Forex Trading Strategies and Forex Trading Systems
Used By Professional Forex Traders

Why Forex Mechanical Robot Systems Don’t Work

Anyone familiar with the world of forex trading has undoubtedly come across a website selling a forex trading “robot” software program. Such programs try to completely automate the art and skill of forex trading so that the only thing required of the user is pressing a button when they are told to. The reason why there are so many of these forex trading robots for sale and why they all sound so good is because it is an easy thing to sell.

It is very easy for internet marketers and scammers to design a nice looking webpage full of big claims about how much money you will make if you just buy their product. It is also very easy for the creators of these forex robots to back-fit their trading software to a specific time period in a specific currency pair so that it appears to produce amazing results. They then show these results on their webpage and imply that you will experience the same type of success by simply buying their product and installing on your computer.

If it sounds too good to be true…..it probably is. This old saying is no more relevant to the world of forex trading products than it is to any other. To believe that you are going to consistently make a lot of money by blindly following some strict set of trading rules dictated by a piece of computer software is almost comical. Yet many many aspiring forex traders fall prey to the scam of forex trading robots each day. The problem is that everyone wants to make money easily, and forex trading SEEMS like an easy way to make a lot of money, so it is a very easy thing to sell to people. However, nothing worthwhile is easy, and forex trading success is no different, it takes years of discipline and effort to become a professional trader.

So why is it that forex mechanical robot systems don’t work? Well…the primary reason is that there are virtually an unlimited amount of variables that influence price movement each day in the forex market. If you consider the fact that each market participant is a variable because of the fact they could possibly enter a trade and influence the market, and then consider that every single thought about the market that every single market participant has is a potential variable, it becomes evident why it is simply futile to try and encode or program the forex market. To put it succinctly, you cannot control the uncontrollable. Trying to make a computer program that can accurately predict human cognitive responses to price movement is simply not possible at this point in time.

It is best to save your money on these very expensive forex robot systems and invest in more common sense, logical, and time tested forex systems. The trick to successful forex trading is that you do not need to spend a ton of time searching for that “holy-grail” trading system. You only need to find a definable market “edge” that gives you a relatively high probability entry method. The biggest portion of successful trading is made up of sound money management and developing the proper trading mindset. Most traders end up spending most of their time on trading system development and little if any time working on their discipline and money management. Don’t fall into the trap of expensive and useless forex trading robots; use simple forex trading strategies based on price dynamics and support and resistance levels, once you acquire this knowledge begin working on your trading mindset, continue putting most of your time into perfecting an objective trading mindset and less time on system development and you will have a much better chance at consistent forex profits.

Support and Resistance Forex Strategy

A thorough understanding of how to effectively use support and resistance is crucial for any aspiring professional forex trader. There are essentially 4 primary ways to implement support and resistance levels into your forex trading routine. The 4 primary support and resistance forex strategies include: using support and resistance to trade consolidating markets, using support and resistance to trade trending markets, using support and resistance to trade breakouts, and using support and resistance combined with candlestick strategies to find confluent areas.

• Trading Ranges

Notice in the chart below how price has been stuck in a trading range between about 135.85 and 131.00 for over 2 months. By watching for price to enter into a trading range scenario like the GBPJPY daily chart below, you can simply buy or sell bounces off the trading range high and / or low. When price gets near the top of the range you can sell with a stop loss above the highest high of the trading range, and when price gets near the low of the trading range you can buy with a stop loss below the lowest low of the trading range.

• Trending Markets

Trending market conditions are arguably the best to trade in; they can be very consistent and lucrative, especially in forex. Knowing how to effectively utilize support and resistance in trending markets will make you a much better trader. Notice below in the daily chart of USDJPY there was a downtrend in place and nearly every time price broke through to new lows it eventually retraced back up to challenge this break down level. This is the point where you want to look to initiate new positions; in a downtrend like the example chart below, you want to watch for a pullback up to an old support / new resistance level and in an uptrend you would wait for a retracement down to an old resistance / new support level.

• Breakouts

Knowing how to use a breakout forex strategy depends upon having a thorough understanding of support and resistance. The problem many forex traders make when trading breakouts is that they get filled to early; before the actual breakout occurs. The best way to try and avoid this is to set your buy or sell order above or below the highest or lowest resistance or support level. In the example below of daily USDCAD we can see a strong resistance level near at 1.0215, once price broke past this level it shot higher by over 500 pips. When trading breakouts make sure to set your entry order above or below the most well-defined high or low, as in the example below.

• Support and Resistance with Candlestick strategies

Using support and resistance in combination with candlestick signals can be a very effective and accurate way to trade the forex market. This is done by finding a strong area of support or resistance and then waiting for a well-defined candlestick pattern to develop at or near the support or resistance area.

In the chart example below of daily EURJPY, we can see 2 candlestick patterns known as a “hammer”. The first hammer set the support level near 127.00-127.50. When the second hammer then formed showing rejection of this support level, we had a support level in combination with a candlestick pattern, this is known as confluence of signals and is a very strong trading setup. There are many other candlestick patterns and strategies that can be used in combination with support and resistance levels, this just one example.

You now have a basic background in support and resistance forex trading strategies. Support and resistance levels are very important in all financial markets and can actually be used in combination with price patterns as a stand-alone trading method, meaning you can trade successfully with only a thorough understanding of support and resistance and price patterns. Keep everything simple like this and you will be on the track to forex trading success.

Moving Average Cross Over Systems – Do They Work?

