All currencies have periods of trending and consolidation so its easy, to build a system which can trade all currencies and make money long term. This concept is nothing new, both Richard Donchian's 4 Week Rule and the Turtle Trading Rules which date back over 30 years, were systems which not only trade Forex markets successfully, they can be applied to any market which trends and make money.
A Trading Strategy to Trade ALL Markets
Let us look at the definition of a trend following trading system to trade all markets:
Its a strategy is a trading system, with the same rules used to trade all currencies and financial instruments and the exact same parameter settings and logic, are used to trade be it the - EUR/USD or EUR/GBP pair. The currency trading signals, are all generated in the same way across all markets.
Timeless Logic Means – This Type of System Will Always Make Money
When looking at the markets its obvious they trend so you focus on locking into and making money from these trends. The logic is – Forex markets will always trend therefore, for the system to fail long term, would need human nature to change and of course it won't. If you have a system that can trade anything profitably, long term profits is almost guaranteed. This is because the natural behaviour of humans that gives the profit will always be there.
Systems like this are not hard to build and we have already given you two free systems earlier which will make money long term and we have an in house system which is based on long term trend following which makes money so is this a good way to trade currencies?
The Advantages of this Method
The answer is with a good system and a big enough spread of contracts, you are almost guaranteed to make money. Furthermore, a long term trend following system, only needs to have simple logic and as the rules are set, you simply follow the rules. You don't need to spend much time on your trading and this is due to the long term nature of this type of trading method.
Long term trading with a set of rules does have drawbacks and this should be obvious because if they didn't who wouldn't want to trade long term and make almost guaranteed profits. If these trading systems didn't have drawbacks, everyone would be using them and making money easily but this is a type of trading which also presents problems, as well as giving them advantages.
The Disadvantages of this Method
The logic of a system to trading everything is actually one of the major problems of the system andthe system focuses on catching trends. In currency markets, you will tend to see, most currency pairs are in periods of consolidation most of the time and NOT trend following. Furthermore more many currencies are correlated to each other so, when one pair is trending so to are many other pairs and this also applies to periods of consolidation which brings us to the problem of draw down.
In our testing, on long term universal trend following systems, we have found that drawdowns can last for a year or longer, before the system moves to make a new high in equity. Generally we have found, the system makes money overall only in short periods of time. The rest of the time the system is flat or in drawdown. Simple trend following systems do make money though and over holding periods of 5 – 10 years, they can turn in 10 – 30% annualised gains which easily beats the majority of managed funds and is better than almost any Hedge fund manager.
Is there a Better Mechanical Trading Method?
Before people tell me, the algorithmic systems professional money managers use are better than the simple trading systems I have outlined above there not and the facts prove it. If you had invested, in an average Hedge fund since 1998 to the present day, you would have been better off in t-bills! This is because you would have made twice as much money! You might be thinking why don't professional traders use these systems, if there algo trading methods, produce such poor returns?
Bank and brokerages are NOT interested in making money for clients. These institutions have huge overheads and salaries to pay, so they create the mystique of advanced trading systems which beat the market but all they do is trade a lot and make money for the company, who is using them. These managers also know, that if they used universal long term trading systems, the public who invested in them would withdraw because the draw down periods would make them withdraw their money as most investors, are greedy and want instant results from trading programs.
Holy Grail Is Not Possible but Consistent Profits Are
Due to the nature of how currency pairs move, you can see why, there will never be a mechanical trading system which is the holy grail which can give consistent returns with low draw down. The best you can do is generate solid long term returns but for patient traders this is great news.
The reason of course is that, you only need a simple set of rules based on trend following and if you have sound money management and have enough money in your account to ride out drawdown, you are almost GUARANTEED to win long term because human nature ensures that long term trends will always happen in currency pairs, despite the fact they spend the majority of time in periods of consolidation.
Final Words
Mechanical trading systems which can make money with a simple rule set are nothing new – they have been around for decades but most traders and fund managers won't use them for the reasons already stated. This style of trading, suits patient traders looking for above average returns long term. We all want the ultimate system -the one that just gives us money with no drawdown like an ATM but its not possible in the real world.
So the next time you see Forex robots and Expert Advisors claiming it is possible, you know its not true. The best way to trade currencies with a mechanical trading system is to see markets for what they are and not how you would like them to be. If you do this, you can become a successful FX system trader from home.
