Technical Principles

(Lies, Damned Lies and Statistics)

The most successful trading strategy of all time is to trade with the trend. FX rates are highly trended, and once you have identified a trend, you can ride it up or down.

The most basic trend identification technique is the two-moving average model. When a 10-day moving average crosses a 20-day moving average to the upside, you have an uptrend. If you always buy on the upside crossover and always sell on the downside crossover, you have a moving average trading system. While it will, by definition, lags, it is still the most successful basic trading system. Figuring out how many days to put in the two moving averages is another subject, but as trading principles go, nothing beats the two moving average crossover.

This is so basic that we feel almost foolish mentioning it, but you’d be surprised how many fancy advanced models fail to start with the simple question—“Is the price rising or falling?”

Once you spend a few hundred hours looking at moving averages, you realize that steeply sloping moving average lines are (1) more reliable and (2) more profitable than weakly sloping lines. WD Gann, one of the pioneers of technical analysis, believed that a trendline sloping at a 45 degree angle was the most stable and desirable. And it seems to be true, although we haven’t tested it in any systematic way, that too steep a rise results in a more violent pullback when the pullback comes (and there is always a pullback), while a weakly sloping line is more often subject to a pullback that turns into a trend reversal.