2Bull Forex Blog

If you are thinking of buying a currency trading system, then you will find that well over 95% of systems sold have great track record - but lose in real time trading. The reason is curve fitting - so if you want to find one that works, learn what it is and how to spot it.

I would say that of the currency systems sold on the net, most are curve fitted on purpose, to allow the vendor to show a profit so they can sell the system - if you don’t know what it is then you will lose.

Forget the track record you see, in most cases that’s not what you’re going to get!

Curve fitting in simple terms means optimizing the system to fit the data.

A trader I know once likened this to shooting at a barn door and then afterwards, drawing a bulls-eye around everyone, to make them look like a bulls-eye!

In currency trading a system vendor will simply find his system doesn’t work on a segment of data, so he makes it work and bends the system (curve fits it) until it does.

The clue to a curve fitted system is:

Lots of rules and parameters, different rules for different types of market and different ways of trading individual currencies.

If you see a track record that shows extra ordinary profits with low drawdown it’s probably curve fitted.

Many vendors don’t realise that the more they bend the system to fit the data the more likely it is to collapse in real time trading.

No one bit of data is going to replicate itself exactly again.

If a currency trading system is soundly based, it should work across all markets and use the same rules all the time and be simple with few rules and parameters.

As long as a vendor puts this disclaimer on he is free to present any track record he likes here is the standard CFTC one:

“Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those show”.

This allows un-scrupulous vendors to present any gains they like and they do!

They know that the system wont work but they know that the naive trader will fall for a track record of gains. The vendor makes a profit and the trader has a guaranteed loss!

Lets face it anyone can make a profit in hindsight but the problem is that we need to trade without knowing the data.

If you buy a currency trading system look for the evidence of curve fitting.

The majority of systems use it whether it’s done on purpose or in error.

Stick with simple systems which are easy to understand, where the logic is fully revealed - or even better, insist on some evidence the system works, by asking for a real time track record over at least two years.

Fundamentals move currency prices and this is obvious but if you try and trade the news you will lose it is incredibly difficult to trade news stories and win - but if you know how to use fundamental analysis in your trading correctly, you can make huge profits.

Let’s start with a simple equation for market movement

Forex supply and demand fundamentals + Investor perception = price

Millions of trades see the facts but they all draw their own conclusions from what they see.

Humans are not logical, they are motivated by the emotions of greed and fear and guessing the impact of the fundamentals is the hard bit.

Consider this rather startling fact:

In the last 100 years the amount of winners in forex trading remains the same about 5% and 95% lose.

This is despite the fact that we have seen huge advances in forecasting, computers are more advanced today than the one that landed man on the moon and we can get the news instantly at the click of a mouse.

It hasn’t helped why?

The answer is simple humans determine the price of what something should be. While prices tend to move in line with the long term fundamentals prices spike away from fair value as greed and fear take hold and volatility takes prices in the opposite direction of the fundamentals a lot of the time.

It’s a fact that markets collapse when the fundamentals are most bullish and rally when they are most bearish - this is human psychology at work.

You can still use them to back up your analysis of the long term trends - but you should really use forex charts to look for price spikes away from fair value.

These are easy to see on a chart and then you can time your entry with your trading signal to take advantage of the spike.

It’s a fact that throughout history, that strong price spikes are temporary and eventually prices fall back to fair value - ALL you need to do is spot them.

News can also be used to spot contrary trades - if bullish news fails to push a market higher and bearish news fails to push it lower, this is warning you of a price change.

Today, trying to guess the impact of each individual news story is impossible, as the news is discounted instantly and you have no chance of winning.

Forex charts take care of this for you.

All forex technical analysis does is assume that all the fundamentals that are known show up instantly in price action. The technician is only interested in letting the chart tell him where prices are going next, not the reason and the bonus is - the chart shows human psychology to.

If you want to use the news then go ahead - but always use charts to time your entry and look for news stories that don’t have the affect most traders thought they would to generate contrary trading signals.

There’s an old saying:

“If you can hold your head when everyone else is losing theirs you probably haven’t heard the news”

In forex trading you have but you are looking at the news in a different way to the majority and know how to use it to make forex profits.

