Wednesday, June 30, 2010

Targetting the JPY Crosses : Why it is so Hard to Develop Long Term Profitable Systems for These Instruments

If you have been interested in system development and you have been following my achievements for a while you would have certainly noticed that I have never developed a system to target any JPY crosses. The reason why I haven't done so is not because I haven't tried but because the development of long term profitable systems for them has proved to be extremely hard. On today's post I want to share with you my experience with these instruments and why I have had a very hard time attempting to develop strategies that profit from these very volatile forex trading instruments. I will explain to you why price action based strategies simply do not seem to work for these pairs and what other alternative solutions I have put in practice to develop a long term profitable system that is able to diversify our trading with these JPY beasts.

The JPY crosses are a series of instruments in the forex market that pair the Japanese Yen with a non-USD currency. These instruments are most commonly EUR/JPY, GBP/JPY and CHF/JPY but other more exotic pairs like NZD/JPY and AUD/JPY are also available. These pairs have some very notable characteristics which set them apart from regular forex pairs like the EUR/USD and the GBP/USD. What makes them so special is the extremely large daily volatility and their overall lack of liquidity (when compared to major pairs). Developing a system for these babies is no easy ride and I will just show you why this is the case.

System development is based on the finding of exploitable market inefficiencies. Price behaves in a certain way that allows you to enter a trade with a high probability of success under very diverse market conditions. Lack of liquidity introduces a blur to this image and therefore it becomes very hard to find inefficiencies because price is "all over the place" so to speak. Lack of liquidity makes different price patterns appear on very different market situations signaling many different things taking your mathematical expectancy away from positive territory. So if you try to trade a given candlestick pattern you find that the pattern sometimes leads to where you want to go and sometimes it doesn't - like it always happens - but the lack of liquidity increases the number of times it leads to where you don't want to go significantly, to the point where you lose all the edge you would have gained from it.

For this very reason, the development of price based strategies on the JPY crosses is often not a good idea since you are very vulnerable to the "blur" introduced by the general lack of liquidity of these instruments. Systems that have success on very varied currency pairs - like Teyacanani - simply fail to profit on JPY crosses due to the fact that their signals simply don't lead anywhere. After analyzing 10 years of price data for the EUR/JPY I have found that price action is extremely hard to predict due to the fact that lack of liquidity makes it follow a very random walk in the short and perhaps medium term. This is the exact effect you would expect from lack of liquidity since crowd behavior becomes less representative and more individual human behavior - which is just random - starts to show through the charts.

What is the solution then ? Since price action based strategies seemed to fail to bring positive results on these currency pairs for me, I decided to change into indicator based strategies that allowed me to remove the "noise" from the market more effectively. The idea here is that JPY crosses do follow crowd behavior in the long term so introducing a strategy that averages data and gives me an idea of where things are going would most likely prove more effective. This is in fact the case and indicator based strategies do show positive mathematical expectancy values with less effort. However, the fact that the currency pairs lack liquidity makes the eventual profitability of these strategies much lower than what can be achieved on the regular USD paired instruments.

In the end it becomes obvious that lack of liquidity complicates any mechanical profitability to a large extent since market inefficiencies become far more scarce and difficult to capture. Lack of liquidity makes the effect of smaller parties larger and therefore the movements are just more random overall. Crowd behavior becomes less significant and therefore we lose a significant edge that we are able to use on major currency pairs. Many of you may think that this "randomness" constitutes an inefficiency on its own but the fact is that it does not since you aren't able to predict when it will appear with a statistical advantage. If you assume that JPY crosses are random and attempt to profit from their volatility you will fail when they trend and vice versa. The problem is not the character of the instruments but the fact that lack of liquidity does not allow us to have a positive statistical edge on most strategies.

Does this mean that we won't have any mechanical JPY-cross trading strategy ? No, it just means that it will be much harder to develop and probably profit and risk targets won't be as good as for regular systems based on more liquid currency pairs. As a matter of fact I am currently developing some strategies to address these JPY crosses. Hopefully I will be able to tackle this beast and - in the end - we will have some likely long term profitable systems for our JPY trading friends :o)

If you would like to learn more about automated trading and how you too can learn to design and develop your own trading systems with sound trading tactics 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 !

Tuesday, June 29, 2010

Looking at the Future Through the Past : The Key to Successful Entry Logic Design

When you first attempt to design your own mechanical trading systems you often start with big questions about the way in which this is supposed to be done. The building of the entry logic - which marks the potential of a trading strategy (not its profitability !) - is quite commonly the first obstacle new traders find when attempting to develop a strategy. Generally people who aren't familiar with system development will start to develop entry logic based on visual observations - without a true grasp of the underlying market- something which is bound to create significant problems and eventually lead the trading strategy to failure. On today's post I will be writing about how you should address entry development and how you should focus on the understanding of the currency pair and the building of causality chains so that you can truly build entry logic criteria that have a good potential for the development of a long term profitable trading strategy.

When you sit down and start to build the entry logic for your next strategy you have to think mainly about two very important factors. First, you need to think about the underlying market characteristic you want to exploit and second, you need to think about the chain of causality that is bound to bring your trades to exploit this desired characteristic. To do any of these two things, you require an understanding about the underlying price action characteristics of the instrument you are trying to trade. Aiming to do this without a proper understanding of the behavior of the instrument you are trying to trade will bring nothing but failure.

How do you start then ? The first thing you need to do is to ask yourself about the inherent characteristic of the market you want to tackle. For example, let us suppose you want to exploit hourly trends in the GBP/USD. After deciding you want to do this you then need to look for the "ideal trades" you would have wanted your system to get into, when you would have ideally wanted to get in. Once you know your ideal entry you now need to look into the past and see if there were any changes that pointed out that this would happen. This leads us to the second part, developing a sense of causality.

Everything that happens in our world has a cause and so do market movements. When a given market movement develops there is bound to be a cause behind it. By looking into the past and finding certain market behavior that signals that a certain event is likely going to happen we find ourselves with the goal of entry development, a market inefficiency. The idea here is to look at the past and see what particular price behavior has led to our intended ideal entry setup. Once you have pinpointed this past cause that leads to your ideal entry setup you can code the logic and do a mathematical expectancy analysis. As you see here, the key is to find a particular market behavior in the past which leads to a given outcome in the future with a high probability.

The thing you need to understand here is that a given cause is not always bound to give the same effect because market behavior is almost never bound to repeat itself in precisely the same ways. What you are doing is building a "general case" from a very specific setup. Sometimes this general case assumption will not work since your logic "misinterprets" the current behavior as its "general case" while in other instances it will match and you will enter your ideal setup. This is what leads to market exposure and - when potential for profitability exists -to positive mathematical expectancy values.
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Generally your general case will only determine the system's potential but money management (lot sizing plus exit logic) will finally determine profitability. Trying to modify an entry logic to achieve profitability is a wrong approach which usually leads to poorly built systems with very complex entry logic criteria that do not achieve long term profitability. Knowing the mathematical expectancy of your entry logic is vital for success since these data will tell you if there is potential or if your "general case" assumption simply does not work in the long term.

If you would like to learn more about automated trading systems and how you can build systems based on sound trading logic with realistic profit and draw down targets 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 !

Monday, June 28, 2010

What Doesn't Change : Talking About Inherent Characteristics of the Market

Perhaps one of the most important questions you can ask yourself when you start using automated trading systems is : how will I survive in the long term ? This is one of the most common inquiries made by traders new to the field since it seems to be evident that the market is an ever-changing beast that does not allow the mechanical exploitation of any inefficiency for too long. New traders often experience this when they first begin to use automated trading systems. Their systems do very well, then fail or they never do well at all. Besides the fact that many of these systems don't have adequate evaluation- leading with inadequate and unrealistic expectations to long term loses - traders almost never ask themselves : what doesn't change ? It is obvious that if you want to exploit a given characteristic of the market for long term profitability you have to look for characteristics of the market that remain constant as a function of time. But are there any ? On today's post I want to share with you my view about market changes and why - even though the market changes- some characteristics of the market remain constant.

