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

5 reasons why strict rule-based forex systems don’t work

1. They eliminate human discretion

One big problem with strict rule-based forex systems is that they take away the potential of benefiting from human discretion. Developing a “gut” trading instinct is something that comes with months and years of screen time and trading experience. Eventually this gut trading instinct will become part of your trading method, if you use a strict forex system based on rules, you must follow these rules exactly otherwise the system is basically nullified. Most professional traders use some degree of discretion when planning out their trading entries, this is something that is invaluable and comes through years of trial and error. Go and read any of the Market Wizards books by Jack Schwager and you will quickly realize discretionary trading instinct is something that nearly all professional traders incorporate into their trading routine.

2. They attempt to control the uncontrollable

Another primary reason that rule-based forex systems don’t work is that they essentially are attempts to control the uncontrollable. The forex market is driven off of human beliefs and decisions that may or may not be fueled by emotion. There are so many variables that can influence price movement in the forex market that it is literally a mathematical impossibility to try and automate or program a piece of software to accurately trade the market. Even though this is the case many internet marketers and computer programming experts still attempt to make programs that they claim can bring consistent profits. The reason such software exists is because it is extremely easy to market and sell for a high price, and everyone wants to just be able to push a button and get rich, so it sells very well despite the fact that it is not effective over the long-run.

3. They teach you nothing

Blindly following a strict rule-base forex trading system will not teach you anything of substance. If you want to obtain an in-depth and useful market perspective, you need to learn how to trade from forex trading strategies instead of rule-based trading systems or software programs. Essentially all you do when using forex trading systems that are derived from rules or computer programs is act like a slave who waits for a trading signal and does not put any thought into what they are doing.

4. Decreasing effectiveness

Unknown to most beginning forex traders is that most forex trading software programs or other rule-based forex systems are fit to specific market conditions during specific periods of time. These forex systems are not effective in all market conditions and typically only work well in trending markets, which is a problem because markets tend to spend more time consolidating than they do trending. Strict rule-based forex trading systems will lose effectiveness over time because the forex market is constantly ebbing and flowing and switching from volatile to calm very quickly, the only tool that can accurately make sense out of this price action is the human mind.

5. Too good to be true

Finally, if a forex trading system sounds too good to be true, than it most likely is. Many forex trading software programs or other rule-based trading systems are parked on web sites that ramp up the performance of the trading system, making it sound so amazing and profitable that you almost can’t help but buy it. The problem is that talk is cheap and money goes quickly. Meaning, it’s easy to make a forex trading system sound really good and look really fancy on a website. However, most of these systems do not perform how they are advertised and are also very expensive. Save yourself some valuable time and money and learn a forex trading system that gives you a comprehensive perspective on the market instead of telling you to blindly follow a set of illogical trading rules.

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.

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.