the London and New York sessions.

But there can be opportunities to trading in the Asian session too.

This gives you a wide range of times to find trading opportunities.

Low Transaction Costs

Most Forex brokers make money on the small spread and don't charge a commission. This amount is tiny, compared to the commissions you pay at an online stock broker.

So if you will be starting with a small trading account, Forex can be the better choice.

No Pattern Day Trader (PDT) Rule

In the stock market, the PDT Rule limits small account traders from making more than 4 intraday trades, within a 5-day period. In order to trade more than 4 intraday trades during that timeframe, you need to have at least $25,000 in your account.

There's no PDT Rule in the Forex market. You can take as many day trades as you want.

Higher Leverage

You can get as much as 100:1 leverage at a reputable Forex broker. This allows you to put less money in your trading account and keep most of it at a bank, where it's much safer.

Even US brokers that only offer 25:1 leverage still give you more leverage than stock brokers.

When you have the ability to leverage your money, you can grow it faster.

Small Lot Sizes

If you trade nano lots, you can take the right amount of risk, even with a tiny account. Forex brokers also provide micro, mini and full-sized lot sizes.

One of the reasons that the success rate with small trading accounts is so low in most markets, is because the minimum lot size is huge, relative to these small accounts.

For small account traders, his makes Forex a more viable option than most futures markets and can be a better option than putting your money in the stock market.

Low Account Minimums

You can open a stock trading account for as little as $100 at some brokers. Obviously, you won't make a full-time income with such a small account, but it can help you get started and learn the basics.

Cons

Market is Open 24/5

Although this is a potential benefit, it can also be a downside. For some traders, this can lead to overtrading. They think that they have to trade, just because the market is open.

Limited Number of Pairs

If you like the thrill of searching through thousands of stocks, the you might find Forex boring. You will be looking at the same number of pairs on a daily basis.

Higher Leverage

New traders can have a tendency to use too much leverage and blow out their accounts. If you don't understand how to control risk, then higher leverage is dangerous.

Currencies Can be Harder to Understand

There are so many factors that affect currency prices, that it can seem daunting. For traders who like to make fundamental (based on economic data) trading decisions, the Forex market can be a little overwhelming.

Pros and Cons of Stock Trading

Pros

Stocks Can Be Easier to Understand

For some traders, it's easier to understand what a company does. This makes the research process more logical.

You look at financial statements, research the products and see how the sector is doing.

Thousands of Stocks to Choose From

If you like the thrill of digging through a ton of stocks to find a few hidden gems, then stock trading may be easier for you.

For some traders it can be like a treasure hunt.

Since there are so many stocks out there, there's a very good chance that something will be tradable. 

Low Account Minimums

You can open a stock trading account for as little as $500, at some brokers. This allows you to get your feet wet and understand the mechanics of placing a trade.

Cons

High Transaction Costs for Small Accounts

If you have a small account and are only trading a few shares, then the commission on each trade will be large, relative to your account size.

For example, let's say that you have a $1,000 account and buy 10 shares of a $25 stock, and your commission is $7 per side ($14 total). The commission ends up being 5.6% of your total position size.

Your stock will have to go up to $26.40 before you start making a profit. This puts you in the hole from the beginning.

Market is Only Open During Certain Hours

If you are in a timezone where the stock market is open at an odd local time, it can make it much harder to trade. Trading when you are tired can lead to mistakes and poor decisions.

Pattern Day Trading (PDT) Rule

As mentioned above, if you want to be a serious day trader in the stock market, you need at least $25,000 in your trading account.

This can be a lot of money for some traders, especially when you are first starting out.

Since most new traders blow out their first account anyway, this is also a lot of money to put at risk.

Things to Consider About Your Personality and Lifestyle

Now let's get into some of the other factors that you should take into account when determining which market may be easier for you to trade.

A big one to consider is your timezone.

For example, in Hawaii the New York Stock Exchange opens at 4:30 am. I'm a late riser, so when I lived there, that didn't work for me.

Of course, I could have just position traded stocks. But I knew that I was missing out on a lot of opportunties when the market opened, so I decided to trade Forex instead.

In Hawaii, the London session opens at about 9 pm Hawaii Time, so that was perfect for me. That's one of the reasons that I chose Forex trading.

Also consider which market will work better with your personality. 

Do you enjoy the stock research process? For some traders, it feels like a treasure hunt. If you see it as a game, you will be more likely to succeed.

For others, researching stocks is a chore. In that case, Forex might be a better option because you have a limited number of currency pairs.

Your trading personality will play a huge role in your success.

How much time do you have to trade? 

Think about how much time you have to trade. Do you have to pick the kids up from school?

Be realistic about your available time.

Things to Consider About Your Knowledge

Next, consider your experience and knowledge.

Do you know a lot about a certain industry? Maybe you have a lot of insights into cyber security or corn growers.

I'm obviously not suggesting that you do insider trading because that's illegal. But if you know an industry really well, then you will be one of the first people outside these companies to know about news events and new products.

So use that to your advantage. 

It can be a lot easier to trade stocks when you have in-depth knowledge of an industry. 

The same thing goes for Forex. If you used to work at a bank or you used to hedge currency fluctuations for a company, Forex might be an easier market for you to trade.

Things to Consider About Your Personal Interests

Finally, which market are you more interested in?

If you like trading a certain market, it will be easier for you to do the work necessary to succeed.

Do you like finding out about individual companies, researching their products and digging into their financials?

…or do you prefer working with a core group of currencies, so you know them really well?

Don't underestimate the power of interest and enthusiasm.

It can take you a long way. 

Can You Make More Money in Stocks or Forex?

That's the real question, right?

In reality, there's potential to reach your trading goals in either market.

There are no “easy” markets in trading.

They are all challenging and require the same amount of practice, skill and discipline.

Both markets require you to manage risk, develop your skills and have a proven trading strategy.

What can make the process easier is if you actually enjoy trading that market and it aligns with your personality.

…or maybe you don't have to choose.

Trade both!

If you have any questions about Forex vs Stocks, leave a comment below…

The post Is Forex Easier Than Stocks? Not for These Types of Traders appeared first on Trading Heroes.