Trend following systems usually have some type of long term average rate such as a 200 day moving average. Then they have a signal average rate that tells you when to buy like a 10 day average. As the 10 day rate moves over and under the 200 day rate, it generates signals to buy or sell the currency. These systems exploit a characteristic of foreign exchange. That is, currencies tend to trend. You may have an extended period when one currency is moving in the same direction against another.
Trend following systems do not do well in the currency pairs are range bound. The signal happens too frequently and your profits are swallowed in the transaction costs.
The second major type of system is a fundamental system. This type looks at the economic circumstances of the countries in the currency pair and forecasts which one is likely to strengthen and which one is likely to weaken relative to each other. This type is much less common as it requires much more work from the service and is labor intensive.
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