Moving average cross over systems are usually one of the first indicator based trading systems that forex traders come across in their quest to learn how to trade the forex market. Moving averages do indeed have a useful place in any forex trader’s toolbox. However, many traders use them the wrong way by following them mechanically through the implementation of the moving average cross over system. Blindly entering the market based on the cross-over of an 8 and 21 period EMA (exponential moving average) is a very popular trading system that some scammers and internet marketers try to sell to aspiring forex traders. There are many variations of such moving average cross over systems, the 8 and 21 will be used here for illustrative purposes.

While it is true that sometimes the moving average cross over entry will work, there are also many times where it simply does not work, and it is these times that cause forex traders to give back most or all of their profits. The common way to trade the moving average cross over is by waiting for the faster moving average (8 period EMA in our example) to cross above or below the slower (21 period EMA in our example), and once this cross-over happens you then enter a trade in the direction of the cross. Let’s take a look at a chart example to make this clearer:

Notice in the chart above of the 4 hr GBPJPY pair, the entry signal is the cross-over of the 8 period EMA above the 21 period EMA. Typically in moving average cross over systems the exit signal occurs when the fast EMA (8) crosses back under the slower EMA (21).

So we can see in the above chart that there certainly are times when the moving average cross over system does work. However, market conditions must be moving and trending well for such cross-over systems to work consistently. What happens during consolidation periods when the market is simply moving sideways in a choppy trading range? Unfortunately for traders who mechanically trade moving average cross over systems, such consolidation periods can literally destroy their trading accounts. This is because in a consolidating market as soon as the moving averages have crossed and fired an entry signal, the market is about ready to reverse and head in the opposite direction. Let’s take a look at the 4 hr GBPJPY again to illustrate this concept:

In the chart above of 4 hr GBPJPY we can see a crossover of the 8 and 21 EMA at each red arrow. This means if you were mechanically trading a moving average cross over system here you would have to enter into a trade at each crossover while exiting the last one. One major fact of moving average cross over systems that many traders don’t realize is that by the time the actual cross-over of moving averages occurs, price is well above or below the moving averages. This means you are going to be entering or exiting at a much different price than where the moving average cross over actually occurs.

Because the candle must close out before the cross-over takes place, price can sometimes be 100 pips or more above or below the cross-over price. This means in conditions like the chart example above, you are going to lose on every single mechanical cross over entry. This is the main problem with mechanically trading a moving average cross over system; you are going to have far more losers than winners and thus it is going to be extremely hard to come back. In the example above you would have endured 6 losing trades in a row before the final cross over on the far right which may have netted you some positive pips.

Moving averages do have their place in the world of forex trading systems, however blindly following a moving average cross over system is a flawed system and using moving averages in a mechanical fashion is useless. Where moving averages are useful is in highlighting areas of dynamic support and resistance, you can use moving averages to look for confluent areas in the forex market. These are areas where multiple signals are coming together in combination. We will discuss this topic further in another educational article.

Box Break Out Forex Strategy

The box break out forex strategy is one of the most well-known and consistent forex trading strategies out there. Traders have literally been using this strategy to successfully trade the markets for decades, and it works especially well in the forex markets. Every serious forex trader needs to have a working knowledge of the box break-out forex strategy as it is crucial to spotting profitable opportunities within the market. So let’s look at some examples of this time-tested forex trading strategy and discuss how you can begin to implement it into your trading routine.

The first example we are looking at below is of the AUDJPY daily chart. First, notice how price bounced between 76.50 and 80.00 several times before breaking out to the upside. Once price did finally breakout from this “box” of support and resistance, it moved a minimum of the width of the original box, which was 350 pips, typically price will go a little further than the width of the box before a major reversal, as it did in this example.

Review of the Box Break-out Forex Strategy:

• Look for “box” areas on the currency pair you are trading where price has bounced between nearly the same support and resistance levels several times, forming a box like setup.

• Trade the breakout of the box by putting a buy and sell above and below the box setup, once your first order gets filled the other one automatically becomes your stop loss.

• Set your initial target at the width of the box. In the example above the daily box of AUDJPY was 350 pips, so the initial target was set at 350 pips.

• Often time, price will retrace and test the box break-out level, such occurrences are usually very high probability entry scenarios, especially when confirmed with a rejection bar or price action setup.

The intra-day box break-out forex strategy:

Another way that many traders like to use the box break-out forex strategy is as an intra-day trend continuation pattern. In the example below we are looking at the 1 hour GBPUSD chart and we can see that the trend was up before the box formed between 1.5300 and 1.5140.

After price bounced around in this box for several days it broke decisively to the upside, with the dominant trend, shooting up 160 pips with only a slight retracement along the way.

Notice in the zoomed in chart below we can see the breakout of the box in the above chart. We also have highlighted a 1 hour pin bar setup that showed rejection of 1.5315..this rejection candle was close enough to our initial breakout near 1.5300 to be viewed as a very solid 2nd entry opportunity for any traders who missed the original breakout.

As you can see by the examples in this article, box break-out forex strategy nearly always retrace somewhat after the initial breakout. Typically the retracement will move down or up to re-test the initial breakout level, however sometimes they come just shy of fully re-testing the breakout level. In either case these 2nd entries are a much safer way to trade the box break-out forex strategy because of the fact that you never REALLY know when the box is going to DECISIVELY breakout. Often times there will be many “false” breakouts which can fill you prematurely and thus whipsaw you out of a position.

The best way to avoid this is to wait for the initial breakout and then enter on the first retracement to the breakout level, this is the more conservative way to trade the box break-out forex strategy. The more aggressive way to trade the box break out forex strategy is to simply place a buy and sell stop about 10 pips above and below the box and just sit and wait for the box to breakout, taking profit once price moves the width of the box, however keep in mind this method may result in false-breakouts filling your order in the wrong direction, but the plus side to this strategy is that you will won’t miss many of the initial decisive break-out moves.