During your forex training, you will most probably be told that the best way you can profit from FX rates fluctuations is to use forex signals from trend following strategies. This is a theme that is common with almost all training programmes. It is also something that most mentors focus on with their protégés.
However, the big question is whether trend following strategies are really as good as everyone claims them to be when it comes to making profits from fluctuating FX rates. The answer is not clear cut because while these types of strategies can bring great profits, they also have their own inherent flaws.
Therefore, if you are about to adopt trend following strategies then you will have to always be mindful of their limitations so that you can proactively work towards countering them. For your benefit, here is a list of the most prominent flaws of trend following strategies.
The Market Will Only Trend Sometimes
The biggest problem with trend following strategies is that FX rates will not always show clear trends. In fact, it is a well-known fact that the forex market only trends 30 percent of the total time that it is open in a week.
This is a critical flaw of trend following strategies because it means that a trader has to show great restraint to not enter the market on less profitable or even harmful trades. You will have to make sure that you do not get swayed by your emotional reactions based on inactivity or financial targets not being met.
Your Rate Of Success Will Be Questionable
When you use trend following strategies, you will have to be very careful about which opportunities you avail because such strategies rely on quality of your trades as opposed to quantity.
For instance, such strategies often bring great net profits but end up creating more losing trades than winning ones. This means that you will have to ensure that the trades you place are based on certain projections of FX rates because trends can change without warning in the market.
You Will Be In Danger From Whipsaws And Reversals
The reason why the success rates of trend following strategies are questionable is that FX rates are extremely difficult to project without any doubt. Thus, as forex rates are extremely volatile, you can easily find your positions being rendered dangerous owing to sudden whipsaws and reversals of trends. For instance, if you project a certain direction of forex rates then there is no certainty that your projections will turn out to be right.
How To Use Trend Following Strategies To Ensure Success
Using trend following strategies to profit from volatile FX rates is like an art form. You have to make sure that you consider all possible situations when you place your trades in the forex market.
By considering all possible situations, you are essentially preparing for all contingencies because you will take steps for each profitable or dangerous situation in the forex market.