In this episode of Truth About FX, Walter puts the pieces of the puzzle: what type of market should you be trading based on your system? Or, should it be the other way around? Walter breaks it down into several parts and gives emphasis into identifying the market mood and figuring out which trend is tailored for you based on your system and biases.

Download (Duration: 07:18 / 8.36 MB)

In This Episode:

00:50 – not working

01:47 – different moods

03:51 – not very clean

05:13 – the way it works

06:35 – filter

Tweetables:

Identify the mood of the market [Click To Tweet].

Take advantage of these bigger moves  [Click To Tweet].

Wait for the trend to show up  [Click To Tweet].

Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.

Hugh: Hi, Walter. What are the biggest reasons why traders have a few great months then give it all back? How can we solve that?

Walter: This is such a great question because I’ve been working on this for the last 18 months, 16 months. Here is something that I’ll share that I’ve learned. First of all, why this happened?

The first part of the question, why this happened? Obviously, this happens because if you are trading one-trading system, your trading system is not going to work in all types of markets.

If you are trading a trend system, system that breaks out or there’s something similar like that, what’s going to happen is when the market is in a strong trend, moving really strongly in one direction — up or down, it doesn’t matter — you’re going to do well.

Likewise, if you have a reversion to the mean system where price goes too far and then it snaps back and Bollinger Band edge, and you traded it back in the middle or whatever — those sorts of things like Stochastics or whatever — if you’re trading that kind of system, you’re going to do really well when the market is ranging and not really going anywhere but as soon as it starts trending, you’re going to get blasted.

Here’s the question: how do you deal with this? How do you solve it? It turns out that — and this isn’t my idea but I’ve been reading and many traders and researching on this. Many traders basically set it up say you can characterize the market in different moods.

If you can identify what the mood of the market is, you can switch on and off your various systems. Let’s say I’ve diversified and only have two systems. I have one system where if the markets gets to the upper edge of the Bollinger Band, I sell and I sell it back to the moving average in the middle of the Bollinger Band. That’s my reversion the mean system.

Then I have a trend trading system which is like the trending Kangaroo Tail. Whenever the market starts going into one direction and prints a trending Kangaroo Tail, I’ll take those trades and I’ll go with the trend.

So, those are my two systems and I know that one of them is going to do w...