Trading Systems and Market Dynamics in Forex Trading

On September 25, 2012 | By | In Systems

Most Forex traders both successful and otherwise have some trading systems. How successful the trading system is would depend on the market dynamics. If you study Forex trading systems, you will find that many trading systems depend a lot on the indicators. But all of the trading systems depend on one thing, which is pattern recognition. Pattern recognition lies at the heart of most trading systems.

Take Elliot waves for example. Forex traders try to find patterns in the chart and then base their entry and exits on how these patterns work out. They try and interpret these patterns as waves. The same works with fibs as well. Forex traders basically look out for highs and lows and try to find patterns, match them and use them for fibs. As these depend a lot on the patterns on the Forex market charts, which are in turn dependent on subjectivity, we find that many Forex traders interpret these waves and patterns in different ways and this is the reason why, though many traders might follow Elliot and fibs, their results from this vary a lot.

Forex trading systems which depend on indicators also depend on pattern matching. Just throw in 2 or 3 indicators into the Forex chart and watch it. Say throw in 12 ema, 20 sma and 10 macd. All that the traders have to do is look for patterns. If 70% of the time, they find that when 12 ema crosses 20 ema, the price goes up, then they have a trading system. So all that they need to do is throw in some indicators, tweak the parameters and watch for patterns. If they are able to find a pattern by which price rises or falls 70% of the time when the pattern occurs, then they have a good Forex trading system. Sometimes, the trading system may not be so straightforward. They may need to consider news, whipsaws and all that.

But Forex trading systems do not work forever as they change due to the market dynamics. The Forex market is never constant. It keeps changing its character. So what might work today may not work tomorrow. The correlation between the various Forex currency pairs changes over time. Pairs that were strongly correlated 5 years ago (like EUR/USD and USD/CHF) are no longer so closely related. Likewise, the volatility of the Forex currency pairs also changes over time. Some pairs which had a daily range of 40-50 pips now have a range of 70-80 pips and the opposite is true as well.

This is just one example of changing market dynamics. So with the market changing so much over time, the trading systems also need to change and adapt to the changed market scenario. That’s why trading systems which used to work very well a couple of years back do not work so well now. So be careful in choosing your trading system and once you have done that, keep following your systems closely to find out the time when their effectiveness becomes less and at those times, tweak it to make it more effective or move on to another trading system.

This post was offered by our friends from Trading Singapore:  on their Forex trading blog http://tradinginsingapore.com you can find more useful materials about Forex trading strategies and trading tips. Visit their blog Forex trading in Singapore to increase your knowledge in Forex trading!

 

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