5 Critical Factors YOUR Forex System MUST Have To Make Profit

Is your trading system delivering the kind of profits you really want? Why? In this video I'm going to reveal the five critical factors all systems must have before they can become profitable. 98% of traders are missing at least three of these, which might explain why you're not having the success you imagined. So in this video I will walk you through all five. But first, here's a quick example of a system before and after adding one of the factors that I'm about to show you. It's the exact same system. We just tweaked one thing, but my name is James Tilsted. I'm a professional forex trader with over 20 years experience and I've got a 100% success rate turning my clients into profitable traders. So let's get to it. Did you know that high win rate Systems, perhaps within 90% of trades, are statistically the least profitable and in fact the most likely to wipe out your entire account? I know that sounds confusing, but to explain what's happening, I'm going to tell you about Long Term Capital Management. Long Term Capital Management was a hedge fund formed in 1994 by some of the best people in Wall street, including a Nobel Prize win economist. It was truly massive and at its height IT controlled over $1 trillion worth of positions. They had a zero risk system and every position resulted in a profit, so a 100% win rate. And for the first three years they were the rock stars of the industry. Then in 1998, their fourth year, they lost everything, threatened to bring down the entire global financial system with them, and had bailed out by the US Government just long enough for their positions to be liquidated without crash in every market in the world. How could a hedge fund with a 100% win rate crash and burn so badly? The same reason amateur traders do. When Long Term Capital Management, Nobel prize winners, mathematicians, quants and analysts designed their system, they were thorough. They calculated everything. They back tested. They looked for correlations, repeating patterns and determined the optimal risk strategy to maximize their returns. With precision, reliability and predictability, they knew exactly what to expect and they knew they would make money. And they did. Until they didn't. You see, these geniuses had created a system and a set of rules based on only five years of back tested data. In other words, they created a system perfectly care fitted to work for a very specific, very short period of time when the market conditions were ideal. The instant the market conditions changed, this system collapsed spectacularly. The first thing a system needs for it to be profitable is an edge. An edge is a strategy that produces a positive expectancy over the long term. A positive expectancy comes from a combination of win rate and profit to loss ratio. Your wins must be sufficiently large and frequent to exceed your losses and this must be consistent across all market conditions. That is your edge. And a profitable system must have a statistical edge. If it works in one type of condition but fails in another, you do not have an edge. That's factor number one. And it leads us neatly to the second factor. Which of these trade management strategies is mathematically the most profitable? Pause the video if you want to leave a comment to let me know and I'll give you the answer in just a moment. My first day as a trainee trader at a bank in London many years ago, my supervisor told the eight hopeful applicants, of which I was one, that profit is made on the exit, not the entry. He then showed us how to run backtests using a software that randomly generated simulated price charts to find out which exit or trade management strategy was the most profitable. We were being assessed and the four people with the least profitable results wouldn't be coming back the next day. After eight hours we laid a break for lunch, running thousands of tests. My anxiety was through the roof. I was sweating and I was confident. I was about to lose my job before it even started. Every strategy and I tested made money for some periods, but ultimately ended up in a loss. I just couldn't understand what I was doing wrong. The supervisor came back in at the end of the day and simply said, you can't make profits from a random market. I'll see you all at 8am sharp tomorrow morning. And then he left. He'd just given us a very visceral, dramatic lesson we would never forget. That no matter what you do with entry, exit or anything in between, it is a mathematical impossibility to profit over the long term from a random market. That was the most important thing the bank wanted us to know. All the options I gave you a moment ago in random market conditions give the same net result of zero, assuming no transaction costs of spread or commissions with those costs. Every option is a net loser under random conditions. So that is the second critical factor. For your system to be profitable over the long term, you must make sure you are trading non random price moves. You can't make money otherwise. And if you've watched my last video, you know that in forex, 96% of all price changes happen as a result of mathematical equilibrium algorithms with no no real buying or selling taking place at all. You also know only 13% of real order volume is from speculation. Forex is the most random market in the world. Therefore, to have a profitable system, you must be able to identify when and if you are trading random or non random conditions. Which leads us to the third factor. Would you jump out of an airplane with a scuba tank on your back instead of a parachute? Bear with me as I give you this analogy. Skydiving and scuba diving are both adventurous activities that put us in environments we are not designed to be in. In that regard, they have a lot of similarities. They both require specialist equipment, specialist training, they can only be done at certain times. They both have limited