Tutorial on How to Evaluate Forex Trading Systems
In this tutorial we will discuss some Forex Trend Trading Systems.
Forex Trend Following Systems
The most basic of systems sometimes perform more consistently and profitably than complicated systems that involve complex indicators and multiple setup and trigger points. Especially when you are starting out with trading forex and looking for a system that will perform reasonably, starting with a simple system is often a good idea. It is always possible to refine and improve a strategy, but starting with a simple system has a good chance that it will perform well into the future. As with all systems, it is recommended that you paper trade or trade using a virtual account to get comfortable with the system before trading on a live account. Also, some markets have a greater tendency to trend than others, so it is also a good idea to look at the characteristics of the particular currency before selecting a system.
Two Moving Average Crossover
The two moving average crossover system is perhaps the simplest trend following forex trading system. It is always in the market and is sometimes called stop and reverse, as the system will indicate that you should either be in a long position or a short position. The two moving average crossover forex system works with a short or fast moving average and a long or slow moving average. The idea is that when the short term moving average crosses above the longer term moving average the system indicates a long trade. If the market is trending strongly, the shorter term moving average will stay above the longer term moving average. Once the short term moving average falls below the longer term could indicate that the trend is losing momentum and the system would indicate to stop and reverse, i.e. exit the long positions and enter short positions.
The values to use for the short and long term moving averages depend somewhat on the trading timeframe. For example if the system is to follow longer term trends, a 200 day moving average would be appropriate. The shorter term moving averages are generally half or less the value of the longer term. A trading system with a shorter trading timeframe, may use a 26 day moving average for the longer term and a 9 day for the shorter term. The exact values are not critical, they just need to fit into your trading timeframe, and backtested so that you have an idea of how they work.