tag:blogger.com,1999:blog-28478901027805977632024-03-13T22:30:38.194-07:00Reviewing Everything ForexDanielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.comBlogger595125tag:blogger.com,1999:blog-2847890102780597763.post-19387227317904869672010-09-13T18:19:00.000-07:002010-09-13T18:55:10.462-07:00Time To Evolve... From FxReviews to MechanicalForex, a Milestone Achievement :o)<div style="text-align: justify;">Today it's a very important day, not because of the release of another automated trading strategy or some other achievement related to Asirikuy or the development of expert advisors but because today I will be taking a huge step for this blog and - hopefully- my online presence in general. Through the past 3 years fxreviews.blogspot.com has been the home of my forex blogging efforts and after more than 500 articles and a lot of modifications it has now become evident for me that this blog and its potential have exceeded the limitations of what the blogger platform has to offer. Today I am taking a step forward and sharing with you this blog's new url : <a href="http://www.mechanicalforex.com/">http://www.mechanicalforex.com</a>. Within the following paragraphs I will also share with you the reasons why I decided to take this important decision and why I consider this a very important move for the development of this website.<br /><br />Although blogger has been a very friendly, rewarding and robust blogging solution its limitations became evident as my blogging frequency increased and the number of my posts became larger. Blogger offers some great advantages, such as being free, being able to do everything easily and having the safety and reliability of Google servers to host all the data, however it fails in two main aspects that make it unsustainable in the long term for me. The first problem is the inability to customize things - which means that the platform is rather inflexible - and the second is the lack of professionalism that comes from a sub-domain of a free blogging platform.<br /><br />One of the biggest problems I have faced with blogger is the inability to customize the tags and categories of my posts in a way that makes my blog easy to use. The website now has a lot of content and the limitations of the blogger interface make it very hard to reach. So what is so much content useful for if it cannot be accessed easily ? The answer is that it is simply not useful. Since a website needs to be easy to browse and things should be very easy to find, I considered this a major problem for my future developments.<br /><br />Another important reason why a change was now necessary is the fact that the website is no longer mainly about the review of automated trading forex products, something which makes its name rather inaccurate. Although this was the main topic of the website for a while it is now evident - especially since I started posting daily - that we are now moving towards a much wider area where the review of commercial systems is only secondary to a much bigger goal, which is the continuous achievement of long term profitability. The website is now much more about sharing new ideas and giving advice about how to succeed with mechanical trading than about going through the endless tides of products that reach us every month from the hands of commercial EA sellers.<br /><br />To solve all these problems and move forward, making my blog much more customizable, easy to navigate, accessible and professional, I decided to create a new domain - that better reflected what the website is about now - and create a whole new website powered by Wordpress. This new website is called <a href="http://mechanicalforex.com/">Mechanical Forex</a>, a website dedicated to the use, development, review and evaluation of mechanical trading strategies. A website in which the name is much more reflective of what is going on inside of it.<br /><br />Thanks to some very friendly Wordpress plugins moving all my posts from blogger was a breeze (surprisingly with no broken links :o)) . However there are still some things that need fixing (for example all the links that pointed to articles within articles still point to blogger) but I am confident in that all of these problems will be solved within a few weeks (after I become more knowledgeable in wordpress). However the new Wordpress implementation carees a ton of flexibility that will also allow me to greatly improve the usability of the site, generating tags, category listings and linking systems that will be much better (a world better!) than what we currently have here in blogger.<br /><br /><span style="font-weight: bold;">Starting tomorrow this website will redirect to the new one and new posts will only be placed on the new site. If you are a frequent reader and you follow this blog through the RSS feed please make sure you subscribe to the new blog through any of the buttons shown on the top right. </span><span style="font-weight: bold;">There are also some links on the top right so that you can share the website's articles on digg, stumbleupon, facebook and other social sites. </span><span style="font-weight: bold;">If you like this website make sure you share it with other people you know who might find it useful :o)</span><br /><br />Hopefully this new website will be a major improvement, it is definitely a milestone achievement and for me it feels like a move from a "hobby" to a much more "professional" blogger. Thank you very much again for all the support, interest and trust you have given me through all these years :o) <span style="font-weight: bold;">Please leave any opinions, comments or questions you might have about the new site !