Thursday, October 1, 2009

Can Ranging Markets be Exploited with an EA ?

As you may know, I have always talked about the necessity to tackle an inherent characteristic of the market in order to develop a profitable automated trading system. I have always advocated for the exploitation of the trend as a basic and inefficient (in the sense of a manifestation of market inefficiency) characteristic of the market but I have been asked a few times if other characteristics of the market which exist can be exploited. This is a very interesting subject as exploiting another type of market inefficiency would mean that we could develop a more robust trading portfolio.

Several people have asked me if "ranges" can be exploited with a significant gain in the fx market using an EA. In order to tackle this problem it seems obvious that we would need to analyze the development of ranges in the forex market . In short, the following things :
  • What is the magnitude of a usual range in a pair as a function of volatility ?
  • How many up/down cycles on the range are done in average ?
  • Does the number of cycles depend on volatility ?
  • What is the frequency of these cycles ?
As with trends, we would need to have see things happen a little bit before we can enter the market. We could just enter a trade when price does two cycles inside a range and we would enter for a profit within a third. The logic would need to find these ranges (which can be found easily with high and low schemes on a fixed number of periods in the past) then the system should see how many up/down cycles have been done and then it should decide to enter a trade accordingly. The EA would have to adapt against changing volatility and hence adjust its logic to varying cycle numbers, amplitudes, etc.

Do I believe if such a system could be profitable ? Yes, of course, ranging is what I believe to be an inherent characteristic of the market. However the way in which ranges occur is much wider than the way in which trends happen and therefore it would be harder to define and enter/exit these trades but if done appropriately, there is no reason why we could not have a range trading EA as a part of our portfolio. This EA would do better on ranging periods while losing money slowly in trending periods while our trending experts would do the opposite.

Anybody up to the task ? I would love to hear your ideas about the specific logic and programming approaches you would use to make such an EA reality. Also anyone who has done any statistical studies to answer the questions I posted above is also welcome to leave a comment.

Finally, if you would like to learn more about how you can design and program your own long term profitable systems or how you can trade a freely available long term profitable system in the fx market 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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