Cool post. The fake-outs are interesting. I will figure out how to fix them. I will only take good trades in the future!
Let us break down a fake-out in the context of this system (I am thinking out loud here). This system details moving averages that are applied to the MACD. In simple terms, it’s a moving average system with a twist. Moving averages show the trends. A good investor trades with the trends because a trending market is profitable.
So if moving averages are telling us a direction, that means that the market is assumed to be reversing to start a new trend. Let us think about this. This means that, up until now, the market has been going in the opposite direction. What we are trying to do is detect the start of a new trend and jump on-board as soon as possible.
Let us think about these words. Realize that most things in life continue on a certain path unless some other force interrupts them. The easiest thing in life is for something to continue on it’s current path. It takes a great force to alter the path of an object.
Applying this to trading, we can see that it takes a great force to reverse a current trend. What kinds of forces could possibly reverse a trend? One factor must be volume. Remember, if a pair is currently trending downwards, and we get a cross in the upwards direction, that does not necessarily mean that the signal indicates the start of a new trend. As we have seen, the pairs can flicker up for just a moment, and then continue going downward yet again.
This seems to be a 2-part process. First, we have to get the crossover signal. This indicates that the trend is subject to change and that we are aware of this fact. Second, there needs to be enough momentum to cause the trend to reverse. This is the part of the equation that will make us money. Figuring out if there is enough momentum is the key. If there is not, we will wisely avoid those trades. If there is, then we will enter the trades.
If volume tells us the level of momentum, then it would seem that in order for the trend to reverse, we must also have more momentum today than the pair had yesterday. This tells us that people are jumping on-board and that there is enough momentum to reverse the trend.
I will investigate volume measures. I am ready to receive my forex profits as I feel this is the missing ingredient!