There are enough ideas for beating the markets to make you very rich—or very poor.—Charles B. Goodman
Most traders consider trading techniques—the actual tools they use to make trading decisions—as the most important element of trading. The proof is in the pudding; just consider the corpus of information both in print and online that deals with trading techniques. The sheer amount is staggering.
As the FOREX market matures, some literature on money management and the soft elements is becoming available, but it is still dwarfed by information available about trading techniques. The demand continues to be for information on trading techniques. That is unfortunate given the importance of the other two elements.
Systems and Black Boxes
Before considering some of the most popular trading techniques or tools, let me briefly discuss systems and black boxes.
A system is a self-contained way to make trades. Systems generate specific buy and sell signals. Many FOREX trading systems are available either from broker/dealers or from third-party vendors. They are intended to be complete
in and of themselves, although many traders still use them in conjunction with other trading techniques.
Systems typically show outstanding results over historic data, or they would not sell. But the historic data is very often curve fit. This means that the system was developed to fit the data and not the other way around. If that data
related to some specific types of markets, such as volatile markets, trading markets, or trending markets, when the music changes the system is bound to fail.
Systems have always been popular in all the markets—stocks, options, futures, and now FOREX. Not all systems are bad, but they are all opaque and that is always a warning sign.
Opaque and Transparent
If a trading tool is opaque, it is difficult or impossible to fully analyzewhat it measures. If a trading tool is transparent, what it measures iseither obvious or easy to comprehend.Indicators are generally opaque. Charts are transparent.
If you insist on using a system in your trading, be sure you understand which type of market it was build for or around and use it only in those markets. However, determining which type of market the system was built for can be difficult. Many systems provide limited information regarding how they were developed. The best process is to look at charts of the markets vis-à-vis the system’s performance. In which markets did it perform best—trading, trending, fast, slow? If the system vendor does not provide at least enough information to do this analysis, beware.
Black boxes are systems for which no information is available. You don’t know how they were built, how they work, or what type of data they were built around. My recommendation regarding black box systems is to stay away from
them. The less transparent the tool, the more difficult it is to make adjustments when things go wrong. A black box is the most opaque tool of all.
Robots have become popular in the FOREX markets. Usually, these are programs that automatically execute a trading system. In fast-moving markets they are very useful, especially to the professional money manager overseeing
dozens or even hundreds of separate accounts. If your available time for trading is limited, you may want to consider using robots.
But if you have so little time to trade that a robot appeals to you, I recommend that you consider a professional money manager to trade your account. There are many money managers with excellent track records, but a discussion is beyond the scope of this book. Seek out a manager who has performed well in a variety of markets. It is more important that the manager has done well in a spectrum of market types than in specific pairs or crosses.