During the past few days one of the most important news in the forex market has been the introduction of some new regulations by the CFTC which will become effective before November the first. These new regulations include a lot of modifications to the way in which forex trading is currently done, particularly regarding leverage and broker regulations. On the next few paragraphs I will discuss with you what these new rules mean, the restrictions they pose on US traders and the potential effect they may have in the short and longer term for people trading from US territory.
So what is the CFTC ? The Commodity Futures Trading Commission is an agency which is responsible for the regulation of certain trading bodies within the US. The CFTC deals with the regulation of all non-bank foreign exchange trading entities, something which includes non-bank forex brokers such as FXCM, Forex.com and IBFX. The CFTC had been thinking about restructuring regulations pertaining to these forex brokers for the past year, particularly because they considered the market to be extremely dangerous for retail traders as a very large number of them lose their investment, something which is evidently detrimental for the community in general. The CFTC was also worried about broker funding requirements and other such rules that were just too "loose" and showed a lack of protection for the safety of traders' capital.
Regarding brokers and the protection of retail traders, the CFTC decided to reduce leverage from the previous 1:100 level to a maximum level of 1:50 for majors and 1:20 for minors. This means that if you previously needed only 10 USD to open a 0.01 lot position now you will need 20 USD. Personally I believe that this level is sound and allows most people who use scalping or such other "fast positioning" trading techniques to remain profitable while it also protects new traders from taking extremely large positions and wiping their accounts. From my personal perspective this change in leverage is not that important as my systems can work with levels of leverage as low as 1:5 without having to increase capital requirements. This is due to the fact that small amounts of equity are risked over large movements so small lot sizes are always used.
Many people think this change in leverage is unfair and that it is unjustified as the government has "no business" in controlling how people wish to invest their money or how they handle those investments. The truth however is that when so many "little guys" are losing their money in a manner that is easily preventable it makes sense to change this so that these guys are protected more. Certainly the government does not try here to "protect people from their stupidity" but they just act according to the facts. If 90% of the cars on the street caused people serious injury the government would certainly do something about it, this is also true about forex trading.
There are also some other provisions of the CFTC rules that are good and some others that should cause warning to traders -especially US traders - who trade strategies that require these high levels of leverage or the use of other non-compliant features (such as hedging or lack of FIFO). The CFTC has increased the minimum necessary capital for brokers to start at 10 million dollars (a sound decision) but it has also left an ambiguous road related to whether or not US traders can open accounts in off-shore brokers. If you take the regulations literally - which is the only way to take them I guess - then US traders will not be able to open up accounts with brokers anywhere else except on US soil since the government only considers CFTC regulated brokers legal for US citizens from now on.
This means that if you are currently living in the US you will probably be restricted in the future to trade only on brokers that have no hedging, obey the FIFO rule and are restricted to a 1:50 leverage. This does not mean that profiting will become impossible, since certainly there are many strategies that can be successful using these rules but it will certainly mean that many traders who rely on strategies that do not obey these rules will have some trouble finding a way in which to get their profit. Traders using off-shore brokers (which would probably be the less-ideal brokers since the larger ones will probably stop receiving US citizens due to these regulations) will probably face account freezing and civil prosecution if they reach certain transaction volumes or if the rules are enforced very strongly.
To people trading Asirikuy systems or Watukushay FE, there is no need to worry, as I said before the systems currently trade with very small lot size relative to account size and for this reason they are safe to use under these new CFTC regulations. I personally believe that current CFTC regulations do have the larger amount of new retail traders in mind and that the people who will benefit from these changes are much larger than those that will be unable to profit or those who will lose their ability to live from trading. In the end - although these regulations may make trading harder for some - it is very achievable to profit under these rules (and probably mush harsher ones) using longer term systems as the ones we trade at Asirikuy.
Do you have any opinion about the new regulations ? How do they affect your trading ? Would you be concerned if you lost your ability to trade on non-NFA brokers ? Please leave a comment with your opinion so that we can further discuss this very important matter :o)
If you would like to learn more about mechanical trading and how you too can use likely long term profitable systems that need low leverage please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)
Every time someone asks me what I consider to be the minimum necessary period to evaluate a trading system to know if it has a chance of being profitable under future market conditions I unequivocally say "five years". However - although I have explained vaguely in the past why - I have never written a precise explanation that tells people exactly why this is the case and why systems evaluated over at least 5 years have a better chance of surviving than those evaluated over a 1 or a 2 year period. Through the following paragraphs I will tell you the reasons why this is the case and why using this as a minimum period of evaluation guarantees that systems will have a certain degree of adaptability and the possibility to survive to future market conditions.
