When it comes to selecting systems to trade in the Forex market, you have the choice between buying one off-the-shelf or browsing the Internet for a free one.
The big problem with free Forex trading strategies is that they haven’t been tested, and there is little evidence of their reliability.
Even worse, the PDF’s and basic rules can lack a proper money management education.
Market conditions can change, and the system can start to lose money day in, day out. In that situation the trader thinks that it clearly needs to be adjusted; but how? By adding more indicators to filter out the bad trades. This is funny because if it were that easy, everyone would be millionaires. In my opinion, there are six main reasons to change the trading system.
Trading is a Learning Process
Learning how to trade is not a matter of finding the ideal system, indicator or trading pattern. Rather, trading is a skill, akin to chess. This means that trading consists of component skills that must be practised and refined over time.
These include psychology, trading webinars along with the screen time that will lead to the development of skills related to proper timing, trade execution, pattern recognition and risk management.
Markets are not a Constant
The market changes all the time, so we must change with the market. The movement and behaviour of financial instruments, including currency pairs depends largely on the macro environment at the time, because the players involved keep changing their behaviour according to the wider economic climate. Whether a currency pair is reacting to a news release, a technical level or manipulation, the nature and severity of its reaction depends on many things, such as inflationary cycles, bull/bear market conditions in equities and global macro themes. Because of that, a lot of perfectly fine technical trading systems suddenly stopped working and their creators probably still don’t know why.
Lack of Trust
You have to trust your trading system. When you start trading with real money, and just after only a couple of losing trades, you might start questioning your system’s usability. You have to trust your set-up, you have to trust your money management, and you have to trust your exit strategy. If you don’t, you’re likely to change your system before it has a chance to prove itself. Will you trust it? It depends on yourself.
Exponential Moving Average (EMA) crossovers
In my opinion, many EMA crossover systems don’t work.
Price tends to cross over historical levels more than it tends to expand away from it. This can lead to a host of false signals that will turn into losses.
Price tends to revert to the mean or, in other words, return to its historical price levels or its averages. This is why there are so many whipsaw losses. An additional reason is that the price will revert more often when it extends away from the (mean) average. The simple example is the so-called EMA spiral. Have in mind that EMAs are excellent dynamic support/resistance indicators though, much better than a simple buy/sell indicator.
All indicators have been derived from price. Indicators are there to help you make decisions; they don’t make decisions for you. If a system uses too many indicators on the chart, then it is prone to give you many false signals, and you’ll end up filtering out the good trades as well.
Forex marketers love indicators because they are a simple ‘shiny new object’ that are an easy sell to newbie traders.
No Valid Statement
Many of the systems out there sell without any substantial proof of their effectiveness. Okay, you have bought a system, it shows a nice PDF with results. But that PDF doesn’t contain any info about a trader, the system, the account or any link to any 3rd party tool such as Myfxbook. Part of the problem can be found in the first paragraph above, and it is connected to money management.
The system might be right, but it lacks a proper money management component. The best way to learn proper money management is by trial-and-error or by visiting webinars hosted by traders who can show you what adequate money management should look like.
However, both winning and losing streaks are entirely reasonable. Start thinking in big sample sizes. Don’t just analyse one or two trades. Collect a database of hundreds of trades before you make an educated decision about your trading system. Try it on a demo account. Don’t blindly change or alter your trading approach after few bad trades.
Remember – The Holy Grail lies within you.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.