This question is probably asked by every novice trader. Almost every information resource on the subject of financial markets provides a separate section on trading strategies. On YouTube you can also find examples of trading and descriptions of various methods of earning in the Forex market. Most of these strategies seem quite successful, but it comes to practice, a trader sees only the increase in losses. Why is this happening? Now let's try to figure it out.
Why forex strategies don't work?
There are several reasons why most of the trading systems presented on the network do not meet the expectations of traders:
- Technical issues. The strategy was developed exclusively for subsequent sales. The developers did not have the task to solve the buyer’s problem. Therefore, in the description of the strategy, separate fragments of charts were presented that do not reflect the general reality. As well as fabricated statistics were presented. Trading strategy ColorBar is a striking example of such strategies, which is already distributed free of charge.
- Incorrect indicator settings. Pricing features of financial assets depend on various factors and are constantly changing. It is important to understand that the algorithms of most indicators were developed quite long ago, mostly in the 20th century. Since that period, trading volumes of most assets have increased significantly, which led to the formation of, so called market noise, which significantly impedes the correct operation of analytical tools. This applies not only to indicators. When trading by support and resistance levels, false breakdowns are observed more often, under the influence of which a trader makes incorrect trading decisions.
- Human factor. This is the most common reason for the failure of many novice traders, so it should be discussed in more detail.
Quite often, novice traders make a number of mistakes that impede the achievement of the desired financial result. These include:
- Inattentive study of the features of the strategy. During a quick study of the principle of trading by a certain method, novice traders may not notice some details. For example, the system developer recommends trading on a specific time period, or trading session, like American, Asian, etc. If this condition is not met, even the correct settings of the indicators will not save from guaranteed losses. There are also strategies focused on specific financial assets. For example, if the strategy description indicates that trading is possible only on the EUR / USD pair, then you should not try to apply it on AUD / USD. It is important for novice traders to understand that all financial instruments are radically different from each other. Effective trading strategies take into account the characteristics of a tradeable asset, and this cannot be ignored.
- Almost all novice traders seek to find a nonexistent “grail” - a universal trading system, using which it is impossible to record losses. It is imperative to understand that such strategies do not exist. An effective method of trading in financial markets is the one using which the number of successful transactions exceeds the number of non-profitable ones. Moreover, there are strategies in which the number of losing trades is 90%, but the trader’s financial losses are insignificant due to the small distance of the Stop Loss order from the transaction opening price. In such cases, only one successful order fully compensates trader’s losses and allows to get the expected profit (Martingale method does not apply to such strategies).
- Ignoring safety orders. Many novice traders seek to adapt the strategy according to their own preferences, which in their opinion can positively affect the trading results. It is permissible to carry out such experiments exclusively when working with virtual tools in a demo account. It is also important to remember that refusing to use the Stop Loss order is a gross mistake, which subsequently can lead to a complete loss of invested funds.
- Misuse of doubtful methods for optimizing losses (Martingale method or averaging). Perhaps all traders have heard about the Martingale method, which involves placing Stop Loss and Take Profit orders at the same distance from the transaction opening price. In the case of closing the Stop Loss trading order, the user will need to re-open the deal in the same direction, but with doubled trading volume. The logic is obvious - sooner or later, the transaction will be closed with profit taking and compensate for losses previously received. The averaging method can be used only in case of pronounced cyclicity. Otherwise, there is a high risk of losing a deposit. It is important for novice traders to remember that the integrated application of the mentioned methods is permissible only if the number of successful transactions when trading according to the rules of the chosen strategy is at least 80%. In other cases, there is a high risk of loss of investments.
Important information! As practice shows, most novice traders prefer to use indicators when working with price charts. This can be explained by the availability of trading signals. Along with standard indicators integrated by developers into the set of analytical tools of the MetaTrader platform, and most other platforms, custom indicators and oscillators are actively used today. It is important to understand that up to 98% of them are based on the algorithm of standard tools and differ from the counterparts just visually. The only exception is the adaptive moving average, the construction of which is significantly different from the standard version.
