|03-05-2009, 03:55 AM||#1 (permalink)|
Join Date: Aug 2007
Location: Melbourne, Australia
Forex Trading Strategy System
If you’ve been trading the forex market, you’ve either been creating a forex trading strategy system or in search for one… or else you wouldn’t be reading this.
I think we’ve all been there, maybe we are still at that stage; create a system, test the system, use the system, tweak the system, etc… We’ve come across several systems, used them and found out that they don’t work.
How about that trading system you personally created? It was going good, then suddenly the market behaved differently and you lost all your profits. So, back we go to the scarp book to create a new and better system. We need a system for any market condition… everyone’s in search for that holy grail system.
Is there a holy grail of forex trading? If someone did find that holy grail, I don’t think they would share it with anyone. If a system is capable of earning you your $1million, wouldn’t it be logical to sell it for more than $39, $59, $97? If I was to sell such a system, I would sell it for a minimum of $30k or not sell it at all.
But… maybe there are just those good people who will sell it for a cheaper price I think you should ask yourself that question: If you had such a high return system (potential of making $1million), would you sell it for $97?
Just be careful of the many sharks out there
…And in advance, I’m not here to sell you one or recommend you one.
Forex Trading Strategy System
Here is what I want to share with you when you create your own trading system. I just want you to be aware of a simple concept that hopefully could make your trading more successful.
Having 4 or more indicators doesn’t increase your winning edge in trading. If you ever tried to create a trading system, you might have complicated the process. You might have 4-7 technical indicators within your system, and that’s over complicating things.
If you’ve taken enough time to study them, you would realize that ALL indicators reflect or mirror each other.
Example: Using these given constant and technical indicators would produce the same entry signals. MA (26) , MACD (12,26,9), CCI (26), RSI (26), ICHK (9,26,52), etc…
This may sound weird, but 1 indicator can make you more than you can imagine. 3 technical indicators are ok, but anything more than that is irrelevant. Seems bizarre and illogical? No, not really. You can find the same amount of false signals with 1-3 indicator compared with 4-10 indicators.
How to make more money with fewer indicators
In the early days of trading they only used one system or one indicator. And the truth is that they made money from that single indicator alone. Time and time again as new inventors of a new indicator proved that money can be made from their invented indicator.
John Bollinger (Bollinger bands), Gerald Appel (MACD), Donald Lambert (CCI), Charles Dow (Dow theory), William D. Gann (Gann Angles), Ralph Nelson Elliot (Elliot Waves) to name a few of the greats. These guys became well known for their indicator because that is what they used to make their millions in trading.
Take for example the Japanese candlestick. The Japanese created the candlestick to trade rice. They exploited statistical data in its simplest form, and they were very successful with it. The candlestick was invented in the 17th century. And the MACD, Bollinger bands and Gann angles wasn’t even invented yet.
You can make a lot of money from simple moving averages (SMA) alone. As knowledge passed down from teacher to student, it gets diluted. And with years of diluted information, most of today’s traders don’t even know how to use a MA properly. Rather, they love to debate that EMA or WMA are better than SMA.
The Problem and the Flaw
Even though we are not in the 17th century, the fundamentals of these technical indicators still holds true. You may argue that today’s market is very noisy and turbulent, but it is irrelevant due to that these indicators will always calculate the historical data. Thus, it will produce the same results from now and for centuries to come.
But from all the noises and turbulences of the market, a trend is always to be found. Thus, the simplest indicator will always show you the trend for you to take advantage of.
The biggest problem is emotion. The early traders made their millions over time. Today, most traders’ expectations are to make their millions in a very short amount of time. They lose control of their emotions, which lead to losing money.
The respected and great traders made their money in a slow and gradual process. The old generation way of thinking was: hard work and the rewards will come in due time. In today’s way of thinking: little or no work, want the rewards now and not in 5 years.
The great traders also admitted that the indicators are not 100% perfect. It means that the indicator will produce a false signal. This is true in both fundamental analysis and technical analysis.
So the main question is: How can you avoid these false signals?
This is the question you should be asking yourself. When you have answered this question, you are on your way to a successful trading system
Even the simplest system/indicator is not 100% perfect and has flaws. Limiting and avoiding those flaws will make you become a successful trader. Can you imagine using a simple indicator with certain flaws? Now add more indicators with other flaws… Aren’t you just complicating it and making it worse? Adding more indicators is like adding more problems and flaws into your forex trading strategy system.
Why re-invent the wheel and why complicate things? You can be successful when you grasp the fundamentals. That is the key, exploiting statistical data in its simplest form. You can be very successful in trading the forex using only one or two indicators.