The first thing we need to ask to understand the 5 years argument is : What changes when market conditions change ? When you analyze any trading instrument and look for changes in the different quantitative characteristics of the market you will notice that changes in market conditions are usually accompanied by changes in volume. This happens mainly because market participants trade more under rough market conditions and less and more orderly under growing market conditions. In the end what you have in an economic cycle is a series of cycles in volume. Since volume is proportional volatility (which is just a way to measure the length of the movements within an instrument) we find that volatility changes as market conditions change. Generally markets in which the economy is growing are steady and quite non volatile while markets where there is a lot of economic turmoil are extremely volatile.
If we then consider that changes in market conditions correspond to changes in volatility then in order to have a sufficient variety of market conditions for the evaluation of a trading strategy we need to have a large enough amount of change in longer term volatility. When you look at the daily or weekly charts of any given instrument, you will notice that volatility within most years tends to change very little while periods of 5 years usually contain large changes in volatility. The graph shown below of the EUR/USD weekly chart clearly shows you the changes in volatility during the past 10 years (as the 14 period ATR indicator). You can see how any given one year period has an almost static volatility while periods of several years, especially 5, have large changes in volatility. - - The period of 5 years comes from an analysis about these variations in volatility. If we take a look at any instrument and consider the time it takes for an instrument to go from its average level of volatility to a new high and a new low and return to the original level we find that this period is roughly 5 years (like how it is shown above). This means that after a period of five years there is a large amount of different market conditions that a system needs to tackle if it wants to be successful. Therefore a system that survives to testing periods of more than 5 years has a high like hood of surviving to changes in market conditions in the future since it contains - within itself - the capability to adapt to changes in market conditions.
Of course, a 5 years period does not implicitly guarantee that any given system will be able to achieve success in the future since the market can change further or at a faster phase than what the system sustained during that 5 year testing period. However it is true that to survive profitably through such a long period a system needs to have some degree of adaptability that is not necessary to survive to shorter testing periods when hardly any changes in volatility happen during most years. It is for this reason that evaluation of strategies through prolonged periods of time is necessary since short tests of just a few years may only show how the system behaves under some very specific market scenarios. Of course, the longer the period you use for your tests and the larger the overall chances in volatility, the more robust your system will need to be.
If you would like to learn more about the evaluation of automated trading systems and how you can evaluate and create your own systems that return profits after 10 years of evaluation without exploiting any backtesting faults please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)
A week or so ago I wrote a post about tick volume in forex and how I believed it could be used for the development of long term profitable strategies. Inspired by a currency trader magazine article, I decided to explore this issue even further to discover if I was capable of coming up with some 10 year volume-based profitable strategies. Of course - as I had mentioned before - the first problem comes when you realize that tick volume is different between each broker and that some sort of normalization must be carried out before even attempting to come up with something useful. Within this article I will talk to you about how I sorted this obstacle and how I came up with my very first volume-based system with 10 year profitable results.
Evidently there is no such thing as true market volume in forex since the amount of money exchanged by all market participants cannot be accurately determined in an "of the counter" type of market. This lack of "true volume" information seems to doom forex traders to absolutely forget about using this information leaving them at a great disadvantage against stock and futures traders who do have access to centralized exchanges with very accurate live-updating volume information.
However tick volume - which simply measures the volume of ticks during a certain amount of time - has been shown to be proportional to true volume in systems where this data is available for comparison. In forex we have tick volume and this allows us to think about the building of systems based on this information. However a big problem is that each broker has different liquidity providers and for this reason the number of ticks as an absolute value becomes useless as each system would need to be tailor made to the data feed of each broker and this is just impossible to do since forex brokers do not let you access their 10 year data (or they haven't even been on the market for this long).