Custom indicators have one unpleasant, commercial feature - they can be redrawn. This is provided by the developers in order to convince a potential buyer of the high efficiency of the analytical tool. In fact, the use of such indicators practically guarantees a loss of deposit due to the frequent generation of false signals. Therefore, supporters of computer analysis are strongly encouraged to refrain from using third-party, analytical software.
Why are standard MetaTrader terminal indicators ineffective?
This is actually not the case. Each tool provided by the developers of the mentioned platform can significantly improve trading results. For this, it is important to choose the right asset and specify the correct settings. In fact, the standard MT4 indicators can rightfully be considered one of the most effective analytical tools, especially if we talk about complex application. To make sure of this, pay attention to the Puria Method strategy developed at the end of the 20th century.
Briefly about the rules:
- For trading, you will need exclusively standard MetaTrader platform indicators, namely 3 exponential moving averages with periods of 85, 75, 5 applied to Close, as well as a MACD oscillator with settings of 9.26.1.
- To open a Sell order, you need to wait until the MACD histogram crosses the zero level from top to bottom. In addition, a moving one with a period of 5 should cross in the same direction 2 other movings. The opposite is the case for opening buy deals.
- When trading according to the rules of this strategy for the EUR / USD pair, developers recommend using the M15 timeframe.
- Take Profit is fixed and amounts to 15 points for the EUR / USD pair and 20 points when working with GBP / USD.
- When opening an order, placing Stop Loss is mandatory at the level of the last local maximum / minimum. For novice traders, it is permissible to use the Bill Williams Fractals indicator to determine the values â€‹â€‹of safety orders.
Now pay attention to the effectiveness of trading using the Puria method:
The graph segment shown in the chart displays the dynamics of the asset pricing within 2 days. During this period, 3 trading signals were generated, among which there were no false ones. This confirms the high effectiveness of the strategy. It is important to understand that when trading using the Puria method, losing trades will still occur, but their number will not exceed 30%. The main thing is to follow the rules of the strategy and the rules of money management.
In addition to computer analysis, traders use technical analytics methods as well as Price Action candlestick patterns to determine the potential value of an asset. Beginners mainly avoid such methods of working with price charts, since they doubt their effectiveness. In fact, technical analysis and candlestick pattern trading can be called the most effective online trading tools. To verify this from personal experience, you will need to follow a fairly simple rule, but first pay attention to a few examples:
The Price Action reversal patterns are highlighted in the chart, indicating a change in the current trend in asset pricing. An important condition is that such signals should be considered only if they are formed at the local level. As it is not difficult to notice from the presented image, all the patterns met expectations.
Now it is worth noting the support / resistance levels. The screenshot shows that the chart crossed the support line twice, but each breakdown turned out to be false. Pin bars formed in each case warn about an undesirable opening of a trading position. In addition, it is not worth responding to overcoming the price level of support with a downtrend.
This chart shows a sideways trend. After the breakdown of the support level, the trend changed to a downward one. As you can see, breakdown trading strategies are also quite effective.
What's the secret? As mentioned earlier, market noise impedes the correct operation of analytical tools. The above charts show the dynamics of the pricing of the EUR / USD pair with D1 timeframe. When working with this timeframe, traders will need to open medium-term and long-term positions with a minimum trading volume, which will affect the level of potential profit. In return, the user will gain confidence in the trading signals.
Attention! According to unofficial statistics, most traders are supporters of intraday trading (M5, M15, M30, H1 timeframes). Perhaps that is why 97% of them lose money invested in trade? According to a study by Forbes magazine, among supporters of long-term and medium-term trading, only 10% of traders are steadily losing investment. This confirms that standard indicators and technical analysis tools are still effective. They just need to be used on higher timeframes to get accurate trading signals.
Author: Kate Solano, Forex-Ratings.com