One of the worst mistakes that losing traders make again and again, is looking for and buying into "Holy Grail" or "Magic Set-up" type systems. You've seen these, they are virtually all based on a some combination of technical indicators. Wait until this does this, and that does that, and when it's the first half of the month sell short, if it's the last half, go long. There are trading courses that revolve around the cycles of the moon, and your wife's middle name. There are courses that revolve around last night's winning pick 3 and pick 4 numbers. OK, I'm getting a bit facetious, but I think you know what I mean.

Losing traders are the ones who, no matter how long they've been in the market, still keep looking for a magic bullet. They may not actually be "new" traders at all. But if they are still losing, they are treating the market as more of a one armed bandit in a casino, than as a business.

So when looking for trading information, you have to keep this in mind. A trading set-up based on lunar cycles may actually work for a while...probably only by accident, but nevertheless it may work. So if it produces 10 winning trades in a row, is it a good system for making money? Well, it was for those ten trades. And if the ten trades spanned a period of 5 years, then, yes, it may be a decent system. In the end, the number of consecutive winning trades is not all that important. The real question is "How long is the span of time that the system has produced consistent winners?"

In the age of vast technology, a decent system creator can build, back test and tweak a system that can show positive results based on almost anything. The question is, how will it perform going forward? All forex trading has short and intermediate term trends, and they tend to work themselves out much faster than in stock or bonds or commodities. Creating a system around such trends makes it look absolutely viable. But looking 6 weeks to 6 months out, it may (and probably will) be a disaster.

I mentioned in last night's alert about current circumstances in the forex. Now when I say current, I am referring to the period from about August of 2008 to the present. This period has seen a lot of volatile action, and a great deal of it based upon fear in the markets. The volatility index (VIX) has spiked to incredible levels, displaying the fear and uncertainty in traders' hearts. We've seen a bum's rush to the USD, one of the fundamentally worst currencies in the world. Massive unemployment, record breaking debt and spending levels, falling revenue, exceedingly low interest rates which are failing to stimulate economic growth, are signs of a failing economy. A failing economy means a failing currency.

So why is the dollar shooting to new highs and making such a great display of strength? FEAR. Plain and simple. Traders and investors worldwide will run to the liquidity of the USD, when riskier currencies are getting dumped. They believe their cash will be safe in the dollar. That fear ended up creating inverse fundamental relationships. So if good fundamental news came out for the dollar, the dollar would then get sold. WHY? Traders should have been buying the dollar if the news was "dollar good". But they weren't.

The reason why is because of the familiar paradigm that the US "feeds" the world. If the US is doing well, then her citizens will be spending money. "On what?" you may ask. Everything! We buy the imports of the world. They make the widgets and we buy them. It was a wonderful arrangement. Until the US citizens ran out of money. Until they could no longer refinance their homes. Until their homes became "upside down", where they owed more on them than what they were worth.

So then, each piece of bad news created more fear, and more demand for the liquidity and safety of the dollar. And good news made traders think that the US might be recovering. If so, she would begin spending again. If she bought the trinkets and widgets of the world, they would all be happy again. So good news for the dollar meant the dollar would sell off as traders bought higher yielding currencies in anticipation of a recovery.

Everything turned on its' ear. Up meant down, and down meant up. So that trading systems developed in the last two years may actually perform well, but when fundamentals return to normal, they may be a complete bust. That's why all systems must be tested and proven over time. It is the only way to verify how sound they are.

And that means you must exercise caution and move slowly. After all, if you go risking your account and the system you're following is a bust, you won't have anything left at the end. And sticking with someone who has a proven track record of being in the business over the long haul will also be a benefit. Am I tooting my own horn? Well, yes, just a little. But after all, it is my blog...

Happy Trading!

Bill
www.thefxtradingmasters.com