A Simple Forex Trend Following System

Over the past 4 years, I have opened 4 currency trading accounts with various brokers. My first 2 currency trading accounts imploded due to me not knowing what I was doing, the third account I broke even at (but closed it due to the sleep deprivation it caused), while the fourth account I have been trading actively since May.

In my opinion, currency trading seems to offer many advantages over stock trading, including:
  • Very low commissions (about 20 cents per $1,000 of currency traded)
  • No interest charged on margin
  • Open 24 hours, 6 days a week
  • Stops are almost always hit right on (very few gaps)
  • Shorting is as easy as going long (no need to borrow stock)
  • Easy order entry (a click of a mouse)
  • Can earn interest on carry trades
  • Basically unlimited liquidity

Despite these advantages, the vast majority of currency traders end up losing money. One major reason for this is due to the fact that currency trading is a zero sum game (actually a negative sum game when you include commissions). This means that there is no money generated by the Forex market; it is merely transferred from one account into another. It stands to reason, therefore, that every successful currency trader had to have drawn upon the capital of many more unsuccessful traders.

In order to stand a chance in this market, I have learned that you need to always trade with an edge, and always follow strict rules. Here are the rules that I now always follow before placing a new short trade (long rules are just flipped):

  • On the daily chart, the currency pair must be below its 50dma (daily moving average)
  • On the 60 minute chart, the currency must be below its 50ma
  • On the 60 minute chart, the currency must be below its 200ma
  • On the 60 minute chart, the 50ma must be below the 200ma
After the position is initiated, it is closed once it crosses the 50ma on the 60 minute chart.

So, basically, I am attempting to following the trend (no surprise there). Here is an example of a trade that worked out using these rules. The chart below shows a daily chart of the USD/CAD pair:


In the above daily chart, I am just looking to see if the currency pair is above or below its 50dma. In this case, the pair is below, so I now know that only shorts can be taken. Longs are never initiated if the daily chart is below its 50dma.

Having established the daily trend, I now zoom in and look at the 60 minute chart. The chart below is a 60 minute chart of the USD/CAD pair:




As the above chart shows, this pair was in a strong downtrend for the past few days, and met all of the rules mentioned above. I held on to this trade for as long as it remained below its 50ma.

To be fair, the majority of my trades to not work out this well, and, like any trend following system, there are whipsaws. In fact, probably about 70% of my trades are losers, but, on occasion, I am able to surf some truly massive waves, which tend to pay for the losing trades and then some.



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