When you start to trade the market seems like an invincible beast that behaves in a very unpredictable manner. I remember that the first few months I traded I used to think "I got it" only to discover that the market would rip my strategy apart the next few months. I used to behave erratically - like most new traders behave- modifying my strategy every week in a desperate attempt to "adapt" to changes in market conditions. Of course, my focus at that moment wasn't the understanding of market inefficiencies but the massive multiplication of my money from 500 USD to a few million in a few years.

It wasn't until much later that I decided to stop my journey and build an understanding. If I ever was going to make money from this seemingly chaotic thing, I would need to find the "science" behind it. It became important for me to understand how the market behaved, what changed, what didn't and what strategies could be built that would most likely work for the next 20-40 years. I needed strategies that could work for long enough to build myself a decent income and NOT strategies that would put my capital into excessive risk or work for a year and then wipe my account.
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The question becomes : what doesn't change ? After reading a lot of books and watching market behavior for many months, I started to realize that the only thing that doesn't change in the market, is the specie trading it. The market is traded by humans and therefore any aspect of the market imprinted with human behavior should remain fairly constant. As many traders have discovered I started to see that - although individual human behavior is very different - crowd behavior doesn't change very much. I then read a few papers on game theory experiments applied to economics on groups of people across very different cultures and the results started to match up as the groups became bigger. I then realized that - what doesn't change - is simply the way in which crowds react to price action.

How do crowds react to price action ? You see manifestations of this everyday - not only in the form of market trends - but in the form of long term reversal and continuation patterns, support and resistance levels, etc. There are some characteristics of the market that simply do not change, characteristics which have appeared time and time again during the past 30 or 40 years. Evidence of this is present on almost all market instruments from the GBP/USD, to gold, to the DOW index. However you will notice when you do a close analysis that - even though these objects are ever-present within market instruments - their AMPLITUDE and LENGTH changes as time evolves. A trend that may have been only 200 pips long in 2004 can be 1000 pips in 2010 and the reason why this happens is related with the market's trading volume.
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As time evolves and there are more people in the world, the amount of money being moved in the markets becomes larger and therefore the extent of inherent characteristics of the market caused by crowd behavior also become larger. Through different market conditions, there may be larger or smaller movements of money, causing overall changes in the extent of market moves that appear like "large changes in market behavior" but that are no more than the same old characteristics viewed under the looking glass of a different volatility. For this reason, the key - I believe- to the exploitation of long term market inefficiencies seems to be the use of an inherent market characteristics that changes only with market volatility. Trends are a perfect example of this fact and there are many examples of successful trend following systems that achieve their long term profitability through adaptive criteria based on market volatility.

If you would like to learn more about automated trading systems and how you can build your own likely long term profitable systems with sound risk and profit targets 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 !

Sunday, June 27, 2010

Automated Trading Nightmare : Why Your VPS Could get Hacked and How to Avoid it

I have said several times that anyone interested in doing serious automated trading should think about getting a Virtual Private Server (VPS). It is absolutely true that a VPS is more reliable than a home server (several reasons are outlined in other articles) but it is also very true that a VPS is not infallible and failure to adequately care and configure one of these servers can bring you substantial problems. Generally people tend to have a very relaxed attitude towards VPS use and security and this in some cases turns out to be fatal as hackers take advantage of this and hack your VPS. I have to tell you that I have seen this happen and it is anything but fun to watch. On today's post I want to talk about VPS security, what happens when your VPS is hacked, how to detect hackers and how to configure your VPS so that it is a truly reliable and secure trading machine. Although following these guidelines will not make your server 100% hacker proof (no computer really is) you will make it a LOT tougher for any hacker to access your system.

Can a VPS get hacked ? Yes, I have seen it happen. One day a friend asked me to check his VPS because he couldn't get access to it. His password had been changed and we had to ask the VPS provider to issue a new one. Up until this point we though that the provider had reset the password due to some maintenance, etc so we didn't take it too seriously. Then - a few days later - the same thing happened again and this time we couldn't even connect to the VPS to input the password. Of course, my friend wrote an angry email to his provider asking them about their reliability, etc. After we got the password, I decided to check the VPS in a deeper fashion and - oh surprise - I found several scripts uploaded, IRC bots and at least 5 other users with administrator privileges had been created. Upon checking who was logged into the VPS I saw some unknown people using the server. My friend's VPS had been hacked and his resources were being used by other people with obviously malicious intent.
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On top of that, since the hacker had access to all the programs he/she decided to checkout his Metatrader platform and he fiddled around with it, placing a few trades, closing other ones and changing the settings for one of his expert advisors. Luckily for my friend, the hacker seemed to point to the right direction and in the end all the positions were actually profitable. However it is obvious here that things could have gone pretty wrong and a 5K USD account he was running could have been wiped in the blink of an eye with a hacker messing around with his stuff.

What did my friend do wrong to deserve this? Actually he didn't do anything and that is precisely what attracted these hackers to his VPS. You see, when a VPS provider sets up your account your VPS is vulnerable to attacks because it has some "factory defaults" the hacker knows about. For example, the hacker knows that there is a default administrator user name, he knows the remote desktop ports and he also knows what default software and security configuration your VPS came out with. On top of that, if you run your VPS as an administrator (which is the default user created) you run a higher risk since any take over will give the hacker very high privileges over your server, allowing him/her to modify the system as he/she desires.

What can you do to stop this ? The easiest way to avoid most attacks is simply to change your server configuration to something that is none standard, this in turn will eliminate all hackers who are just targeting the "easy preys" that do not strengthen their security. Think about it this way; if a thief was looking to steal some money, would he/she rather take the bill hanging from the old man's pocket or the bill within the bank's safety vault ? Both of them can be stolen but most thieves will pick the first one without second thought.

What you need to do here is actually not that complicated. First, create a custom administrator user and disable the default, then create a regular user with non-administrative privileges. The first user is the one you will use to install software while the second one is the one your MT4 platforms will run of. You will keep a regular user logged in while there will never be an active admin unless you are doing something that can only be done as an administrator. Then you want to change your remote desktop port to a random value (not the default 3389) so that most hackers will simply not know that you have this service enabled, this is something that will make random attacks disappear almost completely.

It may sound a little bit paranoid but - truth be told - these are just some simple steps to prevent someone from accessing your account, messing with your trading stations and using your server for malicious purposes. Of course, it won't make your server hacker-proof but it will ensure that the vast majority of attacks will stay away from your VPS. Next week I will be doing a video on Asirikuy explaining people how to adequately make these configuration changes on their VPS so that they can run their systems with some sound security standards. If you think "this won't happen to me", I ask you : do you really want to take that chance ?

If you would like to read more about my journey in automated trading and how you too can start to design and build your own likely long term profitable systems to run on a VPS 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 !

Saturday, June 26, 2010

Talking About My Ebook... What the Future Holds

A few weeks ago I gave my almost one year old ebook a new read-through to check the validity and relevance of its content and to see if there were any improvements I could do. After reading the ebook and looking at how my vision through last year has evolved I realized that many changes and additions are due. Although the contents of the ebook right now are very valid and do point traders in the right direction in automated trading I feel that a lot of depth - particularly pertaining to system design - is currently missing from its contents. Of course, there is also the fact that the ebook is missing the last 2 experts from the Watukushay series, something that also must be added if the ebook is bound to keep up with this - seemingly ever-evolving - project. On today's post I want to talk to you about the ebook's future, the changes that will happen within the next few months and what I expect from all this evolution.

