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Home Page > Finance > Where Will You Start to Build Your Forex Trading System Where Will You Start to Build Your Forex Trading System Posted: Jul 24, 2010 |Comments: 0 | ]]>
If 90% plus of Forex traders fail, why do it? Can you possibly think that you will be any different?
Most traders who trade Forex are ignorant of probability theory. Probability theory in Forex is the study of which way prices will go, up or down. That doesn't sound too complicated does it? It might be more complicated than you think however and it might have more to do with losing money in than you think.
Consider that way back in the year 1900 a man name Louis Bachelier began to study French government bonds. Probability theory had been around for 350 years going back to two fellows named Pascal and Fermat. Bachlier didn't believe in fundamental analysis or technical analysis, and decided that prices go up or down with equal probability, like tossing a coin. His work was pretty much ignored until 60 years later when Eugene Fama developed it into what is known today as the Efficient Market Hypothesis.
This is the idea you hear express often. It goes something like this, "all the important or relevant information is already priced into a stock or currency pair and all price changes are independent from one another." In the 1980s Bernard Mandelbrot showed that price changes are interconnected and they have a memory. In his words, "Today does, in fact, influence tomorrow."
]]>There is a good chance that if price moves in one extreme today it will move in the extreme again tomorrow. The markets are also not well-behaved and it is not predictable with any degree of certainty. Not the kind that economists would like to see or for that matter The Fed. Forex is one of the most volatile of markets. The way prices are absorbed in the future are not consistent, some have long memories, some short. This contradicts the random-walk theory.
So, with all of this information how do you the Forex trader make money?
1. You can't make money with robots or automated systems on a consistent long term basis. The noise in the market created by spot traders and other robots will burn up your account.
2. Fundamental analysis has some relevance in that your knowledge of market conditions and what I call the Tipping Point after Malcom Gladwell's book will give you an edge. More than if you were completely unaware of the imbalances between say the Euro and the Dollar.
3. Technical analysis which is subjective is not helpful. It is financial astrology. Trend lines, Fibonacci, Gann, Elliott Wave, moving averages, price action, etc, for the most part are not able to provide objective trading methods. At best they are storytelling that can be second guessed and interpreted differently by any number of traders.
What does work?
The best trading systems are systems that find when the market is out of balance. Typically this happens when large banks, speculators, and hedge funds move from one position to the other. The best Forex traders are the ones that anticipate these moves. The Forex trading system you use should be developed around this type of thinking.
1. Look for a system that recognizes momentum changes in the market. Momentum is best determined using indicators like RSI which has 4 signals that give the trader valuable information about what is going on in the market.
2. Use a system that creates a signal by way of an algorithm. In other words the computer tells you when the situation exists but then you use your own mind to decide if factors are right to trade.
3. Those factors might include the time of day or the type of signal or the conditions for moment.
It would be nice to buy a system that you can put on autopilot and make thousands if not millions of dollars trading Forex but this is not happening. Learn to trade Forex using a solid trading system and sound thinking. In the end you be ahead of the game.
Paul Dean is the owner of You Learn Forex and has been trading Forex for nearly five years. He has worked extensively with RSI, the Relative Strength Index in the past three years developing new insights with trader/programmer, David Moser. Their research has brought to light important statistical data regarding RSI that benefits traders who use it make better trading decisions. Paul writes a daily blog post at http://www.youlearnforex.com
]]> Questions and Answers Ask our experts your Finance related questions here... Ask 200 Characters left How can we register Forex trading company in india.? Is there any law for Online Forex Trading Business in Indian Govt. ? What is the best approach to use forex signal in forex trading? Is this driven by fundamental aspect of trading? How many people died building the world trade center ? Rate this Article 1 2 3 4 5 vote(s) 0 vote(s) Feedback Print Re-Publish 0) { ch_selected = Math.floor(Math.random()*ch_queries.length); if(ch_selected == ch_queries.length) ch_selected--; ch_query = ch_queries[ch_selected]; } }catch(e){ ch_query = document.title; } ]]> Source: http://www.articlesbase.com/finance-articles/where-will-you-start-to-build-your-forex-trading-system-2891419.html Article Tags: forex trading, currency trading, rsi, indicator Related Videos Related Articles Latest Finance Articles More from Paul Dean How to Avoid Risks in Forex TradingHow to cut the Forex trading risks as much as possible. For more free articles visit us on http://forextopten.com/articles/. (02:46)
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