Recently one of my reader sent an email to me. In the email he said that he used to attend a forex trading course that costs him more than $3000. In the seminar the speaker taught the students how to trade GBPJPY using MACD and Williams.
I am always skeptical whenever people tells me that using fixed indicators in their forex trading strategy will turn out to be profitable. I can simply perform a quantitative test to prove that using fixed indicators on currency pairs will not work over a period of time. This is because different currencies have different behaviour and this behaviour changes over time as market condition changes. So we cannot use the same indicators for a specific currency pairs for all seasons.
In my view trading strategy can be narrow down into 2 broad categories:
1) Trending following and 2) Reverting to the mean.
1) Trend following strategy means if the trend is up, you follow the direction and buy. If the trend is down, you follow the direction and sell. This is why most people say the trend is your friend. In this case, indicators used for this strategy will be MACD, Parabolic, Bollingerband etc.
Currency pairs that currently belong to this group are EURJPY, EURUSD, USDJPY, GBPUSD.
2) Reverting to the mean strategy means if the price goes up too high, it may be time to sell. Vice versa if the price goes down to much, it is time to buy. In this case indicators used will be Williams, Stochastic, Commodity Channel, RSI etc. If you have been trading long enough, you will know that the trend is NOT always your friend. The trend can be a trap many a times.
Currencies that used to belong to this group are AUDUSD, NZDUSD, USDCAD. But behaviour of these currencies have changed lately due to market’s wild move.
So those traders who had previously been successful in trading AUDUSD using stochastic will face serious damage in his trading lately.
To solve this problem I have developed a system that is flexible and adjust itself to market conditions. Quantitative tests are performed on a weekly rolling basis so as to capture up-to-date behaviours and patterns of the various currency pairs. Then using the information from the quantitative test to generate buy and sell signals. (Brendan)