The best solution to the above problem is to use an NVO or normalized volume oscillator that portrays tick volume as a percentage of the tick volume values for the past X market periods. There are already several NVO indicators available for free for metatrader 4 and the one I like the most is available here. This indicators shows us volume in a -100 to 100 range where 0 represents the median volume value and -100 and 100 represent the lowest and highest volume values during the past X periods. Below you can see an image of the NVO together with the volume indicator (which just shows absolute tick volume values as a histogram). - - After we have this information it now becomes quite simple to design a strategy based on this NVO indicator. But how do we use volume ? The traditional way to use volume is to distinguish between different "reasons" for different "events" to happen in trading. Usually price action patterns, indicator signals, etc, can happen due to reasons that are not related to actual changes in market behavior. For example, you can have a shooting star candlestick pattern develop because of lack of liquidity and not because of an imminent reversal. What volume allows you to do is to eliminate all these "false" signals, since you are only entering positions after a signal that is meaningful happens. Meaningful in this case, means that it happens on high market volume (which we assume to be proportional to tick volume which is what we actually have). - - I designed a very simple system using a very simple candlestick pattern and the above mentioned NVO indicator. The results in simulations (Jan 2000 - Jan 2010, EUR/USD) were quite good with a system with an average yearly profit to maximum draw down ratio of 0.5:1 without any optimization or additional exit logic besides a simple SL and TP. What this strategy shows is simply that entries with very good mathematical expectancy values can be designed when using an NVO as a way to measure the meaningfulness of certain market signals (of course a strategy has to be designed with the use of volume in mind from the beginning, strategies like the ones used by Watukushay No.2 or Teyacanani don't actually benefit from an additional NVO based filter). - - Bear in mind that this does not mean that you should add an NVO filter to "every system" to attempt to improve its entries. This will most likely not work since anNVO is only useful as a way to aid in entry selection when the price pattern we are looking for benefits from this type of criteria. When a pattern is valid regardless of volume, the NVO becomes a problem and NOT a solution. Also most indicator signals do not get any improvements from the use of an NVO since their signals represent the conjunction of complex calculations done over price through significant periods of time. In the end if you want to design a system using an NVO you should plan this from the beginning, adding such a filter as an after thought is NOT going to work in the large majority of cases.
After a few weeks of hard work and development using normalized volume oscillators I can say that I have developed at least a couple of strategies that show long term profitable results on a basket of currency pairs. However we will see in time if such strategies are in fact able to avoid broker dependency due to the NVO implementation and therefore succeed in the long term. Tomorrow I will be releasing a few videos in Asirikuy dealing with volume as well as the actual logic and coding implementation of the above mentioned NVO strategy.
As always if you would like to learn more about automated trading and gain a true education in the development and understanding of these trading systems please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to trading systems. I hope you enjoyed this article ! :o)
It is very interesting to analyze the answers you get when you ask people what they are looking for and if they think that what they are looking for is the automated trading "holy grail". This mythical piece of code is an EA that does NOT exist which achieves "unbelievable" results. However despite the fact that most people will utterly deny that what they look for is the holy grail - they will always say they know the holy grail doesn't exist - when you analyze the answer to the question "what are you looking for in a trading system?" you will realize that the bast majority are indeed looking for this mythical piece of code. On today's post I will talk about the holy grail and new traders and especially the relative character of the definition of this term and why so many people are looking for it even if they categorically reject to be doing so.
What average yearly profit to max DD ratio do you consider realistically achievable ?
So what is this trading "holy grail" exactly ? Its definition is actually simple and yet very complex. In my mind a holy grail is a hypothetical system which achieves results superior to the highest achievable maximum draw down to average yearly profit ratio allowed by the market in real returns over the past ten years. This means that any system that can do better than how the best REAL trader has done within the past 10 years is the holy grail. The best way to measure this "better" character is by using the above mentioned ratio which compares profit to risk.
When we look at the performance of forex traders for the past ten years -and the best registered traders since then- we notice that any system that achieves an average yearly profit to maximum draw down ratio of 5:1 over a ten year period is in fact a holy grail (check my post on the Barclay index to learn more about REAL long term performance of forex traders). This means that - being realistic - a system that achieves a 100% yearly profit with only a 20% maximum draw down over ten years is a holy grail. A system that is extremely unlikely to exist due to the very nature of the markets and the long term limitations on performance it imposes.
When we then ask new traders what they are looking for the answers are actually quite interesting. As a matter of fact, the above mentioned realistically inferred holy grail becomes the "lower standard" of a given set of return figures that are inferred from short term results and "lore" rather than from actual long term real performance records and realistic expectations. The 100% yearly profit with 20% maximum draw down becomes something that new traders perceive can be "easily achieved" and things like a 20% monthly profit with a 5% maximum draw down start to become the "grail" targets.
As traders start to accumulate more experience and they get to know the market and the inherent limitations of profitability and draw down they start to lower these figures. A trader with one year of experience is bound to give a 5% monthly profit with a 5% maximum draw down as a realistic expectation while it usually takes traders 5-7 years to realize that the before mentioned grail of a 5:1 ratio of average compounded yearly profit to maximum draw down ratio taken from real performance data is actually the real "extremely hard to achieve" target.