Wishing you all the best with your Forex trading,
PS. Stay tuned for my next post “How to avoid the flaws & false signals of a technical indicator”
Last edited by Power; 03-05-2009 at 03:58 AM.
|03-26-2009, 03:36 AM||#2 (permalink)|
Join Date: Aug 2007
Location: Melbourne, Australia
How to avoid the flaws and false signals of a technical indicator
So, you have been using a certain indicator for a certain amount of time now. You even use the technical indicator to find the entry points or show you the overall trend. My question is “how well do you know the function of the indicator?”
It is good to have an understanding of how the indicator calculates the data, the mathematical equation required. Fortunately, we have the computer to do all of that for us. Also, knowing it doesn’t really make you a better trader, but it is good for some foundation of knowledge.
Function and Maintenance
Understanding your technical indicator is like driving a car. You don’t need to understand the physics of the combustion engine. You just need to learn how to drive and it will take you from point A to point B.
But wait, it is not that simple. So you know how to drive, what would happen if you don’t know the basic function/maintenance of your car? Your car would break down, right? You don’t just keep driving. You need to maintain your oil, water, petrol, batteries, etc…
Using any technical indicator is like using a car. You just can’t use it all the time without ever maintaining it. A technical indicator requires a similar approach like maintaining a car. In a car, you need to know when you change your tyres, add petrol, change the oil, add water, etc... Using a technical indicator, you need to know when to use it and when not to use it.
Oh, I know your situation because I personally been there too. You know, one week you make 500pips. Then the following week, you lose the 500 pips or more. Make 100 pips in one trade. Then you lose 100 pips or more in the following trade. And I’m excluding all the emotional aspects. Meaning, you are much disciplined to follow the indicator and exclude all emotion based decisions, leaving all the decisions on the indicator.
Address the problem
You need to understand the capabilities and limitations of the technical indicator. No doubt, you have made winning trades using your forex trading system. And you also made losing trades using the same indicator or the same forex trading system.
Do you know the limitations of the technical indicators? Understanding your losing trades is more important than understanding your winning trades. It may sound like focusing on the negative, but why is this? Because a technical indicator was designed to produce a more favourable odds to the trader.
You see, a technical indicator is around 60-80% correct most of the time. And 20-40% wrong most of the other time. So, why would you try to concentrate on the 60-80% wining trades? Stop fixing what’s not broken. You can’t increase the winning signals, it is at a default of 60-80%. But the 20-40% losing signals, well you can decrease it by avoiding it.
Thus, decreasing your losing trades means retaining more of your profits. It means less emotional rollercoaster stress to keep you sane for another day of trading.
Understanding the limitation and the flaws
You can’t fix a problem if you are not aware that the problem exists. Time and time again, traders don’t know what the problem is. This is what the traders’ know for a fact:
1. Technical indicators are not 100% correct all the time.
2. Technical indicators are lagging.
There is a big difference between “Knowing” and “Understanding”. Everyone knows point 1 and 2, but they don’t understand it. Point 1 and 2 sounds too simple enough, but do you understand the “Why?” Why are technical indicators not 100% all the time? And why are the technical indicators lagging?
Here’s why (pay close attention here):
Technical indicators calculate historical data. It cannot produce any result without first some data, hence the term ‘lagging’ because it is delayed information.
It is designed to detect a trend. When a shift in a trend occurs, the technical indicator cannot detect the shift straight away because it requires more data to confirm the shift in the trend.
So what does that mean? It means that in a consolidating market (market going sideways) the indicator doesn’t have enough time to calculate and produce a trend. Example: When the market is going up the indicator shows up. When market shifts down there is a delay in the indicator. The market then shifts up and then the indicator would only then starts to shows down (false signal). The moment the market shifts down again, the indicator would only be catching up and would indicate up (another false signal).
90% of losing trades occur during consolidating times. This is the time when technical indicators gets chaotic and starts to produce the false signals. Some of you may know this already and maybe even telling yourself that I’m stating the obvious. Of course, you have the right to think that… because I haven’t even made my point yet
Conclusion - Crucial Factor
Here’s my point: Being aware of this flaw within your forex trading strategy system, wouldn’t it make your trading system more powerful when you get informed before a consolidating market occurs? To know when ‘NOT’ to trade because the risk of trading and losing your trades are very high is just logical.
Avoiding consolidating times will reduce your losing trades. As with trade management, usually 1 losing trade requires 2 or more winning trades to breakeven and return your capital. It is very important to avoid losing trades.
Avoiding consolidation is very hard because a technical indicator will never inform you in advance. Traders are already caught within the consolidation and have lost trades before they realize it. Even Swing trading are no match to a consolidating market.
I’ve seen many forex trading strategy system that doesn’t address this major and crucial issue. Not one that I’ve come across that address’ this problem. So my advice when you create your own system, try to address this big problem; “How can I make the indicators warn me of an impending consolidation?”
Once you answer this question, you will take you trading to a whole new plateau.
Wishing you all the best with your Forex trading,
PS. Stay tuned for my next post on “How, why and when do consolidating times occur the most.”
Last edited by Power; 03-26-2009 at 03:45 AM.
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