The first thing that will be certain is that the ebook will no longer be offered by itself. Through the past few months I have been giving this a lot of thought and I believe that the ebook does a better job at helping traders as part of the overall Asirikuy package. So from the next update, the ebook will be only available within Asirikuy. Of course, previous ebook customers will keep on getting the update but the option to buy the ebook by itself will completely disappear from this website. I believe that this is the way to go since it will allow people to have a "full view" of everything and to get a complete education in automated trading. I hope I will be able to create much more synergy between the ebook's contents and Asirikuy within the next release.

Regarding the contents, I believe that the current version leaves a lot of spaces open that need to be addressed. I reviewed the ebook with a friend who has some basic knowledge regarding automated trading and forex in general and he was a little bit overwhelmed by the amount of content and the ideas within some sections which required a good amount of time to assimilate. It took him a lot of time to follow many of the tutorials but -in the end- he was able to reproduce the Watukushay experts and their analysis on his own. I believe that a lot can be done to improve the teaching of coding within the ebook and a lot of emphasis in initial system development is also missing.

Perhaps one of the most important additions I plan to do is a whole section on mathematical exepctancy analysis which will provide people with some tools and tutorials to guide them through the first - and often the most critical - parts of system development. I will try to teach how to device an initial trading logic and an approach to trading, focusing on systematic building and the analysis of mathematical exepctancy using the EA I created for this purpose within Asirikuy. I think that with these and a few more changes, the ebook will be able to improve on its current state and better help traders achieve their goals to become long term profitable traders using automated trading systems.

I want the ebook to be the introductory and main piece of Asirikuy, a "tome of knowledge" so to speak, that gathers all my basic concepts in automated trading coupled with a lot of practical exercises, tutorials and guides to bring someone from "I don't have any idea" to "I have coded my first likely profitable trading system using my own ideas and analysis". Do you have any ideas about what the ebook should be ? Do you want to suggest any content additions ? reductions ? changes, etc ? What would you like to find in the ebook ? Please leave a comment :o)

It is difficult to say right now when this "major update" will be out, but probably I will be releasing it sometime before Aug 07. If you would like to learn more about the ebook and my journey in automated trading 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 !

Friday, June 25, 2010

Can Massive Use Eliminate Profitability ? - Looking at How Crowds Affect EA Performance

One of the most important reasons people have to believe that long term profitable trading using automated trading systems is impossible is that the simple appearence of a consistent and profitable system would most likely cause mass adaptation of the strategy, something which would render the inefficiency exploited by the system totally worthless. This is a very interesting issue and there are actually several explanations and examples to show you that long term automated trading is possible and that mass adaptation is actually not likely to happen in most cases and that when it is likely to happen, the system is indeed bound to become unprofitable. On today's post I will talk about this issue of "mass use", its consequences, the reasons why it happens and the reasons why it won't happen to most long term profitable systems.

It is easy to imagine that if any system was able to produce massive riches in a consistent manner, in a short amount of time, everyone would like to get "a piece of the action" trading this strategy. When many people start to trade the same strategy you get a great increase in volume around certain price levels around predictable price action. Since the strategy is widely available, anyone could look at it and figure out when it is bound to enter or exit trades (even if it is only a signal service one could infere these from context). When people start to see what the strategy attempts to do, proffesional traders will exploit the inefficiency created by the movement caused by the system. Since the system is predictable by the market now, traders attempt to exploit the movements caused by the exit/entry of positions caused by the system's signals. This in turn leads to an increase in losing positions for the strategy since the money won by the traders exploiting the "new inefficiency" is taken from the money invested by the users of the initial system.

The main consequence of a system being massively adapted is that its use generates an inefficiency that is exploitable by other traders due to its predictable character. This in turn leads to higher draw down levels and an increase in the number of consecutive loses. People will start to quit trading the strategy when this happens and the strategy will probably regain some of its profitability once the draw down of the strategy is increased enough as to diminish its trading volume significantly (to pre-"mass adaptation" levels).

If you see, it is a sort of self-regulating phenomena. A system with extremely profitable results appears, mass adaptation follows, incredible increase in draw down characteristics happens, people lose interest, the system then regains profitability (although it is now much less "attractive" due to its increased draw down characteristics). However, some systems are much more vulnerable at going through these cycles while others may have a "natural defense" against this from happening.
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As you may know, the Turtle Trading system has been profitable since the start of the 80s and - at the beginning - it was massively adapted to a certain extent due to the huge success the turtles had when they caught massive commodity trends in the beginning of this decade. However it soon became evident that the strategy had some characteristics that discouraged mass use. For example, long term profit targets turned out to be much lower than those initially achieved and the system demanded a lot of patience and effort since long 3-4 year draw down periods amongst individual instruments were possible. This in turn led to a massive discouragement that has kept this system long term profitable up to date. This is a true and living example of the above explained phenomena that clearly shows the market's adaptation to strategies at its best.

However there are other types of systems that are in particular danger when you look at this perspective. For example, systems like Martingales and Scalpers which take small and steady wins based on a very bad - sometimes even uncapped - market exposure, tend to grant long periods of profitable trades followed by sharp yet decisive periods of draw down that usually end up in wipeouts. It is very common for these systems to be unable to withstand even a two or three position increase in their maximum number of consecutive loses. If mass adaptation happens and draw down characteristics are bound to be increased then a simple moderate increase is bound to wipeout most traders using these systems. However it is possible that the market will just cause an increase large enough to discourage/wipe most traders while the most conservative ones will be able to survive at profit/draw down levels equal to those of more conventional swing/trend following systems. Interestingly, mass adaptation is another way in which the market controls average compounded yearly profit to maximum draw down ratios.

The systems I use are made to fit into the first group, where the regular trading characteristics of the systems already discourage mass usage since the profit targets, draw down levels and expected periods of draw down are already very hard to endure for most traders. The key is that mass use is discouraged through the regular draw down cycles of the strategy and therefore the chance of a market correction due to mass adaptation is mostly eliminated since the strategy won't need an increase of its current draw down characteristics to reduce mass adaptation. However my conclusions are just based on observations of what has happened to previous systems and how their characteristics have evolved or remained constant over time, definitely it will be interesting to see how Asirikuy systems evolve and how effective they will be at discouraging mass usage through their regular draw down characteristics.

If you would like to learn more about my journey in automated trading and how you to can learn to design and use your own likely long term profitable 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 !

Thursday, June 24, 2010

Starting a New Project - The Free FXReviews Ebook

If you have been a regular visitor of my website during the past 8-10 months, you will know I have been updating my blog daily for most of this time. There were several reasons why I decided to do this, mainly because I wanted to increase my ability to write creative content and because I wanted to create a loyal based of readers who would always find new articles everyday. I think I have achieved both of these goals in the sense that it is now much easier for me to come up with new posts for the blog and my website is registering a very good 30-40% of returning visitors, some of which I think read my blog on a regular basis (thank you for stopping by ! :o)). Now I feel it is time to take this "daily writing" and all the generated content to the "next level", so to speak. On today's post I will talk to you about a new project I will be starting dealing with all this content that and a new, free ebook that will come out as a result :o).

I have noticed during the past 6 months that most of the articles I write are not read a lot and most of them end up as part of my archives, being accessed only sporadically once or twice every month. Most of the people who find my blog through google end up in articles dealing with backtesting, renko charts, tick charts, Watukushay experts, Ayotl and mainly, in articles dealing with Commercial EA reviews. I feel that this is a waste of content since I believe some of my best contributions are actually the articles that are less-found through search engines.

