A common sense approach to price observation Buy when prices are going higher and sell when prices are going lower. In a nutshell this is my goal when I am trading the forex market. But the above statement of buying when prices are going higher or selling when prices are going lower may be too broad and therefore it may need some guidelines and rules, this is where The 3 Duck's Trading System comes into play.
The system will help you identify buying opportunities in the direction of the last uptrend and selling opportunities in the direction of the last downtrend. The "ducks" in the title comes from the saying "to have all your ducks lined up" an expression meaning to have everything in the correct order. There are three ducks, the first duck will help you to identify the last up or down trend, the second duck helps to confirm the direction of the trend and the third duck will help to identify buying or selling opportunity in the direction of the trend.
This system involves using three different timeframe, a 4 hour chart (first duck), a 1 hour chart (second duck) and a 5 min. chart (third duck). A 60 period simple moving average is applied to all three timeframes. That's what I call keeping it simple!
Back testing - I'm not a big fan
With comments like this one I often get a mixed response. Back testing has its uses, but if a system buys when prices are going higher and sells when prices are going lower I don't feel a need to back test the last twelve months or the past 100 trades. What I will do is forward test the system in real market conditions. The first phase of forward testing for me would be to observe the system. I really want to see the system working with the trend and doing what it is supposed to do most of the time. I believe that if prices are going higher there is a greater probability that they will continue in that direction. The second phase would be for me to see what I can do to make the system perform better, how can I get this system working at its optimum? If I know what my trading goals are i.e. x% per month or x% per year, what do I need to do to give the system the best possible opportunity of achieving these goals? How much should I risk per trade? What size stop-loss should I use? what size targets will work best for me? would it be best for me to positional trade this system or would day trading this system be better? When I have decided on the above I can forward test the system again with these figures in place. After a number of trades or over a period of time I can calculate my win/lose ratio - what is my average winner compared to my average loser? I will also calculate my probability of a winning. Armed with these stats and with confidence in the system I will then happily commit to it 100%, I will always be keeping a close eye on my stats and looking for ways to improve.