Why the “Holy Grail” of Forex Trading Doesn’t Exist, and What to Do About It…

Guest blog post by Kris Matthews

Something that really humors me is the human tendency to search for the “holy grail,” the “magic bullet,” the “surefire strategy” that will bring them profits no matter what, and not require them to even think. However, when asked whether certain traders believe it exists, they say “No” on a conscious level but subconsciously are looking for that invincible, plug-and-play strategy. I don’t want to sound like I’m better than those people because I went through that too, and to this day, occasionally I still can’t resist reading about some latest hot-shot forex trading strategy some guru came out with that pulls in 1,000 pips per week—we’re all just wired to want to believe these things.

Why if there is a holy grail strategy, it’s only a temporary “drug”

Nick mentions something in his ebook, “The NickB Method: Discover Advanced Price Action Analysis” that completely resonates with me:

“…systems are limited to the market conditions that spawned them. Systems do not adapt to changing market conditions.”

When you see the outrageous claims of making $50,000 in one month, the guru selling the course may not be lying to you—it may be true that the system performed so well—in that market period. Markets change and what may have worked very well in one environment may become obsolete in another very quickly. This still doesn’t stop certain price patterns from appearing, and may lead to addictions of putting on trades to get quick profits, just like drugs. As you can see, the market is ever changing and no “quick-fix” is going to work. The only way to win is to adapt to its changes.

The only way to win consistently

After realizing that markets change and no static “holy grail” strategy will do, the next logical question is, “if I can’t win every single time how do I come close?” Let’s expand on the principle of adapting to the market in a more practical manner.

To adapt means that you recognize when the market is changing its behavior and when a given system or strategy is no longer likely to work, and replacing or adding to your system something that functions well in the new environment. Here are some clues that you can observe on a price chart for when this is happening:

1. The average daily range (ADR) is changing dramatically. One of the biggest causes of losing trades is a trader’s misjudgment of volatility. If a trader is trying to capture a large move but price has been confined in a range for the last few weeks with an ADR of 60 pips compared to its usual 160, then most trades are not going to be profitable. If the ADR changes dramatically from its normal value at which your forex trading strategy is profitable, it’s a good sign that the market has changed.
2. Price strongly breaks out from a range formed over a long time period. When price is confined to a sideways range for a while, the market participants are basically either unsure of the future or are content with the current price range and are not comfortable putting on new positions until some big stimulus acts on the market such as surprising fundamental news. When a stimulus finally does occur and you see a strongly bullish or bearish set of candles indicating that either the bulls or bears are in control then perhaps the market environment is changing from one of ranging to trending. In that case a trend-trading system is more likely to be profitable.
3. Price faces indecision or retraces after a very strong directional move. Markets move in cycles from ranging to trending to ranging to trending. After price has made its upward run, for example, to a level where the bulls are either satisfied with the current level or are not convinced that price is likely to go up to higher levels, or the bears begin to think that price is oversold, the market may sell off or engage in ranging price action. Either of these is not good for an upward trend trading strategy because the market environment has changed.