How to fix this issue ? Some of you have suggested that my navigation system is pretty bad and that I should change it to a more "category sorted", "user friendly" way of finding my different posts and articles. You are absolutely right in this sense but the truth is that I am bound by the limitations of the blogger platform which does not allow me to input posts categories and generate menus with as much freedom as I would like. Of course, changing websites might be a solution for this (changing to a more powerful platform like wordpress) but the fact is that I would lose search engine placement and important links which make this move probably not so good for the blog right now.

After reading some websites dealing with content organization and how to make old, unvisited, yet extremely relevant content surface, I decided that the most productive and so the best way to get my content out there would be to organize it in a free ebook. So what I will be doing right now is pretty simple, I will be taking many of my blog posts and I will edit them so that they can be "stitched together" in an ebook. This ebook will become available totally for free and it will become - hopefully - a vital piece of information for new traders who are looking into becoming long term profitable traders using automated trading systems. The ebook will deal with many issues I have discussed within posts like doing backtests, simulation reliability, backtesting pitfalls, scalping systems, martingale systems, surviving draw down periods, EA design, etc.

Does this make the current ebook irrelevant ? Of course not ! The current ebook contains a lot of content which has never been published on the blog and it is bound to stay as the guide it has always been for people new to automated trading. What I seek with the new free ebook is to organize the blog's content and make it easily accessible for people who will not easily get to all those archived articles. It will be more of a "blog summary" which I think will prove absolutely useful for many people out there. Right now I am aiming for a 30-50 page ebook but the final length will depend on how much content I take from the blog and how much space it takes after editing it to fit a more "ebook feel".

Certainly the current ebook will have some changes (sorry, I know it hasn't been updated for a while !) which I will discuss on tomorrow's post. I will be working on a very important remake and content addition in July and other similar changes and I am definitely thinking about offering it only within Asirikuy as for me everything is kind of bundled now and I fear that people buying only the ebook are not getting "the whole picture". Again, I will explain all of this in much more detail on tomorrow's post :o).

If you have any suggestions or opinion about this new free ebook project dealing with the blog's contents please leave a comment. Is there any post you would like to see on the ebook ? Do you think the idea is good/bad ? Which posts do you think would be very useful if you were a new trader ? Which posts did you find particularly interesting ? Please leave a comment :o).

If you would like to learn more about automated trading and how you too can learn to design your own trading systems based on sound trading tactics 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 !

Wednesday, June 23, 2010

How Big is the EA Business ? A Look at this - Many Times Disgusting - Business Model

The most interesting consequence Metatrader 4 has had in the world has definitely been the creation of a massive industry around automated trading products for retail traders. Most of these products are offered from a few dollars to thousands and promise to give the retail trader an advantage in the world of forex trading by making them profitable "while they sleep" simply by running these strategies which have been "made by expert traders". Of course, through the past few years we have seen that most of these products actually always fall short of their promises and never deliver what they promise. Even systems that have worked slightly for some have always fallen short of the marketing promises made on the very hyped commercial EA websites. However one of the things we haven't looked at yet is the extent of this business. How much money is there in EA selling ? How much money does the overhyped worthless expert advisor make every month ? On today's post I want to answer this question so that you can all get a glance at the HUGE money that there is in EA selling.

A very good question I have often asked myself is : Don't people learn anything ? The fact that many new systems come out every month with the same lacking evidence and obviously faulted trading tactics points to the fact that these people are making money and that people are still buying systems that have no sound trading strategies or realistic targets with the hope that they will work. However, reality here is that most people DO learn and become more difficult to "convince" as time goes by. The problem here is that there is always a big group of new traders that are introduced to forex trading continuously, these people are the ones who fall prey to these EA sellers.
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But how good is this business ? The answer is HUGE. I will now make use of some evidence presented on the Donna Forex forum about the profitability of a very BAD commercial EA that had NO forward or live testing evidence and absolutely no like hood of long term profitability. This EA - called stealpips - was widely discredited in several review sites after running forward tests (an example here). However the EA was able to make a LOT of money- indeed probably more than 100K- and the website is currently being sold here. What kind of business is this ? What kind of product is "so good" that the website gets sold a few months after release ? What kind of evil mind makes up a product with no evidence of profitability to profit from new traders who probably lost much more than their purchase price trying to test this "system" on a live account ?

The answer is : almost all of these EA sellers. The saying goes that if you believe money can do everything you will do everything for money, the complete disregard for honesty, transparency and ethics in general are the most repulsive aspects of this EA business. These people don't realize that the guy buying their product is not merely a customer, that there is probably a "little guy" somewhere who lost a good portion of his saving on their piece of crap, that someone probably sacrificed a vacation somewhere to trade their product and reach the "dream" of long term profitability in trading. They simply don't give a crap and that is simply disgusting.

Now it doesn't get any better right now. The affiliate marketing game these systems play is also quite evil, based mostly on bad business tactics like spam. For example the Forex STF product - the latests production from the stealpips guys - is already publicly offered to their affiliates, suggesting mail list exchanges (what happened to that privacy policy ?) and promoting the sale of another extremely hyped product with no eviden of long term profitability. You can checkout this links on forexwarrior's post here at the donnaforex forum.

You can now imagine that if this is the kind of money a very bad system makes with a 97 USD cost per product the amount of money that bad systems with a little bit of forward testing evidence may make is MUCH bigger. Systems like the Forex robot world cup robots are rumored to have made more than 2 million dollars in sales. The truth here is that the best way to make money in automated trading is not to trade successful systems but to sell hyped expert advisors to people. You don't need to care about future profitability or sound trading strategies, you only need to care about marketing and sales and that is MUCH easier to do than to design a long term profitable system.

The truth here is that most of this EA business is made out of people who don't care about you, they simply don't mind if you wipe your accounts or if the EA stops being profitable in a few months. They don't mind if it uses a martingale progression that ensures a wipeout or a scalping technique that is overly hyped with backtesting faults. They just don't care because they are NOT trading these systems, their poor customers are and once the 60 day refund goes out... You are all by yourself (if not earlier in some cases). However, there are a few expert advisor sellers out there that do care for their customers and sell their products outside the scheme most of these marketers used, there are hard to find but certainly - as in every business - there are some people who play by the rules and offer their products with honesty and concern.

If you would like to stop buying expert advisors with unrealistic profit targets and lack of proper risk perspectives and you would like to get a true education in forex automated trading instead, 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 !

Tuesday, June 22, 2010

Support And Resistance : My First Attempt to Implement Mechanical Detection of Important Price Levels

The detection of important price levels - so called support and resistance - is one of the most difficult things to do in algorithmic trading since their detection by the human eye seems to be extremely discretional, something that just pops out at an experienced trader when he or she looks at the chart. Through the past few years several attempts have been done to detect important support and resistance levels but most of them fail due to the fact that intermediate levels -which are not important - are often detected and used by computers when their real relevance is minimal. The question then arises : Can we algorithmically detect support and resistance levels in a reliable way ? Moreover, can we actually make a computer "know" the importance of each level ? Can we then develop a profitable system based on this detection ? On today's post I want to give my first set of answers to these questions showing you my first attempt at the computational detection of S&R levels and the achievements this technique has had up until now when used as part of a mechanical trading system.

On previous posts I had talked about how we could approach S&R detection in forex trading by using the fractal indicator (not the default but one that doesn't repaint) and performing a historical evaluation of the accumulation of fractals in certain zones, assigning a particular importance to each of these levels. However this approach seems to be a little bit complex so I decided to implement a much simpler approach in order to first evaluate the concept behind this way of "detecting" S&R levels. What I did was simply to use the High and Low levels of past candles counting their presence amongst different zones and assigning a "percentage value" to each price level pertaining to the "population" of historical candle high/low levels around this area. Areas that are heavily populated by hourly highs and lows and prone to be important daily support and resistance areas owing to the fact that price tends to "hug them" failing to move "straight through them".
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The significance of these levels is then easily evaluated by the percentage population of each price level and we can easily measure if price is moving towards a zone with a high population or outside a zone with a high population. When price is trading within a highly populated area it will have a tendency to remain there while when price trades in a "population scarse zone" it will tend to go to a zone where more trading has happened in the past. As it is shown on the image above, we could create a system by entering a position after we "breakout" of a zone that has a high population value. It is good here to note that we don't use levels but zones using a given amount of space to gather a given high/low population, this is done due to the fact that in forex trading support levels tend to be "spread" over a given area instead of pined to a given level (this is a consequence of not having a central exchange).

