Happy New Year!
May all your trades be wicked good in 2018!!!
Your Forex Trader Blog Team
Now that we are only a few weeks away from the end of the calendar year and the start of 2018, the time has come to look back over the year. Which trading strategies have performed best in the Forex market so far?
All trading strategies can be broken down into two types: trend trading strategies, and mean reverting strategies. With trend trading strategies, traders define the direction of the longer-term trend and enter trades only in the same direction. Mean reverting strategies define an average price, and traders seek to enter trades back towards the average when the price has become over-extended away from it. As over 80% of the volume of the Forex market is traded in just EUR/USD, GBP/USD, and USD/JPY, I’m going to apply a rough strategy of each type to these three major Forex currency pairs and see which came out ahead. I’ll then dissect the results and see if it tells us anything useful about the way the Forex market is evolving.
My favorite basis for a trend following strategy, because it is so elegantly simple, is just to check the opening price of each week to see whether the price has been going up or down over both the past three months and six months. If yes, then that’s the trend direction, and each week is just measured as a trade from open to close without any stop loss. If these results are good, then any trend following strategy should also have produced positive results. So, here are the results for 2017 to the end of October:
|Currency Pair||Trade Results||Winning Trade %|
This is a poor result – it would be negative if the costs of all the trades were factored in. In my blog I wrote recently about using linear regression analysis, and I found that using the slope of the line of best fit over the past 20 weeks can work better. What if we try this trend-following method?
|Currency Pair||Trade Results||Winning Trade %|
Using linear regression, we got an even worse result. So overall, we must conclude that trend following strategies have not worked well this year. This isn’t surprising: trend following strategies tend to go through lengthy periods of losses, before profiting excessively during big winning streaks.
So, what about mean-reverting trading strategies?
Mean reverting strategies, as I explained earlier, are the exact opposite of trend following strategies. This suggests that 2017 should have been a good year for this type of trading strategy, so let’s test a couple of good mean-reverting strategies on the same three Forex pairs.
The first strategy is to wait for a weekly candle to make a new high or low – we will try the same period as the last test, 20 weeks. If the candle makes a new high and then closes down, or makes a new low and then closes up, enter at the open of the next week and close at the end of that week. Here are the results:
|Currency Pair||Trade Results||Winning Trade %|
There were less than 10 trades in total using this strategy, but the overall result was slightly negative. This strategy did not work well this year. Let’s look at another typical mean reversion strategy, which uses the Bollinger Bands indicator, set to its standard 20-day, 2 standard deviations bands, on the daily chart. This strategy waits until a daily candle touches one of the outer bands, and then enters once the price breaks past the other end of the candle (i.e. the candle is reversed). The trade is then held until the opposite extreme band of the Bollinger Bands is reached. Unfortunately, this strategy also produced a negative result. There is one final pure mean reverting strategy which has worked well in the past that is worth back testing: whenever a weekly candlestick moves from open to close by more than 2% in value, enter a trade in the opposite direction at the start of the next week, then close it at the end of the week. This strategy only gave a few trades all year, and the result was, again, a small loss.
There is no doubt this has been a hard year for Forex traders. It seems that all types of mechanical strategies, whether trend following or mean reverting, would, at best, have failed to make any profit this year. Trying to find a mechanical trading strategy which did perform well, I looked at a “time of day” strategy based upon the position at 9am London time compared to the previous midnight, on just EUR/USD and GBP/USD. This strategy exploits the statistical tendency of the London and New York sessions to follow any clear lead given by the Asian session, which begins at roughly midnight London time. The rule is simple: if the price is at least 25 pips higher at 9am London time than it was at Midnight, go long, or short if at least 25 pips less. The trade is closed at 5pm New York time, and no stop loss is used. There results for 2017 until the end of October were as follows:
|Currency Pair||Total Pips||Winning Trade %|
These are impressive results: not only is there a high winning percentage of trades, but the average result per trade was very good (about 10 pips for EUR/USD, 3.5 pips for GBP/USD). Even when you factor in the spread / commission, it was a nicely profitable strategy. Yet this is the only “brainless” trading strategy I know of which was a winner in 2017. Unfortunately, it was a tough year in the Forex market.
