Saturday, February 27, 2010

Broker Dependency in Forex Trading... How Big is this Problem ?

The forex market is different from almost all other financial markets. Amongst all the differences, probably the greatest one is the lack of a central exchange in forex trading. People usually do not understand the large importance of a central exchange and how it helps both trade regulation and successful trading system development. The fact that we don't have a central exchange in forex makes the market both highly unregulated and difficult to trade since each broker feed is different from the next. On today's post I will talk a little bit about how this broker differences affect our overall trading and how they have a very high impact on automated trading system development, an impact usually far larger than what people imagine.

So what is the deal with having different feeds anyway ? There are several problems with this, some smaller and some bigger. On the smaller side we have the problem that having different feeds implies that different price levels are reached on the high/lows of candles. This effectively leads to some orders reaching TP and SL values while not reaching them on other brokers. This inevitably leads to some broker dependencies although the extent to which this influences overall results is not extremely significant.

On the other hand we also have that these small diferences in broker feeds which cause differences by a small number of pips in candle high/lows open/close values tend to affect indicator values to a great extent, since indicator values are calculation made on price action. Now, this specially affects strategies which are based on indicator crosses since very minute differences in broker feeds and indicator values can cause a cross to happen or fail to happen which leads to a very wide range on different signals on different brokers.

You can also conclude from this analysis that the smaller the time frame in which you trade a system and the smaller the TP and SL values of the system the much more prominent to broker dependency issues a trading system is since broker feed differences amount to a much larger percentage of the candles on lower time frames. For example, a 2 pip difference on the close of a candle may only mean 10% of a one hour candle while it may be 30% of the 15 minute candles that compose it. Therefore strategies based on lower time frames have a much greater tendency to show broker dependency.

Broker dependency is usually large and on systems that trade smaller time frames it may mean that results obtained on one broker may be totally irreproducible on another, therefore it is very important to design systems for the higher timeframes (one hour or higher) when looking for limited broker dependency and increased reliability. It is also mandatory to run a trading system on several brokers to know the extent to which these depency issues affect overall profitability and if such issues will or will not lead to a broker being globally more profitable than another. The best trading systems which have limited broker dependency will show different trades in the short term on different brokers but their overall profitability in the long term should match as brokers may compensate for each others performance as market conditions change (a good period for one will be bad for the other and vice versa).

If you are interested in this subject and in learning to develop and trade automated long term profitable trading systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

2 comments:

Tcxmon said...

Daniel-

I agree that shorter timeframe systems are more prone to backtesting error than systems with hourly or larger timeframes.

The issue I have with longer timeframe systems are that the TP and SL are also larger (say 70 pips), so you have the potential of a much larger loss.

What do you think about a scalper EA such as EAKAIN? Its drawdowns are much lower based on the active management of the trade, and the win rates are high. EAKAIN is currently #2 on the Forex Peace Army Experts test and returned an unbelievable 14% this past week alone!

Whether they will do the same on a live account remains to be seen. It will be interesting.

Cheers,
http://fx-mon.blogspot.com/

Daniel said...

Hello Txcmon,

Always glad to have your comments here :o).

I really don't see an issue with having a larger TP and SL since the actual money made or lost depends on the actual lot size traded. In fact many trading systems risk much less per trade than scalpers even though their TP and SL values are much larger. For example Watukushay FE with a Risk = 1 setting risks less than 1% of the account per trade even though the TP and SL values are 50% of the 14 period daily ATR away from the opening price (which is usually 50-100 pips on the EUR/USD). As you see, the size of the TP and SL does not imply a higher risk since the lot size traded must be taken into account.

Regarding scalpers, I have to tell you that I don't trade them at all for several reason (I will now explain the three most important). The first is that their TP is very small so accurate simulations are not posible (so there is no way to know long term performance besides trading the system live for 10 years), the second is that they depend greatly on requotes and broker spreads so demo trading is also prone to be VERY different than live trading, and the third is that the nature of movements on the lower time frames changes a lot under varied market conditions, so the actual inefficiencies the systems trade on are prone to change and render the systems unprofitable (which has ALWAYS been the case on all scalpers which I have analyzed).

EAKain also seems to be a mere modification of Megadroid (you can read more at www.bestforexea.com). Again, short term profitable results are just that and they say NOTHING about long term profitability. Yesterday's post explains my view on this matter and why I am simply not interested in the way in which all reviewers seem to tackle the expert advisor issue. I am interested in expert advisors which have a high probability of being LONG TERM PROFITABLE and I have no interest in systems that cannot be simulated accurately which are also obviously prone, due to their trading tactics, to lose whatever short term profits they make in the long term. I am only interested in trading systems I can TRUST to have the highest posible chance of giving me profit for the next 10-20 years, not just the next 6 or 12 months.

I hope I make my point clearer now :o) Thanks again a lot for leaving your comments, I always appreciate a good discussion !

Best Regards,

Daniel Fernandez

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