What is the result of implementing this S&R "tactic" on an expert advisor ? Eventhough the results of my first analysis are not absolutely incredible, it does reveal that the above given way of measuring S&R level and entering trades has some merit and - at least - a positive mathematical expectancy and some potential for profitability. The below image shows you the equity curve of an S&R system implementing the above explained criteria for entering breakouts of S&R levels (10 year backtesting period Jan-2000, Jan-2010).
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The system does most of the time what I intended it to do, entering trades after breakouts of S&R zones like it is shown on the image below. However the problem now becomes to know which period needs to be used to evaluate the S&R levels and what percentages are going to be required for any given S&R level to be considered important on different timeframes. As you may see, the population is an absolute number and we need to do a deep historical analysis to see what this number should exactly be to call a level "important or unimportant". Nonetheless I consider this step a very important achievement since there is now a way to measure the population of a given price level and some mathematical criteria to establish its importance. I will continue to develop and improve this S&R technique and there will most certainly be an EA with it in the future :o).
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If you would like to learn more about automated trading and how you too can learn to use, design and implement your own likely long term profitable systems based on sound trading tactics 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 !

Monday, June 21, 2010

The Metatrader 5 Series : When Huge Backtesting Differences Appear

If you look at my last few weeks of posts I have been very excited about the new qualities of the Metatrader 5 trading platform and the benefits it brings to system development regarding faster execution, faster optimization and added flexibility. Using my prototype implementation of Watukushay FE I analyzed trading over several different instruments and I finally came up with the "starting point" of intra-currency trading for this well-known freely available trading machine. This week I decided to do a small experiment and compare my results of Watukushay FE for the AUD/USD on Metatrader 5 with those found out with Metatrader 4 and the results found were extremely surprising. On today's post I want to talk about my findings, the possible causes of the issues found and what I will be doing to investigate the nature of this problem and what solutions can be implemented to deal with it.

During the first post comparing Metatrader 4 with 5 and the backtesting results of Watukushay FE we already saw a small yet noticeable difference between the testing results obtained on both trading platforms. I talked about the possibility of these errors being feed-related and the fact that the Metatrader 5 history feed might be more reliable since it has been "remastered and fixed" for this new platform. However the difference was small and therefore there was no substantial issue besides an anecdotical note pointing out this curious fact.

However when I decided to run the initial AUD/USD tests on Metatrader 4 to compare the results I obtained with Metatrader 5 the difference changed from "noticeable" to "abismal". The pictures below show you the results for MT5 and MT4 using the exact same settings on the AUD/USD currency pair backtest from 2000 to 2010. The overall equity curve is very different and the results do point out that something is substantially very changed between the historical feeds of MT4 and MT5. I first thought that the difference would be due to the presence of Sunday candles but this turned out to be false since the MT5 feed doesn't have any of them, so regarding this aspect it is the same as MT4. I then thought about the possibility that the whole difference is caused by important changes in data prior to 2006 (before metatrader 4 was launched) and the fact is that data differences are NOT limited to pre 2006 periods, the whole historical feed is different between both trading stations and meaningful differences are present. If you analyze the results you'll notice that almost all candles have different - if only very slightly - high/low/open/close values pointing out that RSI and ATR values will be very different. The change in one minute interpolation mechanisms is also not likely a factor here as Watukushay FE strictly controls bar opening on both its MQL4 and MQL5 implementations.
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What causes such a dramatic change in profitability ? To get to the bottom of this problem I decided to strip down the logic to its simplest form and eliminate the closing logic of the EA, leaving only the entry rules. This shows us that there is still some difference between backtesting results (shown below). This means that differences in results are caused by differences in the RSI and ATR indicator calculations which are dependent on each backtest's particular historical feed. Stripping down the logic does reveal that most dependency is located before 2002 with results beyond this date being in better agreement. However there is still some dependency which is caused by differences in data between both historical sets beyond this period.
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Since we simply cannot know for sure which of the two historical data selections is better - and they are probably both valid within normal broker differences (with the 2000-2002 data being very different probably due to differences between feeds in this period) - it becomes a wise decision to run backtests on both and trust the less profitable results to calculate profit and draw down targets. In some cases like the EUR/USD backtests this proves to be trivial but on others like the one I showed you today doing this mixed analysis proves to be extremely important. I will email the people at metaquotes to get some information about the different nature of the feeds and I will let you know once I have more information about their origin. However up until now all backtests of Watukushay FE seem to be more profitable on MT5 (meaning that our MT4 simulations are in fact the worst case scenario). Investigating other issues which may be related with the closing mechanism of orders in MT5 is also something I am currenlty doing since I have seen that the differences when the closing logic is enabled seem to have other strong causes besides simple feed dependency (more on this on a later post !).

If you would like to learn more about automated trading, the evaluation of expert advisors and the programming of your own strategies 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 !

Sunday, June 20, 2010

Introducing Our New and Exclusive Profit and Draw Down Asirikuy Analysis Tool :o)

If you have read my posts during the past few months you will notice that I have become increasingly interested in the analysis of trading portfolios and the effect of trading several different systems together. After I was able to implement a solution that made the balance of Asirikuy experts independent it became possible to trade systems without their balance calculation becoming dependant on the other systems' trades, something which in turn opened the door towards the merging of backtesting results to accurately evaluate joint performance of the different trading systems. Up until now all this analysis had been made through the use of SQL scripts and VBA macros which were implemented by several Asirikuy members. Thanks to their effort we were able to do accurate calculations on the draw down and profit characteristics of portfolios. However it became evident that these solutions to portfolio analysis were not very comfortable needing backtesting statement manual reorganization in excel followed by loading into an SQL server and then loading onto a separate excel spreadsheet to run VBA macros. For this reason we decided to start a project with an Asirikuy member (named Gábor) who offered some of his free time to do all the coding of this new draw down/profit analysis program. On today's post I have the pleasure to introduce this little Asirikuy-exclusive utility, our own profit and draw down analysis tool :o).
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What is so great about this program, what does it do ? The program has many virtues that make it exceedingly good for backtesting statement analysis. The application allows us to load one or a series of backtesting statements joining them together automatically and calculating a series of very important characteristics which are not calculated on the metatrader backtester (not even the MT5 backtester). The program automatically calculates draw down periods, their length, their depth, yearly profits and monthly profits. Having all this information "a click away" is extremely important since it will allow us to do very fast Asirikuy portfolio analysis without having to through the cumbersome process needed to use SQL scripts for this purpose.
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The image above shows you one of the main characteristics of this software, displaying the equity curve for the loaded backtests (in this case three) plus the addition of their results to show you the "portfolio equity curve". This instant snapshot of the equity curve is important since it allows you to see which systems were losers and which ones winners through the testing period you are evaluating. This in turn allows you to gauge the contributions to the maximum draw down and the overall risk level of the different systems, letting you know which system causes the most loses or profits.
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The above picture shows you perhaps the most useful feature of the software, the ability to display draw down period lengths and depth of a given portfolio with great easyness. This allows you to know the average extent of draw down periods and how long you would have to be prepared to wait if you want to use a given trading strategy. It gives an overall realistic picture of a system's trading characteristics showing you why it is evidently hard to trade and what you should be looking forward to regarding eventual loses and losing periods. This draw down period analysis has become a very important part of system analysis within Asirikuy, letting us evaluate accurately worst-case scenarios and largest draw down period lengths.