durations, communication needs to be done with hand signals, and you have to qualify through certified schools. On paper they tick the same boxes. In reality they couldn't be more different. And if you try to do one using the methods and equipment from the other, you're dead. Well, Forex and stocks are both financial markets and on paper tick the same boxes. But in reality they couldn't be more different. And if you tried to trade for it using the methods, indicators and systems designed for stocks, you are going to fail. That is the third critical factor. Your system must be specific to Forex. If it isn't, you will not be able to make money over the long term. So now let's look at the fourth factor. If I gave you a system with a guaranteed 60% win rate and a 1 to 1 reward to risk ratio, so a definite positive expectancy edge set in stone, what would you be able to do? The only question is how many millions you would make. Right. Well, a financial analyst working for some of the top hedge funds as a system designer called Ralph Vince wanted to find that out. So he ran an experiment. He took 40 PhD students. They each had $10,000 to start with and were asked to take 100 trades each to show how much money they could make. Their returns were astonishing. 38 out of the 40 traders lost money at a 95% failure rate. Wait, what? This was a winning system with a guaranteed edge, with positive expectancy. So how did they all manage to lose? Well, with a 60% win rate, you can expect to win 6 out of every 10 trades on average. But probabilistic averages don't balance out smoothly in the short term. It's possible the first four trades were all losses. If they had bet $1,000 per trade, they may think the next trade is more likely to win. So now they bet $2,000 to win some back. But this might also lose. Now convinced the next trade must be A win, they bet the last $4,000. If this also loses, which it certainly can, they're wiped out. There's a formula called the Kelly criterion, which if you know your wing rate and your average profit to loss ratio, in other words, you know your edge, it will tell you the mathematically optimal position size to bet on every trade. If you stay below that level, your winning system will remain a winner. If you go above that level, you will turn your winning system into a losing system, which is what happened to the traders in that experiment. At the start of the video, I gave you an example of a system that changed from a loser to a winner with one simple tweak. It was money management. We used bad money management on the first and good money management on the second. That's the fourth critical factor. You must use sensible money management, which maximizes your profits over the long term, but protects you so you can find short term random distribution of losing streaks. So now we're at the fifth and final factor, and this is by far the most important. Profitable traders are always insane. They literally behave in a way psychologists and psychiatrists would consider crazy. And if you think that sounds crazy, stick with me. But first, have you ever noticed in sports, when an individual or team are winning, they play it safe? They're in the lead, so all they've got to do now is not mess it up. If they can just hold on to their lead until the clock runs down, they win the trophy. So they don't want to take risks. The losing side, on the other hand, play it differently. They are already losing, so they may as well take chances. If it pays off, they go from losers to winners. So it is in their best interest to take risks. If you think of our ancestors hunting and gathering when they had plenty to eat, there was no point risking injury by trying to take down a woolly mammoth. Better to play it safe. But if they hadn't eaten for a month, they are going to die anyway, so they may as well try their luck and take the risk. It might pay off and they'll be saved. Being risk averse when we're ahead and risk seeking when we're behind is a matter of survival. You wouldn't be here if your ancestors didn't act like that and you've inherited that behavior. Risking your life for a little extra when you've already got plenty of food would be insane. Have you ever noticed when you trade, as soon as you're in profit, you try to protect it. You move your stop to break even as soon as possible. Or you trade it up tightly, or you take the whole trade off to bank that profit asap. Or close a portion of the position to bank something and then let the remainder run a little longer. Never let a winner turn into a loser. Right? And what happens in a loss? You might widen the stop to give the trade more room to breathe. Or you average down and you add to the position, maybe even double up on your next trade, using some kind of martingale strategy to recover the loss. Do you see what you're doing there? You're playing it safe when you're winning, and you're taking risks when you're losing. Completely normal, natural, sane behavior. But it doesn't work in trading, because what that's doing is cutting your winners short and letting your losses run the exact opposite of what you need to do if you want to make money. That's why profitable traders are basically crazy. They act in a way that isn't natural for humans. But there is no way to be profitable unless you can do this. You are the most important element in a profitable system. You are the fifth critical factor. I can honestly say the reason I've got a 100% success rate with my clients is because of this final element. Okay, so you know the five essential factors you must have for your trading strategies to be profitable. But now you need to know the details that can help you put all of the components together. So click one of the links on the screen now and check out some of the other videos on my channel. And. And if this has been helpful or interesting for you, maybe consider subscribing to the channel. I'd really appreciate that. So thank you, and I'll see you next time.