Saturday, August 7, 2010

My Latest Currency Trader Magazine Article : Exploiting an Asian Session Based Inefficiency

Certainly some of you will remember my June Currency Trader Magazine article in which I did a study of the Asian session showing that this trading time frame has very predictable characteristics which become evident when normalized through the eyes of a volatility criteria such as the ATR. Near the end of that article I said that I was working on the development of a trading system to exploit this predictable behavior, something which is precisely the subject of my latest Currency Trader magazine article (which was released the day before yesterday). During this blog post I will talk a little bit about this article and why it is an important achievement for me in the area of automated trading system development.

For those of you who are not familiar with the magazine, Currency Trader is one of the most world-renowned online publications dealing with forex and futures trading. The magazine features publications from very knowledgeable people around the field of trading, showing you things from concrete system development (like my articles do) to a fundamental analysis of the market or certain currency pairs (like Barbara Rockefeller shows). As a plus this publication is also available online for free here.

My August article on this magazine deals precisely with the exploitation of the predictability of the Asian session on the EUR/USD. Certainly if the Asian session was able to exhibit almost constant trading behavior (when normalized by an ATR) through an extensive period of time (you can read my June article to learn more) it was obvious to me that some type of inefficiency would have to come out from this phenomena.

My first approach was to look for the obvious, which was the exploitation of an inefficiency based on the ranges or total price changes within my June article but after doing research on this for a few days it became obvious that such a system could never be developed and simulated in an accurate way, especially using a program with the limitations in backtesting that Metatrader 4 so clearly has. In the beginning of the article I clearly highlight the reasons why I chose definitely NOT to trade within the Asian session to get a profitable system.
Then I realized that the only way to build a system that gave accurate simulations which I could use to exploit the Asian session was to use the Asian session but trade after it was finished. This allowed me to build a system with wide profit and loss targets that could be simulated accurately which I could use for the Currency Trader Magazine article. Of course, the specific nature of the inefficiency I found and its nature can be seen on my article which can be downloaded free of charge for two months (if you are reading this after September/2010) you might need to purchase it).

The system was clearly an important achievement with very good profit and draw down targets that have additional merit in the fact that they were obtained without any optimization whatsoever. The simple nature of this inefficiency (which is almost entirely price action based) and the obvious predictable character of the Asian session made the system achieve good results during a 10 year testing period, although the June article only analyzes the Asian session from 2006-2010 showing that the predictability of this session probably goes all the way back to at least the beginning of this decade. Of course, if you want to see the exact results of this trading system feel free to download and read the article (again, available for free).

I liked this system very much because it shows you that the market works in a very interconnected manner. The fact that a trading period has predictable characteristics may allow you to exploit a completely different market period which appears to be extremely efficient on its own. It definitely seems that the obvious ways of developing market predictability are already efficient since the information is known to all market participants but this predictability in itself seems to sprout inefficiencies on other times of the day which are not obvious to all traders within the market, giving us the clear opportunity to exploit a tradable inefficiency.

Again, I invite you to go to the Currency Trader Magazine website to download and read my August article (you might also want to read the article after mine, a very interesting system developed on tick volume analysis). It would be great if you could leave a comment with your opinion about this CT article :o)

If you would like to learn more about my work in automated trading and how you too can start to gain a true education to build and trade likely long term profitable systems please consider joining, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to trading systems. I hope you enjoyed this article ! :o)

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