The reason for this is because when you’re back testing your system on historical charts, you are only seeing the obvious setups which have occurred, and not always seeing the ones that are less obvious. These less obvious ones sometimes can produce losses, which is why back testing isn’t always the best method to implement.
A better method of determining profitability is by trading your system in real-time with a demo account. This would give you a true understanding of what your system is capable of. This would also allow you to familiarize yourself with your trading platform at the same time. When determining profitability you must look at it in terms of expectancy and opportunity.
Expectancy & Opportunity
These two factors together will be able to tell you what you could expect to make over a period of time. Expectancy is calculated with the following formula:
(Probability of winning × average win) – (Probability of losing × average loss)
This will give you a figure which is the average amount you can expect to make per trade. This shouldn’t be a negative amount, if it is you should look at some other method of trading since you cannot make money on a system that produces a negative expectancy. Obviously the higher this figure is the better. Now to the opportunity factor.
The opportunity factor is how often you are able to trade using your system. By multiplying your expectancy figure with your opportunity factor it will tell you how much you could expect to make over a period of time. The more opportunity you have to trade, the more money you should expect to make. This now brings us to the last component of a trading system, money management.
Money Management
Without proper money management you will end up as a statistic. In other words one of those 90%+ of traders who loose their money. Money management tells you how much of your account balance to risk per trade. The whole point of money management is to ensure your survival over the long term, and to preserve your capital.
The most common form of money management is the percent risk model which tells you not to risk more than x percent of your account balance on any one trade. A range between 1-3% is generally an accepted amount which has been a reliable percentage to use in order to make money in the long term.
Conclusion
By taking into consideration the above factors you will be able to determine if a trading system best suits you, and with some simple mathematical calculations you will be able to determine its profitability


الموضوع الخامسForex Glossary

Accrual The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals, over the period of each deal.Actualize The underlying assets or instruments which are traded in the cash market.Adjustable Peg An exchange rate system where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency. The official rate may be changed from time to time.Adjustment Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.Agent Bank A bank acting for a foreign bank. In the Euro market - the agent bank is the one appointed by the other banks in the syndicate to handle the administration of the loan.Aggregate Demand Total demand for goods and services in the economy. It includes private and public sector demand for goods and services within the country and the demand of consumers and and firms in other countries for good and services.Aggregate Risk Total amount of exposure a bank has with a customer for both spot and forward contracts.Aggregate Supply Total supply of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.Agio Difference in the value between currencies. Also used to describe percentage charges for conversion from paper money into cash, or from a weak into a strong currency.Aggressor A trader dealing on an existing price in the market.Appreciation A currency is said to 'appreciate' when it strengthens in price in response to market demand. Describes a currency strengthening in response to market demand rather than by official action.Arbitrage Profiting from differences in the price of a single currency pair that is traded on more than one market.Arbitrage Channel The range of prices within which there will be no possibility to arbitrage between the cash and futures market.Around Used in quoting forward "premium/discount". "Five-five around" would mean five points on either side of the present spot value.Ask Price Sometimes called the Offer Price, this is the market price for traders to buy currencies. Ask Prices are shown on the right side of a quote - e.g. EUR/USD 1.1965 / 68 - means that one euro can be bought for 1.1968 US dollars.Asset An item having commercial or exchange value.Asset Location Dividing instrument funds among markets to achieve diversification or maximum return.At Best An instruction given to a dealer to buy or sell at the best rate that is currently available in the market.At or Better An order to deal at a specific rate or better.Authorized Dealer A financial institution or bank authorized to deal in foreign exchange.Average Rate Option A contract where the exercise price is based on the difference between the strike price and the average spot rate over the contract period. Sometimes called an "Asian option".Back Office The office location, or department, where the processing of financial transactions takes place.Balance of Trade The value of a country's exports minus its imports.Bank Notes Paper issued by the central bank, redeemable as money and considered to be full legal tender.Bank Rate The rate at which a central bank is prepared to lend money to its domestic banking system.Bar Chart A type of chart used in Technical Analysis. Each time division on the chart is displayed as a vertical bar which show the following information - the top of the bar is the high price, the bottom of the bar is the low price, the horizontal line on the left of the bar shows the opening price and the horizontal line on the right of bar shows the closing price.Base Currency In terms of foreign exchange trading, currencies are quoted in terms of a currency pair. The first currency in the pair is the base currency. The base currency is the currency against which exchange rates are generally quoted in a given country. Examples: USD/JPY, the US Dollar is the base currency; EUR/USD, the EURO is the base currency. Bear Market An extended period of general price decline in an individual security, an asset, or a market.Bid Price is the price a trader can sell currencies. The Bid Price is shown on the left side of a quote - e.g. EUR/USD 1.1923 / 68 - means that one euro can be sold for 1.1923 US dollars.Bid/Ask Spread is the difference between the bid price and the ask price in any currency quotation. The spread represents the broker's fee, and varies from broker to broker.Big Figure The first two or three digits of a foreign exchange price or rate. Examples: USD/JPY rate of 108.05/10 the big figure is 108. EUR/USD price of .8325/28 the big figure is .83Bretton Woods The site of the conference which in 1944 led to the establishment of the post war foreign exchange system that remained intact until the early 1970s. The conference resulted in the formation of the IMF. The system fixed currencies in a fixed exchange rate system with 1% fluctuations of the currency to gold or the dollar.Broker An agent, who