Forex: Long-Term Trend Following

Filed under: Learn Forex Trading |

Screen shot 2013-07-16 at 09.19.48There is plenty of evidence that long-term trend following systems still work in the forex markets. If you don’t believe me, create a simple expert advisor and test it on Metatrader. I’ve already done this, and there is a market edge. For example, a simple moving average crossover system, done over a long period of time, would almost certainly be profitable. Moreover, you could fine-tune the system to try to weed out some of the whipsaws associated with these kinds of systems (where the moving averages cross over several times during volatile markets). However, the bottom line is that these systems only give marginal profits (say, 5% per year with a 1% risk per trade), and as such, they are only really useful to those who are really well funded.

 

Unfortunately, most of us do not have hundred of thousands of dollars to trade with, and as such, most people are looking to risk more and profit more from the markets. Long-term trend following systems also need a good deal of patience, as there might only be one really decent trend in a one or even two year period on any given pair. This takes a lot of patience and belief in your system, and most non-professional traders do not have the mindset for this.

 

What all beginners to the forex markets want are high profits in a short space of time, with low risk. Unfortunately, this is impossible, and some compromises have to be made. This compromise usually results in higher risk levels. However, it is possible to create a balance whereby trades last for several days or weeks (so medium term trading), where risk is moderate, and where profits are reasonable (20-30% per year with a risk of 1% per trade). This is price action trading, and this is something that I discuss regularly on this website and give regular trade examples.

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