So chances are that if you are a relatively new trader you are looking for a system which is quite unrealistic and your actual "holy grail" is way beyond the limits of what the market is willing to let you get. In the end, most traders are looking for holy grails, even if they believe they currently have "realistic" and sound expectations of draw down and profitability for their trading systems. If you would like to earn a true education in automated trading and learn how you too can design and build your own systems with realistic profit and draw down targets please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to trading systems. I hope you enjoyed this article ! :o)
Isn't hassle free profit from the forex market all we want ? Definitely the goal of every person that starts to look for an expert advisor - or most at least - is to find a trading system they can simply "set and forget", a trading system that just collects money from the market in a consistent manner with minimal or limited draw down. A "holy grail", so to speak. However, it becomes obvious after a while of being in this business that if it is too good to be true it probably is and that no trading system can provide the owner with profit without an effort to develop knowledge and understanding. However the fact that the other road seems plausible makes a lot of people continue to search for this nonexistent trading system, a quest that brings nothing but disappointment and financial loss for most new traders. On today's post I will be giving you a logic based demonstration that shows why easy profit in automated trading is impossible and why this search is meaningless and will never arrive at your intended result (a system that easily gets you money without any effort).
First of all we must understand the very basic aspects about logic based demonstrations. When we are faced with a given hypothesis there are several ways in which it can be demonstrated to be true. In mathematics this is done in several ways but one of them is of particular interest to my article. You can demonstrate that something is false if the assumption that it is true leads to absurd results. For example, let us test the hypothesis that the addition of two even numbers gives us an odd number (which is false).
Assuming this to be true :
n, m and k are integers (2n is the definition of an even number, 2k+1, the definition of an odd one)
2n+2m = 2k+1 2n+2m-2k = 1 subtract 2k from both sides 2(n+m-k) = 1 factor 2 out 2a = 1 since n, m and -k are integers their addition is another integer (a)
Since 2a is an even number by definition and it is said to be equal to 1, we have an absurd result. No integer times 2 is able to give us 1 as a result. The hypothesis has been proved false because the assumptions that it is true leads to absurd results.
When it comes to making money from a system without any effort we can do the exact same thing. Let us suppose that there is a system that generates a 200% yearly income which can be traded from 100 USD and used successfully by anyone who buys it. Looking into the sales of the most popular experts we could expect this system to be used by at least 30K people during the first 2 years. This means that 300K USD - assuming each person trades the minimum - will be traded within the first 2 years. After ten years the return of this system would have been 17714700000 which is around 17 billion which is above all other market participants for this same time period. If 300K USD were added each year (of course new sales), the results would be even more staggering nearing more than 100 billion USD.
After 20 years, results become even more absurd and the system is now making a return that would be equal to more than the volume available to be traded. That is, all other market participants would be losing money against this system. This reduces the result to absurd levels since the system's profits surpass the amount of money available from the market. In fact, all the money in the world roughly describes what this system would be making.
The conclusions of this thought experiment are therefore quite simple and straightforward. One of the following things must be true :
If a successful system exists that anyone can trade then there is an inherent - and quite small - volume limitation to its trading that will thereafter make it lose its profitability or its "tradable by anyone" character.
If a successful mechanical system exists then there must be strong psychological barriers that make it extremely hard to trade for most market participants
If a successful mechanical system exists then there is bound to be a maximum compounded yearly profit to maximum draw down limitation that forbids it from reaching the above scenario (a limitation on profits).
Through all my research and work I have found that it is certainly possible to have successful mechanical trading systems and I suspect all the above are in fact true statements. Systems that would be easily available for anyone to use would quickly lose this character as a function of volume and become hard to trade for some reason (psychological, increases in the maximum draw down to average compounded yearly profit ratio) and systems that are already successful are bound to be hard to trade or have an inherent profitability limitation that does not allow them to reach the above mentioned scenario.
In the end, logic is simply undeniable. The scenario portrayed before is an absurd outcome that cannot be reached and therefore limitations to its achievement must be contained within the systems themselves. Systems that may seem to show extremely high results must be volume limited and later become much less profitable and harder to trade while mechanical systems that are profitable in the long term are hard to trade by definition. The above logical reasoning also shows us that there is bound to be some form of profitability to draw down limitation which comes from the simple assumption that the above scenario must be avoided. In conclusion, there is simply no easy long term profit in automated trading.
As you see, the simple power of the "reduction to absurdity" logical reasoning allows us to gain a lot of information about the world of automated trading systems merely by the use of a very simple thought experiment. If you have any comments, suggestions, opinions or other similar reasoning exercises, please feel free to leave a comment !