Besides the features I have commented here, the software also has the ability to display monthly and yearly profits, important characteristics that are useful for determining the overall trading character of a given system. How profitable is the average month ? How many months are winners vs how many are losers ? What is the average yearly profit ? All these questions are answered by our new Asirikuy tool and its ability to dissect trading results into yearly and monthly statistics.

As time evolves we will be able to implement new features and correct bugs that may appear but currenlty this new profit and draw down analysis tool is a very nifty and welcome addition to Asirikuy. From later today, Asirikuy members will be able to download this piece of software from the Expert's section of the website. If you would like to learn more about my journey in automated trading and how you too can start to design your own long term profitable systems based on sound trading tactics 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 !

Saturday, June 19, 2010

Intelligent Trading : Answering Every "What if"

I believe that the worst characteristic a person can have as a trader is unfounded optimism. When I started trading I possesed this very undesirable character trait and it took me a long time to get rid of this pest that would keep profits away from my account. It is very easy for traders -especially new ones - to get lured into believing simulations or past live testing results and jump into systems with high risks believing that a certain scenario will not happen. I cannot tell you how big a mistake it is to ignore every possibility and to act on faith and hope. Time after time I have seen traders do this and get burned in the process with their hopes in one hand and their empty accounts on the other. On today's post I want to talk to you about the great importance of the "What ifs" of trading and why it is important for you to answer every possible "what if" question you can ask until you are satisfied with every answer.

One of the most vital things when you want to succeed at something in life is definitely preparation and trading is simply not the exception to this rule. Often people will venture into trading manual or automated trading systems with little preparation and without a good plan for every possible outcome that can arise. The truth is that most people who attempt to succeed at trading with expert advisors don't even have a clue of what they do if certain scenarios arise and in the worst cases they consider some scenarios "extremely unlikely" or "impossible to happen".

I remember clearly how a person told me a few years ago that it was "almost impossible" that his Martingale system would get 7 consecutive loses since such a market situation was simply extremely rare and such a case would never appear. I told him that everytime a trade is entered the possibility to lose exists but he continued to tell me that it wouldn't and that I was simply "not understanding" the nature of his system. The years passed and his system did trade profitably for a while and after a year or so of trading it took 8 consecutive loses and wiped his account clean. It was not the fact that the consecutive loses happened what killed my friend's account, it was the obvious lack of preparation for such a scenario.

This happens all the time. People trade systems believing that a certain "what if" question does not deserve an answer because it is simply "extremely unlikely" when the truth is that the mere possibility of it happening should make a trader have a plan against it. If you are trading a system believing that A or B or C won't happen then you are setting up yourself for disaster. Every unanswered "what if" question is a void in your system, a void that will one day be filled, catching you completely unprepared for the consequences.

I always answer any possible question about a trading system - especially losing situations - so that I can avoid having a situation where I am simply caught with no answer. What if system A has 6 consecutive loses ? I will suffer an X draw down and the system will be Y% away from a worst-case scenario. What if a draw down level of X% is reached ? I will stop trading the system since it is below the worst-case scenario which is double the max draw down infered from reliable simulation results, etc. One of the things I have found helps me keep up with my systems and maintain my success as a trader is to ALWAYS have a plan. The most important part of doing this is to answer EVERY "What if" question you can think about. What if you have 5 onsecutive loses ? What if you have a 2 year draw down ? What if... What if ?

As you see, one of the most important parts of success in trading is nothing more than preparation. Knowing the answer to every possible question about your system and having a plan for every possible trading outcome is vital for you to achieve success. There cannot be a lethal "What if" question. If there is any of these questions that ends in "I would lose my account" then there is something inherently wrong with your trading strategy, as a safety every system must be able to give signals of "being too risky and not worth trading" before reaching a wipeout status. For example, a system with a worst-case scenario of 30% will be stopped at this equity level, preserving the other 70%, while a system that wipes the account at 5 consecutive loses simply has no such "time" to warn its user about a problem before it is already to late. Hope for the best. Prepare for the worst.

Are you answering all your "What if" questions ? Having an answer to all of them and having a plan for every draw down and profit outcome is vital for success, that is my humble advice. If you would like to learn more about automated trading and how you too can learn to design systems based on sound trading tactics 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 !

Friday, June 18, 2010

Five Common Mistakes in System Optimization

I believe that one of the most important aspects of system design and use is system optimization. This step in system design is vital since it allows us to adjust a given trading system so that it can more efficiently exploit the market inefficiency it is based on. When done correctly, the optimization of a trading system gives you a more profitable version of your logic with better profit and risk targets in long term performance and a very robust strategy which is not likely to fail even if market conditions change significantly. When done incorrectly, optimization leads to curve-fitted systems which are "fit" to test profitably in the past but fail to profit in the same way in the future. What is the difference between correct and incorrect optimization ? On today's post I will talk to you about this very important aspect of system design and what mistakes system designers and traders usually make that make their optimizations invalid and the resulting trading system useless.

In the end, there is a good way and a bad way to optimize a strategy and definitely all systems can be adequately optimized if certain precautions are taken into account so that the most important "curve-fitting pitfalls" are avoided. I will now describe the five most common and dangerous mistakes made when optimizing and I will attempt to give some solutions to these very usual and sadly lethal blows to long term profitability.

1. Optimization period length. I think that the most common mistake when doing optimization is -without a doubt- the length of the testing period used to optimize. Strictly speaking, optimizations are not bound to be meaningful fit they are done within periods of less than 5 years given that smaller periods of time are not statistically relevant according to long term changes in market volatility. So if you want to optimize your system and avoid curve fitting, use a period of at least five years. Using a smaller period will most likely "fit" your strategy to very specific market conditions and will make it unable to perform correctly as the market changes.

2. Reliability of the simulations. It is very important to note that in order for optimizations to be valid, simulations need to be valid. Optimizing a scalper or a similar strategy which cannot be simulated accurately does not make any sense since the trading results - and thus the optimization results - are not going to represent live testing to any accurate extent. Designing systems that explicitely control one minute bar opening and that use adequate profit and risk targets - large enough to avoid interpolation errors - is critical for adequate optimization.

3. Ignoring the result's surroundings. One of the most important aspects of system optimization is to take into account the results "around" the most profitable result you found. For example, if the optimal value for an indicator period for your strategy is 20 when doing a 5 year optimization what happens when the indicator value is changes to 19 or 21, what about 18 or 22 ? It is very important to consider the surrounding since they give you an idea of the possible changes of profitability you will get if the market changes enough so that your "optimal" settings are no longer that good. If your system is very profitable with 20 and then loses 70% of its profitability with 19, then the strategy is not robust enough and it IS bound to fail in the future as market conditions may drift - even if only slightly - from your set results.

4. Fine grid optimizations. Another common problem with optimizations is the use of very fine grids when optimizting. In general, the coarser the optimization the less risk there is to curve fit a strategy since the fitting is done in a "lose way" and results that may over estimate profits and underestimate future draw downs are also avoided to a good extent. In general you should not optimize to any grid lower than 2% and better 5% so if you are doing an optimization of a strategy's SL from 20 to 200 do not use steps smaller than 4 to accomplish this.
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5. Reoptimizing after Optimizing. When you optimize a parameter for given strategy, then optimize another one and then reoptimize the first one to the new profitable results you are most likely doing a sort of "fine grid" optimization in the sense that you are "fine tuning" the first variable to the second's "best results". This is similar to doing a fully correlated optimization (although less computationally intensive) but it has similar dangers in the sense that increased correlation and probably further curve fitting is introduced. My advice here is to only optimize variables from a first set of parameters in order and avoid reoptimization of a variable after it has been optimized once.

