Trade Forex Fundamentally

I know that you’ve been waiting for a strategy that combines the best of both worlds- it takes advantage of the true driving forces that control forex price action: sentiment and fundamentals, but at the same time it’s as objective as the technical systems that you’re used to.  Well here it is. I’ve taken my famous long gamma trading system based on sentiment in the forex market and systematized it to the point where everything is mechanical and objective.

The result? Testing the rules of the forex trading strategy from 2007 until 2010 yielded over a 400% return on the AUD/USD pair. Starting with an account size of $10,000 back then using these rules would’ve yielded a balance of $50,931.04 this year. What’s the secret? It’s not that complicated- it uses some of our common forex trading tools that we discussed earlier to gauge the overall sentiment of the forex market.

Here’s how you can do it in a few easy steps:

1. Use a currency meter (such as the CCFp indicator available for Metatrader) on a weekly time frame and wait for AUD to become strongly positive as an individual currency, and for the dollar to become very weak as an individual currency, and get ready to go long (get ready to go short if the reverse happens).
2. Make sure that price is trending and not ranging. In other words, price has been making new highs on a daily chart or the Momentum indicator is showing a value of 102 or greater.
3. Make sure that price has not pulled back more than 2.5 times the daily average true range for the last 2 weeks. This ensures that money is flowing into the base currency of interest with some momentum.
4. Enter at market price, setting a stop loss at 2 times the daily average true range, and a take-profit of 3 times that for a good risk/reward ratio.
5. Enter up to 2 positions at a time, but make sure each entry is separated by 100 pips to give price plenty of room to “breathe” and so that we can account for short term randomness in the market.
6. Get out if the sentiment turns around as indicated by the currency meter before the stop loss is hit.

The results are not based on “curve-fitting,” an evil practice of forex backtesters who keep tweaking their system on past data until they turn a bad system into a good one only to find that it doesn’t work in the future. There were periods where it didn’t work as well, but hey, let’s be honest- there’s no such things as the holy grail. There will be periods where you will have losing trades no matter what strategy you trade- are you prepared to deal with that?

Furthermore, This is only based on one sentiment indicator. Just imagine what things could be like  if you added on other fundamental sentiment indicators such as COT data to strengthen your edge? I’ll comment on the addition of more tools to enhance your forex trading system in a subsequent post so stay tuned.

So there you have it. An objective forex mechanical trading system that is based on how the market works (money flows from weak to strong currencies) rather than some cheap nonsense pattern/moving average-based system. It certainly takes the guesswork out of forex profits!