Recently a team of Forex system testers perfected a well-known forex trading concept. The trading concept is that if you have a forex trading system or technique that is consistently losing why not reverse the signals and make a profit. It sounds easy, doesn’t it? This does however not work very well in practice.
The reason it does not work is that to reverse a trading system, the forex trading technique must meet with a number of conditions. Firstly the stop must be exactly the same size as the target. In other words your return on risk must be exactly one to one. Your potential gain has to equal your potential loss. What impacts this requirement is the cost of the spread. The fact that the spread is included in only the buy leg of every transaction complicates the reversal process.
That brings us to the second condition to exist before a forex trading system or technique can be reversed is the cost of the spread. Ideally there should be no spread or a very low spread. Having no spread allows the buy and sell transactions to occur at the same price levels which is ideal if you intend reversing the direction of trade. Many brokers will charge a commission rather than a spread. That is a way around getting away with the reversal complications. If this is not possible you should use brokers or currency crosses with small spreads.
The third condition is that the transaction costs, made up of broker commissions and spreads, should be a small percentage of the potential gain or loss. For instance if the spread is two dollars and the target is ten dollars the broker share of your gain is going to be very high. You should aim at transactions where the costs are no bigger than five to ten percent of your target.
There are many forex trading techniques and forex trading systems that meet these criteria. The well known Good Vibration Forex trading technique is one, but if you don’t have one you can make one up. Many systems that use no stops, hedging or grid system concepts also meet these criteria.
Given that you have a system that meets the above criteria you would do the following. You would back test the system for a long period using numerous currency crosses. The period should cover all conceivable market conditions. You would test is two ways. Firstly you would trade the system as intended. Then secondly you would trade the complete opposite of the system. When the system gives a buy signal you would sell and the other way round. It is likely that this will result in one being a losing system and the other a winning system. If this does not happen re-assess your system and testing process.
You should then analyse the conditions and times each of these systems are profitable. Sometimes the day of the week could determine profitability. Other times, the time of day could determine profitability. Certain currency crosses may show different results. Avoid market condition factors that require trading judgement such as whether the market is trending or consolidating. Nobody knows when these conditions will exist before the time.
Your finding might surprise you. You might find that a certain currency always makes a profit on a Monday or Wednesday. You might find that your system is profitable on Mondays to Wednesdays but the reverse system is better on Thursdays and Fridays. The reverse system might work very well in the Asian market but the normal system works better in the European and US markets. You may therefore end up trading both versions of your system when appropriate.
The above should give a few things to think about and consider about forex trading systems and forex techniques. Forex trading is a wonderful challenge and finding a forex trading technique that gives you an edge most off the time can be fun and rewarding.