Trading forex extremes Series - Part 3

ROOM FOR IMPROVEMENT

While the primary trend of the dollar moved through three distinct phases from down to sideways to up over the one-year test period, a longer-term track record would need to be produced to certify the validity of these findings.

On the entry side of the equation, dynamic application of support and resistance zones would help isolate more significant and lasting reversals. Thus, when the extreme point in the pattern coincides with an important support and resistance area, the quality of the signal may be rated higher, resulting in a higher percentage of profitable trades. Also, the inclusion of a volume and price measurement filter within the three-bar reversal pattern might further delineate between strong and weak signals.
On the exit strategy, the first order modification to test would be lowering the initial stop (on long trades) from just below the low of the completion bar to just slightly below the low of the doji star's extreme low price point. (The opposite would be done to adjust stops on short trades.) While this increases the initial risk in every new trade, the larger question becomes whether this additional risk might be more than fully offset by a larger number of profitable trades as well as higher net profit.

Though vast numbers of newfangled trading algorithms are being thrust upon today's forex markets, you don't have to be a rocket scientist to trade them effectively. At their core, all trading systems merely consist of three things: an entry criteria, an exiting strategy to define and manage the risk, and an underlying investment process. Further, whether fully administered by computers or with human intervention, the trading process is still guided by human decision making.

When developing any new system, the human element is not only the most important, but it is also the most fragile. Technically speaking, it is always better to trade an average system with superior risk management, than it is to trade a superior system with average risk management.

System results are available for review at wildertrends.com

David Wilder is the chief market analyst for the Delta Society International and publishes advisory reports covering more than 30 commodity markets. Contact him at trenddwecox.net.

source : http://findarticles.com/p/articles/mi_qa5282/is_20090401/ai_n31511651/