Sunday, September 30, 2007

Forex System Addiction, Don't Let This Happen To You!

It is a process many new traders in forex go through. Find a system that people seem to be making money with and start trading it. At fist you make some pips but inevitably you experience some losses and then move onto the next system. We have all fallen victim to this process, it's what kills many new traders. At the first sign of a loss you move onto the next best thing and this process repeats its self over and over. Some traders can be trapped in this circle for many years.

It is the quest for the perfect system, let me assure you there is no perfect system, you will not find a system that never looses. However you can find a system that wins more than it looses, this is all you need in order to make money in the forex market. All we are looking for is an edge, an edge that over 10-20 trades will bring you out on top with a profit. Once you have this edge all you need to do is keep trading it, trade it like a machine.

Trading for a living can be very boring at times, we all enjoy experimenting with the latest indicators and systems but try to keep them separate from you main bread and butter trading system. Don't let new systems distract you from your trading routine, it is imperative in this business to find a system you like and stick to it. Focus on your solid edge that will pay you over time.

If you are wondering which profitable edges you should trade I recommend you study some price patterns, find one that appeals to you and back test it manually. You could then add this edge to your favourite system as a filter or trade it with discretion. You will be surprised how much price action can improve a system's results. Record your back testing results over a large period of time so you can know what to expect in your live trading.

Let's take a simple system and add price action to demonstrate this. For my example I will use a simple 10ema 21ema moving average cross. Everyone knows if you just trade every cross of moving averages you will end up losing your account, however this is not what we are going to do.

The cross of the moving averages is our signal to look at price action. I will only use one candle stick pattern in this example the 'engulfing candle'. Once you have a cross of the moving averages look for a small retrace with an engulfing candle in the direction of the cross, take the trade on the close of the candle with your stop behind it. I can guarantee you will be surprised with the results of this simple system, go ahead and test it out, try shooting stars also as they can be a great formation to trade on with the trend.

Although you may think that this is far too simple to work, I assure you this is why 95% of forex traders fail, they try to complicate trading too much. Keep it simple and you will succeed.

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