I’ve only looked at the Forex market, even though many Forex brokers also offer trading in major stock indices and commodities. Major stock indices, especially U.S. indices such as the S&P 500 and Dow Jones 30, have been in strongly bullish trends the entire year. If you buy stocks directly, the highest leverage you can get is perhaps 3 to 1, but many brokers offer 20 to 1 on major indices. The S&P 500 Index is up almost 16% year to date, and at leverage of 20 to 1 you could be up 320%, although there is a risk of being wiped out at such leverage in the event of a major market crash slipping a stop loss by more then 5%. Many brokers also charge expensive overnight fees making it costly to hold these positions for many weeks or months.
If you do use trend following strategies based upon price alone, don’t panic. A bad year is not unusual. Some of the best years for trend followers come just after very bad ones. It could be that the Forex market is getting more chaotic and harder to trade, yet there is no rule that you must stick to Forex alone. Stock indices and commodities often provide opportunities when the Forex market is flat.
There’s no question that US-based Forex traders have fewer brokerage options than their international counterparts. Nevertheless, there are some fantastic choices available in the US, including Forex.com and FXCM, two long-established, internationally acclaimed brokerage houses. If you’re looking for an NFA regulated Forex broker, you’ll want to evaluate these two choices among any other options, and you can start your research with this top US Forex brokers comparison.
FXCM, short for Forex Capital Markets, is a no dealing desk Forex broker that offers two distinct services. DailyFX, a news service, provides regular financial news to Forex traders worldwide, while FXCM itself offers trade executions on multiple platforms with competitive spreads. For US traders, leverage is restricted to 1:50 because of NFA regulations. Specifically useful for new traders may be the company’s free online learning seminars that are offered on a regular basis. Experienced traders will appreciatethe company’s fractional pip pricing and non-dealing desk nature, which ensures that the brokerage will not take the other side of your trade. Partnerships with top banks enable FXCM to have fast execution and respected trading conditions.
Like FXCM, Forex.com offers a comprehensive education center for new traders, though the company’s focus is undoubtedly on its wide range of products and services for intermediate to advanced traders. From premium market research and analysis to advanced charting packages such as Trading Central, Forex.com offers excellent options for those who enjoy trading the news or technical Forex trading strategies. Like FXCM, this US Forex broker offers both its own proprietary trading platform as well as the popular MetaTrader4 platform, so that traders trade in a platform that is entirely comfortable. Over 40 currency pairs can be traded at Forex.com, to meet the needs of nearly every trader.
Forex.com is a subsidiary of Gain Capital, a company that is publicly traded on the New York Stock Exchange. FXCM is also a publicly traded corporation. Both companies have offices worldwide and are regulated differently in countries outside of the US. It should also be noted that both companies have been fined by the NFA in recent years for slippage malpractice, or, in other words, for not making price improvements available on all orders. Both Forex.com and FXCM, however, did try to correct their poor behavior and to atone for their wrongdoings.
The best way to embark on a US Forex brokers comparison is to try each one and experience it for yourself, and both FXCM and Forex.com offers a free $50,000 practice account which is available for all of their trading platforms.
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When first learning about trading currency on the Forex, it’s not unusual for your head to spin. Like learning anything new, there is a period of total confusion followed by a little clarity followed by your first glimmer of all the bits of information beginning to come together.
To assist you in your learning, I’ve compiled a list of the symbols of the most-traded currencies. The symbol is first, followed by the country and lastly the common name and nickname of the particular currency. These countries’ currencies are involved in the highest number of transactions processed on the FX each day:
USD United States Dollar Buck
EUR Euro Euro Fiber
JPY Japan Yen Yen
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
GBP Great Britain Pound Cable
NZD New Zealand Dollar Kiwi
Each Forex currency symbol has three letters. The first two describe the country and the third the name of that particular country’s currency.