If you would like to learn more about my journey in automated trading and gain a true education around this type of systems, their uses, limitations and possibilities please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to trading systems. I hope you enjoyed this article ! :o)
Sure, we have all heard about the huge effort and thousands of hours that traders need to put into this business before they even start to turn a profit. One of the first thing that people new to the market first fight with is this inevitable need to acquire experience and the painful but real fact that demands this experience to be acquired through actual real trading, experience that needs to be taken by watching the screens and by losing money on the market (demo or live). If you want to become successful in trading then you will probably need to trade live for years before you actually come up with a true system (mechanical or discretionary) that has a positive long term statistical age and some - even remote - guarantee of bringing you stable profits. Is there any way to short-cut this road through effort ?
On today's post I want to discuss with you a way in which I believe that the time invested in trading can be exponentially reduced, reduced to the point where you will be able to gather a large amount of what would take years to get in just weeks or months. The catch however is that you will need to make the actual same effort so what we would change would be more precisely described as the "effort density" instead of the actual effort or time required. The solution I propose within this article will allow you to experience the markets in a much faster fashion, develop an excellent sense of discretionary trading and accurately evaluate your trading potential efficiently.
It occurred to me that the only way to gather true experience from the market is actually through trading a chart on the end of the right hand-side. Of course, evaluating discretionary strategies and developing a sense of the market when examining historical charts doesn't work very well because you are not taking or simulating decisions as you would in live trading - at least most beginners won't - and therefore it becomes primordial to be able to tackle the market in a "live" way.
Then I realized that there are simply no easily available tools that allow us to do this in a simple and quick fashion. It would be great if there was a way in which you could simulate live trading on a chart which had a controlled live evolution, a chart in which you could also place positions, keep track of you results and evaluate your performance when the test ended. However the closest thing we have - the visual strategy backtests in MT4 - do not allow you to take any positions and do not allow you to have an idea about the performance of a given discretionary trading style in the end.
My idea was then to develop an EA that would allow us to use the metatrader 4 visual backtester with the possibility to actually use it as a "live testing platform" in which we could actually take positions and evaluate the performance of a strategy in a live evolving, quickly moving right edge. This is how I created Umaki, the Trader Builder. This EA allows you to use a metatrader 4 visual backtest as a live market feed - only much faster - so that you can evaluate your discretionary strategies just like you would under live trading conditions (regarding chart movement and information available). (a picture of Umaki in action is shown below) - - If you want to evaluate a strategy over a statistically significant period of time (which is longer than 5 years) then Umaki provides you with the tools to do so. Simply place Umaki on the charts and use it to trade the system as you would in a real, live evoling market. You can then look at the backtesting results in the end and realize how your manual system would have performed over this entire period. Of course, Umaki is by NO MEANS a shortcut to effort but it allows you to study the forex market on your own time and develop trading skills and strategies when it is most convenient for you. Maybe you don't have the time to spend long hours within the week staring at live evolving screens but you do have a space of 10 hours during the weekend in which you can perform a ten year Umaki 4 hour run. As I said earlier, this tool allows you to increase the speed in which you evolve as a trader by increasing the effort density (much more effort in less time) and it will bring an experience as similar as possible to actual trading the real market.
Of course, a lot of honesty is required if this tool is to be used successfully (since the history of the market is anyway known) so you would have to take mechanical or discretionary decisions regardless of your knowledge of "future events". For example we all know that there was a huge EUR/USD drop in late 2008 due to the economic crisis but trading this simply because you know in hindsight is not honest and would defeat the purpose of Umaki. In the end it depends upon yourself to use the tool appropriately and to take the largest advantage from it by earning a "concentrated" live trading experience on a simulated "fast live evolving" trading platform. Also bear in mind that Umaki suffers from the limitations of the metatrader 4 backtester one minute interpolation problems so the evaluation of strategies with very low TP/SL values or on time frames below the 30 minute chart is NOT recommended in anyway.
For those of you who are curious and want to know how you can get this EA, don't worry, a post will come tomorrow just about that (also don't worry, I don't plan to sell it :o)) along with the meaning of this word. Anyone wants to take a guess ?
If you are not interested in discretionary trading or Umaki but you would like to learn more about automated trading and how you too can develop systems with sound profit and risk targets with a very good understanding about their logic and merit please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to trading systems. I hope you enjoyed this article ! :o)
When you go online and start searching for ways in which to become profitable as a forex trader you soon realize that the internet is filled with what seems like very meaningful yet hollow advice. People around forums and educational websites will tell you several key points of advice such as "plan your trade, trade your plan", "cut your loses short" and "follow the trend" but they always fall short of telling you any practical ways in order to achieve the above mentioned objectives. This is one of the main reasons why it is so terribly hard for new traders to achieve success, there is an inherent lack of practical advice online which means that most traders have to learn how to do things from experience, a very lengthy and painful process that usually carries with it a lot of financial loss and frustration.
