By: Christopher Lewis
There are many Forex strategies that sound good on paper, but aren't quite as reliable in practice. While it is possible to make these strategies work, it's often not worth the trouble and risk of loss. Here are three Forex strategies that sound good - but aren't.
One of the most common Forex strategies that sound really good is the moving average crossover strategy. While the strategy certainly can work over time, it is rather counterintuitive when it comes to human psyche. The problem with the moving average crossover system is that they rely on a clear and defined trend. If you've been trading for a while, you know that the market only trends about 20% of the time. Because of this, you have to be able to absorb several losses before you get that one really good trade.
The idea is that one moving average will cross over the other, signaling a change in momentum. Once you take that trade, you do not exit until the moving averages cross back over each other signaling and reverse and the momentum. The problem is that if you are stuck in a sideways move the market, the averages will crisscross quite often leaving you taking one loss after another. On top of that, you have to deal with the human psychological aspect of taking so many losses before finally being rewarded. Very few traders can do this.
Another common Forex strategy that is absolutely toxic is what is known as the "Martingale strategy". While not a trading system in and of itself, the idea of this strategy is to gradually increase your position size under the idea that you will eventually be right. This has been popular lies in places like Las Vegas, and, as they say, things that happen in Vegas should stay in Vegas. The basic premise is that you risk a certain percentage, say 1% of your account on the first trade. The second trade, assuming that you lost on the first trade, will be placed with a 2% risk. This repeats until you eventually win. The biggest problem with this is that you can go on losing streaks. Before you know it, you may have lost half of your account.
Another common Forex strategy that simply isn't a smart one to use is the black box strategy. The black box strategy isn't any one particular strategy at all, rather it is an automated strategy that you pay for and the computer trades for you. While the strategies may mathematically look promising, they cannot react and adjust to so-called "Black Swan events”. What this means is that if the market is presently melting down because of some kind of political event in Asia, the black box system will simply keep trading based upon its mathematical models. One of the largest blowups in history was from a fund called Long-Term Capital Management that practice this exact type of trading. In a nutshell, a bond default in Russia sent the markets into a panic. The LTCM models were not prepared to deal with this type of event, even though they had made astronomical gains before it. The system simply traded itself the way it always did, and loss the firm massive amounts of money and was one of the biggest disasters in the financial world’s history. By the time it was all over, the Federal Reserve Bank of New York had to organize a bailout of $3.625 billion to rescue the find as it was a serious systemic risk to the financial world at large.
As you can see, there are plenty of ways to lose money in Forex trading. The trading business is difficult, and there are no shortcuts, despite what some experts may have you believe. The one thing that these poor Forex strategies all have in common is the attempt to either over-simplify trading or make it completely mechanical. If you're willing to look beyond the easy way out, you'll likely find more realiable Forex strategies that will keep you in the green.