Evaluating Forex Trading Systems

When I first came into Forex trading I like many others was looking for the ways to make quick cash. That's why I thought that shorter-term trades like scalping are the best way to do it. Later I found out that longer term trades like swing trades work best for me. I believe it's also the easiest way to start trading currencies profitably and any beginner should start with swing trade technique. The long-term swing trading has quite a few advantages over the short-term techniques.
Just to name a few of them these advantages are:

1. Anyone trading part time can start with this techniques

Indeed swing trading techniques requires much less time to monitor a trade. For a daytrading one needs to baby-sit his position continuously. Swing trading technique doesn't require a lot of time. I am not saying you need to spend less time on studying the market but once you enter the trade you will spend much less time monitoring it

2. Less spreads to pay

The more trades you execute in a short period of time the more you have to pay in spreads. Let's say you execute 10 trades with a spread of 3 pips then you already lost 30 pips. That's why it's much harder for any one who is trying to become profitable to learn short time trading techniques. It is much easier to start with a techniques that requires less number of trades but has a high profit target.

3. Lower level of noise on the charts

Anyone can notice that the higher timeframe of the chart the more obvious the price patterns. It is very hard to spot a right trading opportunity based on the price patterns on 1-minute charts since those patterns are buried in noise. On the other hand someone who uses daily or weekly charts can easily see those patterns since the level of random noise is very low.

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Here is one of the best swing trading strategies

Most new traders ask what is the best trading system to start with. I recommend starting with any system that based on a breakout method. Such systems are usually simple and anyone can easily identify a trading setup. This method suits any trading style. If you are a day trader you can use it and if you have only a limited amount of time each day to analyze your charts you can also use a breakout method.

1. Definition of a breakout method

To have a breakout on the chart it is necessary to identify a range of price on the chart. Usually when price breaks above the range you go long. If it breaks down the range you go short. It was my experience that the narrower the range the trade is more profitable. There are different periods that give you a narrow range. For example almost all USD based pairs have a narrow range during the Asian session usually. Another way to identify the range is to use some type of indicator.

2. Trading rules for breakout method

As I mentioned the rules are very simple. Once you identified the range you place buy order at the top of the range and sell order at the bottom of the range. The beauty of the systems based on breakout is that you don't have to be guessing where to put your stop losses. They are put at the opposite side of the range. So if your buy order at the top of the range the stop loss for that order will be at the bottom of the range. You can use this kind of system even if you trade part time. For example you can identify a range of Asian session before London open then set your orders and live it until the next day. If you are trading full time you can introduce more sophisticated ways of defining the breakout. You can take a trade only if a candle closes outside the range or you can enter a trade after a pullback.

3. Example of a Bollinger squeeze breakout system

Bollinger breakout system is one of my favorite breakout systems. All you need to do is open your 15-minute chart and place Bollinger indicator. Now look for the time when Bollinger bands become horizontal and the distance between them becomes less than 10-15 pips. The longer such squeeze lasts the bigger the breakout you can expect. You want no less than 10 of 15-minute periods of a Bollinger squeeze. The smaller the price range the stronger the breakout the more profit you can get. Actually this was my experience with any breakout systems. So now place your buy stop at the upper band and sell order at the lower band. Place you stop-loss levels at the opposite bands. Usually with EURUSD I target at least 30 pips of profit. You can test and experiment with your own taking profit strategies.

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