As you see, these common mistakes in optimization are made by most people who want to improve their automated trading systems and all of them are bound to generate very good results using optimizations that are possibly going to be an over estimation of profit and underestimation of draw down in the long term. In a future post I will give you a diagram for optimizations explaining a little bit how I optimize my systems and what "general procedures" I follow so that my systems end up being robust, profitable and with a high like hood of maintaining their risk and draw down characteristics in the long term.

If you would like to learn more about my journey in automated trading and how you too can start to design and program your own likely long term profitable strategies 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 !

Thursday, June 17, 2010

Watukushay FE - An Intra Instrument Experiment - Part No.2

On yesterday's post we talked about Watukushay FE and the first essays to test the intra-instrument compatibility of this trading system. We arrived at some good results which showed that Watukushay FE did achieve long term profitability on all of these instruments while the yearly compounded profit to maximum draw down ratio was always much lower than for the EUR/USD. Since I left yesterday's post with some questions regarding the optimization and modification of Watukushay FE to improve results on these currency pairs today I will dedicate this post to the answering of these questions. I will talk to you about the optimizations I have done on the Watukushay FE system on different currency pairs, what their results have been and what they tell us about the inefficiency exploited by Watukushay FE and its potential to be used on several different instruments, effectively diversifying the usage of this trading strategy.

Many of you may be thinking that the results shared yesterday point to the fact that just a few coarse optimizations would lead us to a gigantic improvement in performance which would leave us with a multi-currency Watukushay FE system, something which is very reasonable to assume given the fact that systems usually improve significantly with only moderate optimization. However what reality shows us is somewhat different. The Watukushay FE trading system fails to improve significantly on almost all trading instruments despite coarse or even finer optimization which attempt to fine-tune the system's variables to each currency pair.

For example, the GBP/USD and USD/CHF achieve compunded yearly profit to maximum draw down ratios of about 1:5 and the usage of even fine grid optimizations is not able to bring this down to a 1:3 level. When we examine the trading characteristics of this system on these pairs we see that the overall market inefficiency exploited by the EA disappears for significant periods of time in which the instruments consolidate or experience wide ranges that are not at all favorable for Watukushay FE. It becomes obvious that the system is simply not able to cut loses short on these currency pairs with its present logic. However a few ideas have come to my mind to "adapt" Watukushay FE to the trading mechanics of these pairs and improve its trading characteristics, something which I will probably leave for a future post.

Perhaps the most important achievement of Watukushay FE comes when you analyze its results on the AUD/USD and USD/CAD instruments. With only very coarse optimizations on these currency pairs we are able to obtain marked improvements that show us that -for example- in the case of the AUD/USD only a modification of the RSI period grants a significant improvement of the compounded yearly profit to maximum draw down ratio from 1:5 to almost 2:1 in a ten year run. This shows that the modification of only one variable is enough to fit a system to another currency pair when the overall inefficiency has a similar presence than in the initial instrument it was designed for. Below you can see the backtesting results for the AUD/USD before an after an RSI period change, leaving all other variables -including SL and TP - intact.
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The USD/CAD also improves its results incredibly only after small RSI period changes but results are improved much more significantly after the TP and SL are optimized in a coarse manner changing the risk to reward ratio of the SL and TP to almost 1:2, this in turn changes the compounded average yearly return to maximum draw down ratio to a little bit more than 1:1 from a previous value - before optimization- of nearly 1:4. The images below show you how the overall results for this currency pair also change as a function of this very limited optimization which is most likely not going to introduce any curve fitting into the system due to its coarse nature and the overall adaptive character of the trading system.
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After doing this analysis of Watukushay FE it is also worth noting that the optimization of this EA are heavily populated by profitable results showing you that future deviations from optimal values are not going to drastically change the risk and profit characteristics of this trading system. We have also learned that when the inefficiency is present to a good extent only minor optimizations are needed to greatly increase performance while very fine and extensive runs -when the inefficiency is absent a significant amount of time- bring us only marginal improvement to pre-optimization results.

From the above results it seems that Watukushay FE will be exploring Canada and Australia soon enough :o) Probably during the next few weeks I will release EA modifications and set files on the experts website so that people can start doing their own evaluations and tests on these currency pairs. A couple of live accounts to test these new pairs will also be added. Right now I am also exploring logic modifications to trade on the GBP/USD and USD/CHF, results I will be sharing with you once they are ready. It seems that Watukushay FE likes more instruments than what I originally thought :o)

If you would like to learn more about Watukushay FE and how you too can build your own long term profitable system based on sound trading tactics 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 !

Wednesday, June 16, 2010

Watukushay FE - An Intra Instrument Experiment - Part No.1

One of the best things about the new metatrader 5 platform - as I mentioned on a previous post - is the extreme quickness in which backtesting and optimizations can be done. It is remarkable how I can now do a 200 run optimization in less than an hour while previously it took more than 5 or 6 hours and even 24-48 for certain trading systems. After porting Watukushay FE and enjoying this very fast simulations capability I decided that it was time to try a multi-instrument approach for this freely available trading system. Certainly I had donde some experiments before on the USD/CHF and the GBP/USD but I had never been able to try as many combinations and settings as I wanted to due to the inherent slowness of MQL4 based backtesting. On today and tomorrow's post I want to show you some of the results of my studies on several currency pairs for Watukushay FE and how these results show us a very wide and unique perspective about the Watukushay FE trading system. For those of you who do not know anything about Watukushay FE it is a freely available trading system I coded available at http://watukushayfe.blogspot.com.

It is important to note here that I coded Watukushay FE based solely on my observations of the RSI and trend behavior on the EUR/USD and I had never thought about making this expert trade on other instruments when I first designed and implemented its logic. It is a fallacy that a "good system" should work on "all" currency pairs as it tackles a "vital aspect of market psychology" since different pairs have different trading makeups and volumes which make their particular price action very different. Pairs that people may regard as similar such as the EUR/USD and the USD/CHF are in fact tremendously different with many systems that work on the EUR/USD failing to work on the USD/CHF and vice versa. Some of the reasons why this happens include bank intervention, liquidity, volume, trade deficit difference, etc.

However it is always interesting to look at the performance of systems on other currency pairs since it brings a hint about the differences between instruments, showing us why a system may work on one and not on another. Understanding and knowing the true nature of these differences allows us to develop systems that are "adapted" to each different currency pair's trading nature. An analysis of these differences also allows us to change the design of a system- particularly its exit logic- to better exploit inefficiencies found in a particular instrument.

The first think I did with Watukushay FE was to run the "standard" settings derived from very coarse optimizations on the EUR/USD on the GBP/USD, USD/CHF, AUD/USD and USD/CAD (10 year backtests on Metatrader 5). The results are indeed good -as shown in the graphs below- in the sense that the system is profitable in the long term on all of these currency pairs, however it is important to say here that profitability is much lower than on the EUR/USD with most of these pairs reaching only a compounded yearly profit to maximum draw down ratio of 1:3 to 1:5. This shows us that the system tackles a market inefficiency that is present to a certain extent on all these currency pairs but unfavorable conditions are much more frequent than on the EUR/USD.
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It is evident when comparing the different equity curves that the smoothest of them is the EUR/USD which - of course - achieves the best results. We see that Watukushay FE has smooth periods of profit on most of these instruments but unprofitable periods are simply very destructive for the other pairs while they are only mild for the EUR/USD. Even tough the equity curves seem to show us that all instruments could be traded profitably the potential reward for instruments other than the EUR/USD is simply not enough to compensate for the risk taken. The deeper draw down periods also make Watukushay FE on other currency pairs far more difficult to trade also limiting risk escalation to a great extent.