executes orders to buy and sell currencies and related instruments either for a commission or on a spread. Brokers are agents working on commission and not principals or agents acting on their own account. In the foreign exchange market brokers tend to act as intermediaries between banks bringing buyers and sellers together for a commission paid by the initiator or by both parties. There are four or five major global brokers operating through subsidiaries affiliates and partners in many countries.Bull Market A market which is on a consistent upward trend.Bundesbank Central Bank of Germany.Buy On Margin The process of buying a currency pair where a client pays cash for part of the overall value of the position. The word margin refers to the portion the investor puts up rather than the portion that is borrowed.Buy Limit Order An order to execute a transaction at a specified price (the limit) or lower.Candlestick Chart A chart that displays the daily trading price range (open, high, low and close). A form of Japanese charting that has become popular in the West. A narrow line (shadow) shows the day's price range. A wider body marks the area between the open and the close. If the close is above the open, the body is white (not filled); if the close is below the open, the body is black (filled).Central Bank A bank, administered by a national government, which regulates the behavior of financial institutions within its borders and carries out monetary policy.Chartist A person who attempts to predict prices by analyzing past price movements as recorded on a chart.Closing a Position The process of selling or buying a foreign exchange position resulting in the liquidation (squaring up) of the position.Commission The fee that a broker may charge clients for dealing on their behalf.Cross Currency A currency pair that does not include US dollars - e.g. EUR/GBP.Currency Money issued by a government. Coins and paper money. It is a form of money used as a unit of exchange within a country.Currency Pair Two currencies involved in a Forex transaction - e.g. EUR/USD.Currency Risk The risk that shifts in foreign exchange rates may undermine the dollar or any other foreign currency value of overseas investments.Day Trade A trade opened and closed on the same trading day.Day Trading Refers to a style or type of trading where trade positions are opened and closed during the same day.Day Trader A trader who buys and sells on the basis of small short-term price movements.Dealer An individual or firm that buys and sells assets from their portfolio, acting as a principal or counterpart to a transaction.Depreciation A fall in the value of a currency due to market forces.Desk Term referring to a group dealing with a specific currency or currencies.Devalution The act by a government to reduce the external value of its currency.Direct Quotation Quoting in fixed units of foreign currency against variable amounts of the domestic currency.Discretionary Account An account in which the customer permits a trading institution to act on the customer's behalf in buying and selling currency pairs. The institution has discretion as to the choice of currency pairs, prices, and timing-subject to any limitations specified in the agreement.Economic Indicator A statistical report issued by governments or academic institutions indicating economic conditions within a country.Euro (EUR) The single currency of the European Economic and Monetary Union (EMU) introduced in January 1999. This is the amalgamation of the following currencies, after Jan. 1, 2002 these currencies will be considered legacy currencies. Germany Deutsche Marks, Italy Lira, Austria Schillings, France Franc, Belgium Francs, Netherlands (Dutch) Guilders, Finland Markka, Portugal Escudo, Greece Drachmas, Ireland Punt, Luxembourg Francs, Spanish Pesetas.European Central Bank (ECU) The Central Bank for the new European Monetary Union.Execution The Process of completing an order or deal.First In First Out (FIFO) refers to the order open orders are liquidated. The first orders to be liquidated are the first that were opened.Foreign Exchange (Forex, FX) Simultaneously buying one currency and selling another.Fundamental Analysis Analysis of political and economic conditions that can affect currency prices.Leverage or Margin The ratio of the value of a transaction to the required deposit. A common margin for Forex trading is 100:1 - you can trade currency worth 100 times the amount of your deposit.Limit Order An order to buy or sell when the price reaches a specified level.Lot The size of a Forex transaction. Standard lots are worth about 100,000 US dollars.Major Currency The euro, German mark, Swiss franc, British pound, and the Japanese yen are the major currencies.Minor Currency The Canadian dollar, the Australian dollar, and the New Zealand dollar are the minor currencies.Offer (Ask) The rate at which a dealer is willing to sell a currency.Offsetting transaction A trade with which serves to cancel or offset some or all of the market risk of an open position.One Cancels the Other (OCO) Two orders placed simultaneously with instructions to cancel the second order on execution of the first. A designation for two orders whereby one part of the two orders is executed the other is automatically cancelled.Open Order An order that will be executed when a market moves to its designated price. Normally associated with Good 'til Cancelled Orders.Open Position An active trade that has not been closed. An active trade with corresponding unrealized Profit and Loss, which has not been offset by an equal and opposite deal.Order A customer's instructions to buy or sell currencies.Over the Counter (OTC) Used to describe any transaction that is not conducted over an exchange.Overnight Position Trader's long or short position in a currency at the end of a trading day.Pips or Points The smallest unit a currency can be traded in. The smallest unit of price for any foreign currency. Digits added to or subtracted from the fourth decimal place, i.e. 0.0001.Political Risk Exposure to changes in governmental policy which will have an adverse effect on an investor's position.Price The price at which the underlying currency can be bought or sold. Price Transparency The ability of all market participants to "see" or deal at the same price. Describes quotes to which every market participant has equal access.Principle Value The original amount invested by the client.Profit /Loss or "P/L" or Gain/Loss The actual "realized" gain or loss resulting fromtrading activities on Closed Positions, plus the theoretical "unrealized" gain or loss on Open Positions that have been Mark-to-Market.Quote Currency The second currency in a currency pair. In the currency pair USD/EUR the euro is the quote currency.Rally A recovery in price after a period of decline.Range The difference between the highest and lowest price of a future recorded during a given trading session.Rate Price at which a currency can be purchased or sold against another currency. The price of one currency in terms of another, typically used for dealing purposes.Resistance Price level at which technical analysts note persistent selling of a currency. A term used in technical analysisindicating a specific price level at which analysis concludes people will sell