The base currency is in the first position of a pair. You could also see it called the accounting, domestic or the primary currency. The second in the pair is called the quote or counter currency. The quote currency is the quantity of that currency that is required to purchase a single unit of the base currency.
Together, these 6 major Forex pairs account for 90% of all Forex transactions:
– EUR/USD: Euro and US dollar.
– GBP/USD: British pound and US dollar.
– USD/JPY: US dollar and Japanese yen.
– USD/CHF: US dollar and Swiss franc.
– AUD/USD: Australian dollar and US dollar.
– USD/CAD: US dollar and Canadian dollar.
Because the US dollar is either the base or the counter currency in 85% of Forex trades, which means it is in all of the major pairs. Any pairs without the USD are called ‘cross rates.’ This is how Investopedia explains a cross rate:
“If an exchange rate between the Euro and the Japanese Yen was quoted in an American newspaper, this would be considered a cross rate in this context, because neither the euro or the yen is the standard currency of the U.S. However, if the exchange rate between the euro and the U.S. dollar were quoted in
that same newspaper, it would not be considered a cross rate because the quote involves the U.S. official currency.”
What is the best pair for beginning traders?
The currency pair to begin trading with is EUR/USD, for two reasons:
1. Because EUR/USD is the most commonly traded pair, which means liquidity is high and the spread, which is your cost, is usually low.
2. Because ample data is readily available on both currencies, so it is easy to access financial news and alerts. The second most traded that a beginner might choose to start with is GBP/USD.
Whichever pair you choose, do try to stay with one pair when you’re just getting started. If you try to follow too many pairs to start, it becomes very difficult to stay on top of the new, prices and trends.
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Being in the Forex trading industry for over a decade now, I realised that in general, traders can be classed into three main categories, i.e. the Risk Taker, the Systems Trader and the Beginner Trader.
The Risk Taker
These traders believe in the ‘High Risk, High Return; Low Risk, Low Return’ principle and are therefore convinced that in order to achieve good returns, a lot of risks must be taken. For most of them, taking a lot of risk would mean going in and out of the market with high frequency, and trading a large number of lots. They believe that the more risk they take, the more successful they will be. These traders are almost certainly destined to fail eventually despite making large returns from time to time. The market somehow has a way to punish high-risk takers who do not calculate, control and manage the risk of every single trade they entered into.
The Systems Trader
These traders believe that by following a set of rules, they can succeed very well in trading. As such, they are constantly shopping for automated trading systems that allow them to be totally hands-free in their trading. Many of these traders are highly intelligent people who might even be able to program their own automated systems, but are often paralyzed by their own analysis. They very much believe in the existence of a ‘Holy Grail’ strategy, which can be programmed to take trades successfully without much effort from the trader itself. Such expectations are unrealistic in the dynamic world of trading.
The Beginner Trader
Most of the students in my training program belong to this category. They are often totally clueless and uninformed about what Forex trading is, but tend to be more successful after the program. The reason for this I believe, is because they do not know enough to complicate the strategies being taught, and they tend to be more risk-averse and therefore less prone to breaking the rules in the trading strategies and more stringent in controlling their risks.
Ask yourself which kind of a trader you are. Each of us has a certain pre-disposition, i.e. a certain pattern in our personality that determines our behavioural patterns and risk profiles. Having seen many traders who do not achieve their desired success, I realise most of them tend to belong to the first two categories, i.e. those who either pay no respect to the risks in the market, or those who are too unrealistic in thinking that the market behaves like clockwork.
Of course, many beginners will someday fall into one of these two categories if they are not properly trained and guided. Whether you are a novice or have some experience in trading the Forex market, I suggest you break free from the limiting influences of the first two trading styles depicted above.
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