However it is clear that some very interesting questions arise. Is it possible to do coarse optimizations on other pairs to find more EUR/USD-like results ? It is possible to implement small modification to the logic that improve the trading technique significantly ? Are there any other instruments worth trading for Watukushay FE besides the EUR/USD ? I will tray to address some of these questions on tomorrow's post. If you would like to learn more about Watukushay FE and all the Watukushay Project experts 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 !

Tuesday, June 15, 2010

Is Your Money Safe ? Think Again :The "GallantFX Hacked" Case

One of the most important things in forex trading is the safety of our deposits and the trust we have in our broker. We tend to believe that all brokers have very tight security measures that will protect our capital from being stolen or our trading affected but most of us don't really have any idea about the security measures taken by our broker or if these measures are enough to protect our deposits and trading information from hackers out there. This problem becomes bigger when people start to use very lightly regulated brokers that trade outside US-UK regulation that often do not comply with the minimal security precautions needed to avoid a very bad event taking place. Today I want to talk to you about such a case in which the GallantFX broker was hacked and its internal information exposed to an unauthorized third party. I want to show you what happened, what was at risk and what is now at risk for the people using this broker. My objective with this post is to warn you about the need for a good broker with a good trusted security system and how it can affect you if you fail to do so.

What happened with Gallant FX ? On May 30/2010 several people on the internet posted images and messages pertaining to the fact that they were observing the picture showed below within their Virtual Private Servers and the GallantFX main website (both gallantfx and gallatnvps.com domains got hacked). The websites and VPS browser requests read "hacked by Aseroh" and later displayed the admin entry login screen of the Joomla control panel. Some users confirmed that they could access the content manager by using the default administrator username and password something that exposed the websites' html content to manipulation by anyone. I checked this myself that day and found it to be true.
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I have to tell you that I was shocked when I read about this on several websites. It was the first time ever that I had seen a forex broker fall prey to the attack of what appears to be a hacker who targets Joomla exploits. The hacker made it clear on the VPS that he had gained root access to the servers, meaning that he could manipulate anything he wanted within the network. However people noticed that their accounts were intact as well as their VPS contents. So no harm done right ? Wrong ! The fact that this broker was exposed to this hacking means that it was vulnerable to the implantation of third party applications that could be used for a WIDE variety of things. From logging trading activity to wiping all accounts during a certain date to whatever other creative evil use you want it to have.

The fact is that this breach of security exposed all the content's of people's VPS severs and by extension, their trading platform passwords, expert advisors, etc. Nobody knows if there is not a guy out there with thousands of forex account passwords waiting to use them in a single day or if there is a secret bot within GallantFX right now waiting for that little event that will trigger a very nasty destructive frency. The fact is : Who knows. For this reason I consider right now that everyone running on this broker should definitely change to a different broker, merely because of the security breach they had which is simply unacceptable for any company dealing with sensitive financial data.

This event makes us reflect upon the importance of our broker's security and the fact that brokers should use non-standard solutions for content management instead of a free widely used and well-known content management system like joomla. Not because Joomla is bad but because it is under constant study by hackers world-wide and vulnerabilities are easily exploited by a wide sector of this community. Using a third party propietary solution is a good line of defense since hacker attacks would take considerably more study due to the custom character of the solution used.

What this shows is that low budget brokers have low budget solutions to their content management, web hosting and probably VPS offerings so I would advice you to think twice before using a broker that you consider extremely new or not very well known. Using brokers that have a good reputation and adequate regulation that forces them to comply with some basic internet security standards should be a basic thing we should look for. All NFA and UK regulated brokers have to abide by these standards while some brokers like FXDD (malta) comply with these regulations on their own accord, outside NFA ruling. Whatever the case, I advice you to research your brokers security so that you can rest assured that an event like the one happening at GallantFX will be extremely unlikely.

If you would like to read more about automated trading and how you too can create likely long term profitable automated 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 !

Monday, June 14, 2010

The Metatrader 5 Series...Trying Metatrader 5 : Porting Watukushay FE

I have to confess that I was pretty excited last week when I learned about the release of the full metatrader 5 strategy tester. Being a fan of simulations to accurately model past trading I was dreaming about all the great enhancements that were now available and how all current Asirikuy systems would benefit from these implementations. This week I have been playing extensively with this new platform, mainly getting to know the MQL5 new programming language and all the "new ways" of doing things we must now relearn. I started by analyzing and understanding the sample experts released with the platform and later coded a few very simple systems to get to know the way in which things are done, indicators called, etc within this new trading program. On today's post I want to talk to you about my first "real exercise" which involved the porting of a preliminary version of Watukushay FE to metatrader 5. I will describe the process I went through, what I achieved and some of the things that surprised me when comparing results obtained with the Metatrader 4 backtester.

First of all, I have to say that coding experts for MQL4 has almost nothing to do with coding in MQL5. Almost everything is done differently and even though previous knowledge of MQL4 is useful, the truth is that several things like order placement, reading of indicator values, reading of bar values (high/low/open/close) and order selection are done differently. I found the approach implemented in MQL5 to be a little bit harder but yet a ton more flexible. This is particularly true of the new implementation of indicator and order handling which will now lend itself to an incredible coding flexibility. There are also some very useful functions included within the Trade.mqh file (downloaded with the platform) that will make EA programming a ton easier for those of you looking towards an "easier transition" from MQL4 to MQL5.

After familiarizing myself with the platform I decided to code the system that would be most easily available to all of you. Since Watukushay FE is the most widely used Asirikuy system -due to its free character- I decided to give the porting of Watukushay FE first priority. It is however important to say here that I did this porting merely as an exercise and it won't be the final release version of this EA for metatrader 5 which will probably take a few more months of polishing to develop (since we are currently developing a common MQL5 framework for Asirikuy systems taking advantage of the new classes implementation in this language). However the preliminary EA version I coded contains all the logic of Watukushay FE and follows the exact same logic as the MQL4 version in backtesting.

I have to say that I am amazed with the capabilities of Metatrader 5 regarding speed of execution. Simulations are not only fast but about an order of magnitude faster than in Metatrader 4. Watukushay FE runs a 10 year simulation in MQL4 in about 5 minutes while the Metatrader 5 implementation takes a little bit more than 30 seconds. Added to this absolutely great feature is the fact that multithreading is available for optimizations meaning that I can run a full 200 run optimization in less than half an hour when it previously took about half a day. Being able to run optimizations in parallel is a blessing and it will most likely open up the doors towards the finding of many profitable instruments and setups not currently used with Asirikuy systems. Below you can see an image of an optimization running on the 4 cores of one of my beloved quad processors.
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You are probably also wondering how the Metatrader 5 backtesting results compare with the Metatrader 4 results and I would have to tell you that the results are a little bit puzzling to me. Watukushay FE is definitely long term profitable on both platforms but results are overall much better in Metatrader 5 when compared with the MQL4 version. The nature of this difference seems to be the difference between data sets. Since this version of Metatrader is new, we could assume that the data quality and interpolation mechanisms are better but such an assumption would have to be proved. Right now I am pleased to tell you that the EA - with the exact same settings - performs better on MQL5 and the Metatrader 5 data than on the Metatrader 4 version, meaning that -if anything- Watukushay FE is as good or better than what we think.
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There is also a ton more of things to discuss regarding the optimizations of Watukushay FE and the new features and results available within the Strategy tester but for today I think that all the above information is enough :o). I have now started this series of posts called "The Metatrader 5 Series" which will deal with topics related to simulations, programming and overall features of this new Metatrader 5 platform which is bound to become the standard within the next few years in automated trading. During the next few weeks I will release several new posts on Metatrader 5 and probably Asirikuy members will also be able to enjoy a few videos on the matter :o)

If you would like to learn more about automated trading and how you can code your own likely long term profitable systems based on sound trading tactics 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 !

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