FOREX Simple Entry Strategy

A simple FOREX (foreign exchange market) entry strategy can form the basis of a complete trading system. A focus on simplicity often performs better in a robust system, applicable across many different markets. Though determining the entry point in a trade is only one part of the puzzle, it serves as a starting point.

Criteria

• For this purpose, three criteria must be met in creating a simple entry strategy. First, there must be a minimum number of calculations involved in determining the perfect entry point. Second, the calculations should be performed infrequently. Third, the strategy should use the least amount of technical indicators possible. This makes interpreting the signal easier.

Strategy

• A 10-month moving average is an indicator, which satisfies criteria. Enter a trade when the price moves above the 10-month moving average. Calculate the average by taking the closing price over the preceding 10 months and dividing by 10. Repeat the process at the end of each month. Remove the oldest month and add the most recent month to the calculation. A 10-month moving average was chosen because it is closely related to another popular calculation -- the 200-day moving average.

Application

• This entry strategy is not designed to promote frequent trading. It is designed to alert a trader to possible changes, in long-term trends, in the FOREX market. Empirical evidence indicates that longer moving averages are less sensitive to price fluctuation than shorter ones. The 10-month moving average will generate a positive signal infrequently. Once a signal occurs, it is likely the trend will continue. This is a reliable method that can be successfully applied to many different markets. In the Spring 2007 issue of "Journal of Wealth Management," Mebane T. Faber explained how a moving average system outperformed buy and hold strategies in both domestic and foreign stock markets, the bond market and commodities market from 1973 to 2008.

Benefits and Drawbacks

• This entry strategy is both robust and straightforward to implement. It has been shown to work across many different markets over a long time. Focusing on larger moves, results in a minimum of market noise. Greater accuracy of trading, fewer signals and less trading costs are the result. The drawback of this strategy is that it only works in trending markets. A moving average, long in duration, causes a trader frequently to miss out on a big portion of a move.

Warning

• A simple FOREX entry strategy as the one discussed is not a complete trading system. Other aspects that still need to be considered: How much to risk on each trade, what markets to trade and when to exit the trade.