How and why exactly does a forex trading system become obsolete?

Good day to everyone. Marc here and I just have a question to ask about Forex trading systems. I have once read that a Forex trading system is said to become obsolete in the long run or after using it for a long period of time. Basically, based on my own understanding it means that a Forex trading system tends not to work anymore so it’s no longer needed. But I’m not sure that’s correct so I wish to be corrected if I’m wrong and I would also like to be enlightened on how and why exactly an FX trading system becomes obsolete. Does the indicator start to malfunction or stop working? How can that be when an indicator in an FX trading system simply moves according to price. I’m really not sure if everything I said here is right or wrong so I wish to hear from someone who has the wisdom about this question I’m trying to ask. Thanks in advance to those who will give me an answer.

Trading systems become because of the dynamic and volatile nature of the forex markets; different factors affect the price action of currency pairs, with time a trading system is likely to go obsolete as new or older factors continue to affect price action. The maximum I use a trading system is 6 months to 1 year; last month, I tried using a trading system I dropped 2 years ago on Profiforex platform and was about to make over 50 pips; this shows that an obsolete trading system can still be used sometime in the future.

Thanks for the reply dronze. The first one after 156 views. But I would like to be very elaborate here. Does it mean that the indicator starts to malfunction or stop working. I mean what is exactly happening when a trading system becomes obsolete. A trading system is composed of indicators. Now when a trading system becomes obsolete does it mean indicators don’t work anymore. I hope you don’t mind but can you be specific with your answer and use your trading system as an example.

Thanks.

Trend Following has profited for centuries and shows no signs of stopping.

If a system works only in certain markets or for a certain time, it is probably because it was fitted. The fact that a fitted system profitted a trader in real trading for a time is just a stroke of luck.

Certain strategies that actually exploit market inefficiencies or rules last until those inefficiencies or rules are gone. Open Outcry guys were burned with computerization. Scalpers from the 90s got crushed with decimalization.

-Adrian

Trend following? Is that a trading system or strategy? Forgive me but I don’t know, but thanks for your answer.

It is a strategy and not a system. I should say, trend following systems (these are systems that implement the trend following strategy) have worked for very long periods of time. Donchian’s 4 week rule (decades old) can produce profits in markets to this day.

Trend following is a strategy that simply looks for a trend to begin, to trade in the direction of that trend, and to stay in that trade until the trend ends. Thus, price moves are not predicted, they are followed. Trend followers trade long or short in basically any market a trend develops. The strategy is not biased toward certain markets or longs or shorts.

Donchian’s 4 week rule was simple:

Cover shorts and/or go long on a 4 week high, cover longs and/or go short on a 4 week low.

The Turtles used a modified version of that (download a pdf that gets into the detail here):

Go long on 4 and 11 week highs, cover those longs on 10 and 20 day lows respectively. Go short on 4 and 11 week lows, cover those shorts on 10 and 20 day highs respectively.

You can backtest these systems and trade them in fx and find that they are profitable long term even today, decades after their development.

Donchian actually filtered his 4 week rule with a moving average. The system was thus:

Enter on breaks of a 4 week range away from a 200 day moving average, exit on breaks of a 4 week range toward a 200 day moving average.

Of course, we would need to get into stop losses, position sizes, market selection and so on. And all that does have an effect on outcome. Also, most of the trend following firms have gone to longer term in the last decade or so (example: instead of trading a 4 week rule they would trade a 10 week rule), but I would not consider that a big enough change to say that these systems have stopped working.

In fact, many speculated that these systems had lost profitability back in 2013. Futuresmag published this article. But by the end of 2014, business reporters were calling 2014 a “banner year” for trend followers.

So trend following systems have worked for a long time and continue to do so with little to no modification.

-Adrian

Yes it’s a strategy. I immediately did a google on that after I’ve read your answer but I kind of forgot to go back here. Nonetheless I still got a lot of info from your answer. I really appreciate it, thanks a lot.

Now next is I’m going to practice this strategy. I’m still learning and practicing and certainly need all the help I can get. Plus this strategy seems so effective. Guess I just have to believe in it.

Just a question. Is there a way for this strategy to be applied on shorter time frames. Like hourly or even 15 minutes. Can the same rules/principles of this system be applied on shorter time frame. That’s just my kind of trading style. I prefer shorter time frames. Maybe because of my personality.