On today's post I want to make this easier for those out there who have just started or those who are still looking for some guidance in how to become profitable in the long term. In the following paragraphs I am going to highlight the first five practical steps you should go through when building a trading plan. I can guarantee that if you follow these steps it will be much easier for you to become profitable since you will gain a deeper level of understanding of what you are doing and what the outcomes of your trades will possibly be.
But what is a trading plan ? A trading plan is merely a set of rules that allow a trader to make decisions under any possible set of conditions. I allows you to remove emotions from trading and to be able to face different circumstances knowing what you will do in advance independent of the way in which market movements develop. Having a trading plan is the first key to success in trading since it allows you to tackle the market without surprises and without using your emotions when your knowledge fails. Since a trading plan covers all possible scenarios, emotions can be left out completely. How do you come up and make a trading plan ? Keep reading to find out.
Step 1. Figure out the type of market movement you want to capture. The first thing you need to do is figure out what type of movement you will attempt to exploit for profits. Here you need to take into account the amount of free time you have and the amount of stress you can withstand. If you cannot stare at the screen 12 hours a day choosing small time frames will be a bad idea. In general I advice new traders to use the 4 hour or daily time frames as these allow them to have a trading plan that only requires them to be in front of the computer an hour or just a few minutes each day. Aiming for daily or 4 hour trends is a good way to start as a trader.
Step 2. Design your first entry logic. Analyze several trades you would have liked to get into and come up with an entry logic that would allow you to get into the market on those trades. Now you need to take that logic and EVALUATE it over extensive periods of time (5-10 years) so that you can know if your entry does indeed have a positive mathematical expectancy. On this first analysis you merely want to see if price does move in your favor and for how much it moves in your favor when entering trades based on this criteria. The main reason why new traders never use systems that work and second-guess their systems all the time is their lack of statistical analysis. Many traders use systems that don't even have an edge over their entries without ever realizing that this is the case. If you use something that is doomed to fail for the beginning your chance of success will be easily reduces. If you are a manual trader you should consider getting Umaki to help you backtest your discretionary strategy over a long period of time.
Step 3. Make sure your systems is not static. Now that you are going to design the exits for your system you should take into account that systems that are static (for example a system that uses a 20 pip stop loss and a 100 pip take profit) almost always fail as market conditions change since their ability to adapt to the way in which market volatility fluctuates is nonexistent. Your exits should be dynamic (based on indicators or discretionary criteria (S&R levels for example). You can also use volatility adjusted fixed TP and SL levels if you want to or you can design these levels around support and resistance levels (this is the best solution if you are designing a discretionary strategy).
Step 4. Design Exits and Lot sizing. After coming up with an entry logic that has a positive mathematical expectancy in the long term you should now design and evaluate exit and lot sizing criteria to exploit this inefficiency. Since you have already done an analysis of where price goes in average once you enter a trade some exits will be obvious to you. For example price may tend to rally up to the next important support or resistance level or it may go in your favor 50% of the daily range. Once you have an initial mathematical expectancy analysis coming up with exits won't be very hard and it will allow you to build discretionary or mechanical exit points that will work with your strategy.
Step 5. Understand the Risk and Profit characteristics of your plan. The large majority of new traders start trading systems for which the profit and draw down characteristics are absolutely unknown. I have always been amazed at how people can trade a strategy without the slightest idea of how deep draw down periods will be, how monthly returns are distributed or what draw down level will suggest that the plan is no longer working. The MOST IMPORTANT THING you need to do is to evaluate your plan through a LONG period of historical testing so that you know what you will be facing.
In the end your ability to succeed in trading will depend simply on how sound your trading plan is and how capable you are of executing what you have designed. If you have designed your trading plan correctly you can then answer simple questions like :
What is your expected maximum draw down ?
What is the average draw down period length ?
What is the distribution of monthly returns expected to be ?
What is the average compounded yearly profit ?
What is the probability to have a winning or a losing month ?
If you are unable to answer the above mentioned questions then your trading plan is currently flawed or at least you have not evaluated or understood it very well. Understanding of what you are trading is VITAL for success and failing to know if your trading plan does indeed have a statistical edge and a possibility to survive in the long term will mark a constant failure for most traders. My advice is therefore simple, develop a plan you KNOW has a positive statistical edge, a plan you know and a plan you understand fully from a statistical point of view.
