Sunday, October 12, 2008

Forex Money Managment Strategies, the Difference Between Success and Failure

Many people, specially new traders, overestimate the paramount importance money management has on their trading. In fact many strategies can be turned from losing to giving decent returns when adequate money management is applied to them. People tend to think (as I have said on other posts) that the most important factor in forex is the entry, they couldn't be more wrong. Most trading systems are profitable either because of their exits or their money management strategies, both of them give the systems an additional edge over other ones.

So, what is exactly money management ? It is simply the adequate control of position sizing inside a strategy to make it more profitable. As you know, there are many ways in which positions can be managed, the traditional approach being to trade a fixed percentage of your account size every time. However, this strategy is not as profitable as people would think because it needs a trading system which is right most of the time and whose exits are very favorable. The advantage is that this system is very good at preserving capital but up to date I have not seen a single system which has demonstrates on live trading to work well based on this money management.

So what systems work ? We have what we would call "progression systems" which increase lot sizes after any loses are attained. The most popular is the Martingale strategy which doubles lot size after each loss, however, if your equity is not infinite, this trading system will wipe out your account eventually because of lot sizes becoming obscenely large. Can it be traded profitably ? Sure, you can demo trade a martingale until it collapses then enter it and withdraw your profits every week, the system will eventually collapse and wipe your whole account but luckily you have made back your account and some additional money. Then you return to demo trading, wait for another collapse, etc. This strategy works because Martingales tend to trade in cycles, they collapse, produce profits, collapse, etc.

Since what we want is a trading system that does not fail with time, we have to find a compromise between increasing lot sizes after loses to recover capital and increasing them too much as to expose us to increase our risk too much. So here comes the variations of the D'Alambert money managment system. What this system does is increase lot sizes linearly with loses and decrease them with profits, so if you have 3 loses and 3 wins and your initial lot size is 1, your traded lots would have been, 1,2,3,2,1,1 . It has been shown with automated systems that variations of the D'Alambert system work the best, that is, not decreasing lot sizes linearly but increaseing them until new all time highs are achieved. These systems give a good compromise between risk and profits.

If you want to learn more about automated trading systems with different money managements and their profitabilities please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Saturday, October 4, 2008

The Forex Autocash Robot an Unbiased Review

Today I decided to write a review about a piece of software called the forex autocash robot. It is a metatrader expert advisor designed to automatically trade the forex market. I have to say, I am repulsed by the way in which this product is shunned upon people on the authors website, it is disgusting that a person can grip such cheesy and unethical marketing tactics in order to convince people to buy a product.

But well, the way in which a product is marketed doesn't make it good or bad so now I am going to focus on what the software really is. The expert advisor is a typical scalping ea, with a 6 pip take profit and a 650 stop loss targeted at an audience of not too knowledgeable forex traders. The webpages claims that the product has remained in profit for more than 8 years without a single loss. This claim is not backed up by live or forward testing of any kind and with such a small take profit it is very plausible that, even if this results really showed on a backtest, that they are not coherent with reality (due to interpolation in one minute candles). So the first problem with this ea, is that it's claims are unproved. The fact that the author does not say or discuss the differences between back and forward testing anywhere is just a blunt proof of dishonesty.

I have had the opportunity to discuss this software with some people who bought it and they all have argued software problems and inconsistency between the websites backtest results and their own at high modeling qualities. So does it show any loses ? Yes, it does.

So now the question appears, with a 6 pip take profit and a 650 pip stop loss, how many trades does the forex autocash robot need to win in order to break even with a single loss ? Well, that number is 108 ! The odds of any system getting such high winning rates is small but, we are not taking into account spreads (which the author never discusses !). So, if the EUR/USD had a 2 pip spread you wouldn't need 108 but 162 trades to recover from one single loss. You can now figure the odds of becoming rich using this systems.

If the system's claims are correct and if the author is honest, he should provide live or at least forward testing information so that people can realize how it works. The author should also provide investor passwords free of charge so that people can verify his claims through watching an unaltered live or demo account.

I have to tell you, expert advisors that deliver what the forex autocash robot promises, do not exist. It is not lack of vision, it is reality. I recommend that when you buy an expert you follow your gut, if it is too good to be true, it probably is ! I wouldn't buy this system, would you ?

Finally, I would like to invite you to read more posts on my blog and if you are interested on other commercial expert advisor reviews or how to really find profitable expert advisors please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Trading Forex, It's all about the Exits !

I decided to write an article about general forex trading since many people have a completely wrong idea of what is and what is not important when trading forex. A very common newbie and even experienced trader mistake is to think that the most important thing when trading is to enter the market at the right time. You couldn't be any more wrong. In fact, you can enter the market at anytime in a direction predicted by a coin toss and the strategy could be profitable if you know when to exit the market.

The most important thing when you are trading and what distinguishes a loser from a winner almost all the time is the ability to exit the market correctly. But, what is to exit the market correctly ? Well, there is a common phrase in forex trading that says, cut your loses, let your profits run, it is exactly that. But we all learn eventually that this is easier said than done, exiting the market requires you or your automated trading strategy to have a very careful plan, there must be some clear exit signals, market orders, etc. These exit signals cannot be any signals, they must be carefully designed to allow you to have the minimum possible risk to reward ratio.

Many people that make automated trading systems do not understand the paramount importance of this concept and they assign any values to stop loss, take profit and trailing stop levels, the system could have the best entries, but exiting the market at the wrong time is quiet fatal. Each assignation of these market order values needs to be carefully studied through deep analysis of the pair's trading ranges, the average movement of the pair after an entry, etc. When you study automated systems carefully, you realize this is almost their most popular Achilles heel, another one is money management which we will discuss at a later post. If you want to learn more about automated systems please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

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