If you want to make money forex trading, you need to learn the art of trend following. This article will tell you the best type of trends for you to follow - in light of your trading personality and the profit potential of each method.

There are effectively three common types of trend following:

Forex day trading, swing trading and long term trend following lets look at all three

Forex Day Trading

The most popular and simply a guaranteed way to lose money - all short term volatility is random making support and resistance meaningless.

Its sounds good in theory and it makes a good story for vendors.

They sell systems that are based on worthless, hypothetical simulations which have never been traded. They don’t have a real track record and the reason is day trading simply doesn’t work.

I find it baffling that intelligent people try it and think they can in a few hours tell what a huge mass of millions of traders will do - Avoid or lose!

Forex Long Term Trend Following

The long term trends last for months or years as they reflect the economic health of the country and they are extremely lucrative if you have the patience and discipline to follow them.

The problem is many traders find it hard to follow a long term trend when volatility can eat into open profit sometimes by thousands a day. It’s rewarding, but its tough, even for experienced traders - but if you have the mental discipline and patience to do it, it’s the most lucrative form of forex trend following.

Forex Swing Trading

This is taking smaller movements with the major trends.

You are aiming to take advantage of moves that can last for a few days to a week or two. This method is perhaps the easiest for novice traders.

It’s simple, there is plenty going on and you are right or wrong quickly which means that it’s not so mentally demanding.

Of the three methods I would say that novice traders should cut their teeth on swing trading and progress to longer term trend following later if they wish.

If you are long term trend following or your forex swing trading you can learn a simple system that can be effective in about a week.

All you need to do is understand support and resistance and use a few momentum indicators to help you enter your trades - and that’s it. Combine the above with sensible money management and your all set.

How much can you make?

If you are long term trend following if you can make 50 - 60% of the major trends you would be doing well and be very rich. On forex swing trading your aim should be up to 70% of the move.

Whichever you do you don’t predict - use price momentum indicators and the price to time your entry and only trade on the reality of the price you see.

The fact is there are trends all the time you can trade for profit - but most traders like to argue with the price, predict or second guess it and lose.

If you don’t and just focus on trading the reality of price as it is, you could enjoy tremendous currency trading success.

When it comes to forex-based technical analysis, using the relative strength index (RSI) indicator or your chart can give you insight into potential trading opportunities.

First, let’s talk about what the RSI is, how it is set up on your chart, and how it can be used to decide when to enter the market.

The RSI is an oscillator, meaning that it will be separate from price data but still on the same chart and it will go up and down (oscillate) in value from 0 to 100.

When it comes to setting up your RSI indicator on the chart, the most popular setting is a 14-day period, though it is possible to tweak this setting to fit your own strategy.

Keep in mind though, that the longer the period is on your RSI indicator, the less frequently it will give trading signals, though the signals that it does give can be considered more reliable.

If the period is much shorter (like 8 or 9 instead of 14), the oscillator will be much more volatile and can give false signals more frequently, so it is important to find a balance.

Now when it comes to actually reading the RSI for trading signals, there are two main methods of doing this. With the first one, the values 30 and 70 are of critical importance (remember the RSI always gives a value between 0-100).

Typically, the lows and highs of the RSI will be below 30 and above 70, so when the RSI reaches this level and stays there, you can be sure that when it changes direction and heads closer to 50 then you will see a trend or market reversal.

For example, you are using a 10-minute bar chart and 14-period RSI. You see that the RSI has crossed the 70 line, moved to around 80 for maybe 40 minutes, and is now climbing back down. This could be a good indication that the market prices will follow and this could be a good time to sell. Your indication to enter would be when the RSI crosses 70 and continues going down.

The other popular way to trade the RSI is to use the number 50 as a center line or deviation line. This means that when the RSI crosses the center line and continues to climb steadily, this could be an indication to buy.

Conversely, if the RSI crosses the center line and continues to decline steadily, this could be a good indication to sell.

One important thing to always remember when you are using the RSI indicator on your charts is that the main purpose of this oscillator is to convey the current strength of the market, and whether or not a trend is likely to continue or reverse.