There are many Forex trading techniques and strategies. If you go to the bookstore you will find shelves of books on how to trade in the Forex market. If you Google ‘Forex techniques and/or strategies’ you will get millions of hits. And if you visit places like the Forex Factory Forums site, you will find hundreds of strategies with just as many viewers taking part almost every day of the week. Which of these systems work and which don’t?
Trading Forex as a retail trader is in its inception and many of the methods used are more like homemade recipes than the sophisticated strategies that are required to trade in a highly competitive market. Retail traders do not have the same advantages that large banks and hedge funds enjoy and employ.
A retail traders eagerly gets into trading thinking it will be easy, only to learn after severe losses, it isn’t. One trader I spoke to over the phone placed thousands of dollars into a ‘live’ account after only two weeks of trading a demo account and reading only half of one book, Currency Trading for Dummies. Fortunately, he came to his senses after losing money in his first trades and called for help.
To get a head start a Forex trader needs to find a system that offers an objective and rational entry for their trades. No matter the kind of trader you are; scalper, day trader, swing or long-term trader, you need an objective trading method.
How does one know the difference between an objective or subjective method of trading?
David Aronson an adjunct professor at Baruch College and one time proprietary trader for Spear Leeds and Kellogg and also a Chartered Market Technician distinguishes between them,
“The acid test for distinguishing an objective from a subjective method is the programmability criterion: A method is objective if and only if it can be implemented as a computer program that produces unambiguous market positions (long, short or neutral). All methods that cannot be reduced to such a program are, by default, subjective.”*
Many Forex traders do not take this into account. The reason is that it typically takes some programming ability or it requires the help of a programmer. Many traders have system rules that are clearly defined rules however they do not follow them. One of the comments that you will see the most on trading forums is, ‘my system works when I follow the rules.’ This kind of statement clearly shows why an objective signal must be the starting point for any trading system.
Suppose the rules of a particular trading system were as follows. Trade short when the RSI (Relative Strength Index) reaches a level of 75 and a fast moving average of 9 crosses below a slow moving average of 45. Why would a trader not execute that trade?
They might be getting a sandwich in the kitchen. Or, it might be questionable as to whether the moving averages crossed at exactly the same time as the RSI hitting 75. What if when the signal occurred you remembered the last trade in which you lost $1000. You’re less sure than you were before that the method works. Fear enters in. The trading strategy and/or technique has become interpretative or subjective.
A quick trip to a website with multiple trading forums will show that this is true. The typical trading system is more about the indicators then it is about the objectivity of the signal. Most forums are about interpretation and understanding how better to interpret the trading system.
The result is a faith-based trading system. Chart patterns, Elliott Wave, Gann Theory, Fibonacci are all subjective techniques and strategies unless they have been programmed. They are interpretive; either by the trader themselves or between two different traders looking at the same chart. As a result the system is not testable and therefore not scientific. There can be no empirical challenge to the result.
If the system is programmable it has a signal that does not need interpretation, the rules are built into the algorithm. One way to prove the idea of interpretation vs. objectivity is to follow an Elliott Wave forum. The interpretations of the wave counts and therefore the possible direction will make you dizzy. This could be true of many forums and why many traders get off on the wrong foot.
If you are new to trading or if you have traded unsuccessfully then you should look for, or build, a trading technique or strategy that is built on the foundation of an objective trading signal. From there other steps will need to be taken to determine if the signal is a good one. But to begin as you ponder what system to use, ask yourself, can it be programmed? Is it objective? Build a system that sends an alert to your trading screen, even better, a text or email message. This will mean that the signal is objective and an algorithm decided the signal to trade; not you.
*Evidenced-based Technical Analysis