If you would like to learn more about trading plans and how you too can develop mechanical trading systems with a full evaluation of all their statistical characteristics please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)
Even though there are many ways in which you can define successful automated trading systems I think that the word that describes them best is : elegant. While the large majority of traders seek systems that promise -and yet don't deliver- massive amounts of profit those few of us who succeed by using automated trading systems have done so through the creation of systems that fulfill a series of very simple characteristics that make them robust, reliable and likely to succeed as market conditions change. On today's post I want to share with you the characteristic of elegant systems and how this type of mechanical solutions are one of the many ways in which traders can actually find long term success in forex trading.
What is an elegant system ? To put it simply, elegant trading systems are those which are extremely simple regarding their coding and trading logic and yet extremely rich and deep in regards to the market inefficiencies they exploit. For example Watukushay FE, a trading system I developed which is available for free (http://watukushayfe.blogspot.com) uses a trading tactic that focuses around the RSI. The whole entry, exit and lot sizing aspects of this system can be coded within less than 50 lines of code, however the system exploits a very deeply meaningful aspect of market behavior that makes it extremely deep in meaning.
Watukushay FE is therefore a perfect example of what I consider an elegant trading system. You have a system that seems extremely simple but within it there is a very large amount of understanding and the solution to many important problems faced by mechanical trading systems. For example, Watukushay FE adapts its position sizes and exits against changing market conditions as well as using an internal closing mechanism to cut losses short and let profits run. This system contains within it the ability to follow trends, enter trends upon retracements and adapt to changes in market conditions all within a very simple coding framework. Watukushay FE shows you that it is meaning and NOT complexity what is bound to make trading system successful.
There are also many other advantages inherent to simplicity that make "elegant systems" much more robust and reliable than other more complex implementations. One of the biggest advantages of this type of systems and their low level of coding complexity is the fact that curve fitting them to past market conditions becomes very hard since the number of parameters - and the way in which they affect performance - is very limited. A simple system like Watukushay FE that works along a 10 year backtesting period shows that simplicity is able to maintain profitability amongst very varied sets of different market conditions.
In the future when you start developing your own automated trading systems bear in mind then that the complexity has to be within the amount of problems solved by the system and not by the amount of lines of code or indicators used by the system. The idea here is that complexity must be an inherent characteristic of what the system is doing and not of how it is being done. So even though the techniques used by Watukushay FE - for example- are exceedingly simple, they solve a very wide array of complex problems encountered in mechanical trading system development.
If you would like to learn more about automated trading system development and gain a true understanding and education regarding their use and development please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)
Through the past 4 years all of us have used the metatrader 4 platform for most of our automated trading Forex needs. Although this platform is not the only one available with such capabilities (tradestation and ninjatrader do this same thing) it is in fact the only one which is available to all retail traders since the platform is free to download and the live feed and historical data is also entirely free. A large part of Metatrader's huge success focuses on this free character which makes its use by people new to forex and aspiring traders a reality. This alone has generated a very large automated system sales industry, showing that the decision to make a platform and its price data freely available is indeed an excellent one. Up until now we didn't seem to have any alternatives with similar free character and the potential to become so massive but now we seem to have a new competitor that may want to take Metatrader 4 and 5 to the boxing ring. Today I will share with you some of my first impressions around this software and my opinions about its potential against the Metaquotes monopoly in retail automated trading.
So what's the name of this software ? The company who dared to fight the rule of Metaquotes in the retail forex industry is actually a broker in itself- FXCM - and the product they are using to compete with MT4 is actually a very young and still under development platform called Strategy Trader. The reasons why they developed this software seem to be both economical and technical since having a monopoly on a better-than-metatrader product would make them a must-use broker for many people and the fact that they have absolute control over the implementation means that they can better handle the straight through processing (STP) with their server implementation.
Is it really that good ? I have to say that I am surprised at many of the things that the people at FXCM seem to be getting "right" from the beginning with their software. It seems that they have really paid attention to what people want, not taking the position of metaquotes which simply turns a blind eye on anyone who wants to give some suggestions about the features and implementations within their platform. FXCM has actually already implemented many features that are obvious and that metatrader simply refuses to use. For example, FXCM has the ability to select ANY custom time frame and to create range bars and tick bars with ANY values. This is an obvious addition 99% of traders want and something Metaquotes has simply been "too lazy" to do. - - Another great advantage of the FXCM Strategy trader is the fact that the feeds are updated and the charts are created as a function of actual ticks taken from a server and not through one second updates as it is done in MT4 and 5. This allows you to have more precise charts and to have a more accurate picture of what is going on. Instead of just sending one package every second with whatever happened, the Strategy trader gets a package for every tick that happens. A feature which although harder to implement is far more robust for the end trader.