Since you are a Master Contributor and Member I would like to take advantage and ask you some specific answer about my question. I hope you don’t mind. When a trading system (which is composed of indicators) becomes obsolete, does it mean that the indicators start to malfunction or stop working. Is that what it means when a trading system becomes obsolete, indicators stop functioning.

The reason I’m asking this is that I also prefer to be a system trader. I like the idea of having a set of rules to follow when entering and exiting a trade because somehow trading becomes simple (but definitely not easy) and you have the tendency to control emotions and not to let it get in the way. But many traders still fail to do this even me. But I’m learning from my mistakes.

It’s been an honor to get an answer to my question from a member like you. Thanks a lot.

You can use a trend following system on any time frame. But, you must understand, that the shorter the time frame, the MORE EXPENSIVE it becomes to do it. Ultimately, as you go shorter and shorter the expenses overcome the profitability and you are toast. The easiest way is the more forgiving and inexpensive way. Long term. (Very boring for a new trader wanting action).

It just means that it will no longer be profitable. Someone may have some complicated system with ten indicators that profits for a while. Then later the system will continue to generate signals but the losses will outweigh the gains. That is what they mean by “obsolete”. I call it “curved”. Ha!

Don’t take my word for anything. I am just a dude with a beer. You must test everything everyone tells you yourself.

May the forx be with you.

-Adrian

So the indicator still works, but doesn’t work the way it should, so it’s kind of like malfunctioning. Still generating signals, but bad signals.

If you ask me I can take your word for it 'cause your a guy with a beer and Master Contributor here haha.

Thanks a lot again pal.

-Marc

“Malfunctioning” sounds as though we are dealing with a computer glitch or something. That is not what most guys are talking about when they say a system is “obsolete”.

I’ll give an example:

My very first trading strategy was trading New York Stock Exchange listed Real Estate Investment Trusts (NYSE REITs) back in the 1990s. A REIT (pronounced ‘reet’) is an exchange listed fund that invests in real estate. There are loads of them to this day. They are generally not s3xy, not in the news, and historically much less volatile than most stocks. Many of them are set up to not grow much. They just generate reliable dividends. It is your grandad’s investment vehicle. Safe and reliable income.

In the 1990s you could watch one throughout the day and find that the entire day it only traded at two or three different prices. (How is that for not volatile?) This was before decimalization. So the whole NYSE gave quotes like this: 20 1/4 (not 20.25). A typical REIT I traded would have a quote like this:

20 1/4 X 20 1/2

This means that the highest bid is currently 20 1/4 and the lowest ask is currently 20 1/2. And if you looked at a chart for that REIT you would see that it traded all day yesterday and this morning at just those two prices: 20 1/4 and 20 1/2. What this means is that buyers and sellers using limit orders set the bid and the ask and buyers using market orders bought at the ask and sellers using market orders sold at the bid. Some grandpa out their died and the kids want to sell his REITs for cash and don’t care about the measly quarter in the bid/ask spread.

So my system was simple: Place an order to buy at 20 5/16 and an order to sell at 20 7/16. That puts both my orders in front of everyone else with 1/8th between them (12.5 cents). So the next market order to hit that market filled me on one side or the other and if nothing changed and another market order came in to fill the other side I was in and out with a 12.5 cent profit.

Then more and more computers got involved and decimalization came to the NYSE so bid/ask spreads went from 20 1/4 X 20 1/2 to 20.25 X 20.27. Spreads went from a solid quarter to 2 cents smashing my little system in the process. Thus, it was obsolete.

-Adrian

Now I’m causing confusion here, sorry about that. The focus of my question is on [B]“trading systems composed of indicators”[/B]. Specially trading system with [B]custom indicators,[/B] those that were built by programmers and are being sold to others. There are Forex trading systems here on Babypips and some of them are composed of custom indicators other than those default indicators included in the MT4. Now if those trading systems which is composed of custom indicators become obsolete, does it mean that those custom indicators don’t work anymore or start to malfunction. This is definitely not about computer glitch. Maybe an indicator glitch. Now does the custom indicators that makes up a trading system start to show glitch when it becomes obsolete? Or like what I’ve been saying does the custom indicator start to malfunction?.

Sorry again for the confusion I,m causing. Now I hope I made it a little clearer now.

Thanks a lot again Sir.

-Marc