Regarding simulations - which I bet is what many of you want to know about - I have to say that FXCM has done a good job. Although the data is still reduced to one minute bars instead of ticks due to the practical size problems involving direct tick data for backtesting the fact is that there are several advantages. First of all, the data from the Strategy Trader is data from FXCM so the actual sources and reliability of the data are known from the beginning. Metaquotes does not disclose the source of their data and this makes it shady and more difficult to trust by traders all over the world. Another great advantage is the Bid/Ask data sources which means that actual spread values from real trading can be known with much better precision than with actual Metatrader data which simulates the spread.
Sure, the Strategy Trader is only in its infancy and it is still a much less stable, robust and of course used platform than Metatrader 4. However I think that FXCM has done a great job so far probably due to the fact that they have listened to what people want and they have created a platform to reflect this. In the future I would say that if FXCM continues with their efforts and decides to sell this platform to other brokers this might come to be the preferred industry standard over the currently more popular Metatrader series. I'll continue to follow up on its development and I'll share some future posts about my experiments with it in the future.
If you would like to learn more about automated trading and how you can gain a true education in the use and development of algorithmic trading systems please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to trading systems. I hope you enjoyed this article ! :o)
There is a very common term used in trading called "paralysis by analysis". This is what happens to someone who is so overwhelmed by the amount of information on their screen that they are unable to make decisions regarding whether or not to trade. This is something that happens to every trader at some point in their career, a fruit of the desire to get very good entries without having significant risk. Usually people who suffer from this paralysis will have dozens of indicators loaded on their charts with a lot of contradictory signals that are difficult - if not actually impossible - to interpret in a meaningful and useful way to actually enter and exit trading positions. On today's post I want to talk about a way in which you can tackle paralysis by analysis and restart your trading in the simplest of ways. Through this post you will learn what I have learned works best to eliminate "paralysis by analysis".
You start your trading day and your screen is filled with indicators and clutter. The obviously beautiful layouts, tons of trend lines, support and resistance levels and indicators are nice to look at but interpreting what they say is difficult. You have a 20 period RSI giving a signal that you would normally take but you do not do so because you have a 100 MA that contradicts what it has to say as well as a Parabolic Sar indicator and a candlestick pattern formation you don't like at all. Even though the setup is pretty good you do not take it because you are paralyzed by the amount of technical data you are having to analyze. You have been officially paralyzed by your own analysis.
This "paralysis by analysis" is far more common that what people usually think it is. It happens especially to traders who have been into trading between 6 months and one year which is the period in which people become a little bit obsessed with perfecting their entry techniques (from what I have seen at least). Paralysis by analysis is not good as it is usually a symptom of lack of confidence and the need to have what people believe are "high probability setups" by putting up as many signals as possible together. Traders who get paralyzed usually believe that they need to see "agreement" between many different indicators and that this - in itself - will provide them with the statistical edge they need.
If you feel you are in this situation, then you need to make a change. When I got paralyzed by my analysis I found out that the absolutely best solution was to go back to the simplest form of a trading chart, the simple line chart. This is a setup that shows you price action merely as a line moving on your screen, it is fantastically easy to interpret and it shows support and resistance levels with a clarity that is not rivaled by any other type of chart (perhaps only by renko charts). The simple line chart easily allows you to determine where price is headed and to draw support and resistance levels without breaking a sweat. Below you can see an example of this. - - The main advantage of the simple line chart over other types of charts used in trading is that it is extremely simple. Even though price action may seem difficult to follow and price patterns hard to spot and interpret on a candlestick or similar chart, on a simple line chart such things as price patterns and price direction simply jump off the screen. Traders usually do not resort to a line chart because they consider them exceedingly simple and "lacking" in the amount of information they give them regarding price action movements but the truth is that line charts offer you one of the clearest pictures of overall market action and - most importantly to new traders - it is the most intuitive chart to interpret.
While spotting trends and support and resistance levels on a candlestick chart can be harder, doing so in a line chart is totally easy as these things are evident most of the time. For this reason I have found that for traders suffering from paralysis by analysis, the line chart provides an extremely valuable tool to get rid of all the analysis tools and come back to what actually matters in trading, price action. - - So even though simple line charts are no miracle tool and they won't make you a profitable trader on their own they will provide you with a very clear, simple and effective analysis tool that will greatly help you improve your trading and remove any paralysis you might actually have that could be eliminating your ability to trade in a reliable and long term effective manner.
If you however would like to learn more about my work in automated trading systems and gain a true education in their use and design please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)