</span> (you can leave them here or in the new website)<br /><br />If you would like to learn more about automated trading and how you too can build your own mechanical systems based on sound trading strategies please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-27722695580993833972010-09-13T04:17:00.000-07:002010-09-13T04:56:13.314-07:00How to Treat Forex Like a Business : Ten Things You Need To Do When You Trade<div style="text-align: justify;">The internet is filled with people who advice and give their opinion about how others can succeed in forex trading. Many times this advice is extremely vague and does not have any practical implications with it that can actually help newer traders succeed. One of the most common examples of this is how more experienced traders tend to tell people new to the market to "treat forex like a business" while they give absolutely no specific advice on how you are supposed to do this. Sure, for successful traders this is obvious and the advice needs no further explanation - since they are already treating forex like a business - but for new traders the advice is totally meaningless since they do not know how to trade forex like a business or the steps they need to take to make this a reality.<br /><br />On today's post I want to share with you 10 practical things you need to do to treat your forex trading like a business, after you do these ten things you will find that your trading will be much more organized, your goals will be much clearer and you will be on your road - or at least a much clearer path - towards long term profitability. Definitely treating your forex trading like a business is extremely important but what does this mean ? What practical decisions can you take to change the way in which you trade the forex market ? Keep reading to find out !<br /><br /><span style="font-weight: bold;">1. Think in terms of goals and expenses. </span>The first change you must make is around the way in which you look at forex trading. If you are going to treat this venture like a business you need to think about it in terms of goals and expenses. In trading goals are profitability targets and expenses are both trading costs and losing trades. A great part of your success will fall into being able to look into your trading as a set of goals and expenses.<br /><br /><span style="font-weight: bold;">2. Determine your plan.</span> This is perhaps the most important part of trading which is to determine how things will be done in your business. If you were opening up an aluminium can factory you would have to figure out how you are going to be making the cans, who will buy them and who your suppliers are going to be before you even think about starting your business. Forex is the same thing, you need to have a trading plan which is merely a set of rules (either mechanical or discretionary) that you will follow in your business.<br /><br /><span style="font-weight: bold;">3. Determine your goals based on your plan. </span>Your plan provides the anchor which allows you to determine realistic profit targets. After you come up with a plan you need to deeply evaluate it - <span style="font-weight: bold;">through reliable simulations</span> - to obtain a given set of profit targets that you will be able to use. If your profit targets are not what you want they you can change your plan - and reevaluate it - to make them better. When you are happy with your goals, continue.<br /><br /><span style="font-weight: bold;">4. Determine your expenses based on your plan.</span> The next important thing you need to do is understand what your expenses will be. What percentage of your account will you be losing in average every year before reaching your goals ? For how long will you lose that capital ? Accurately determining variables such as the maximum draw down, the average draw down period length and the probability to have a losing month are key aspects of your forex business plan.<br /><br /><span style="font-weight: bold;">5. Determine your capital requirements. </span>Since you now have a plan with goals and expenses you now need to determine your capital requirements which is simply the amount of money needed to execute your plan. Certainly different trading strategies will require different amounts of money to be tradable. This also depends on the amount of money you want to make, if you are aiming to make 20K a year and your goal is 20% then investing 100K might be necessary while if the only thing you want to do is execute your strategy with the minimum possible capital you might only need 200 or 1000 USD.<br /><br /><span style="font-weight: bold;">6. Draw best and worst case scenarios based on your simulations.</span> A very important thing you need to do is to come up with how future scenarios might look for your trading strategy. If your simulations were done in a reliable manner then you can use 10 year backtests to get a picture of how best and worst cases might look like. Your next year might be as profitable as the most profitable year of the past 10 years while it can also be as bad (or worse) than the worst year. Having these pictures is vital since it will allow you to see where your plan is going and if what you are experiencing is or is not normal.<br /><br /><span style="font-weight: bold;">7. Come up with a worst-case scenario.</span> As in every business there can be a point when the expenses are way beyond those programmed by the plan and a change must be made in order to survive to the future. In your trading business you need to come up with a worst-case scenario so that - in case your strategy becomes too risky - you will know well before hand when to change it. I generally use two times the 10 year historical maximum draw down as my worst case scenario, something that has worked well for me.<br /><br /><span style="font-weight: bold;">8. Do monthly, quarterly and yearly evaluations. </span>Another important aspect of treating trading like a business is evaluating how your business has performed in a monthly, quarterly and yearly manner. Just like all other business do you should generate reports and analyze how your strategy has performed during these time periods. It is always important to know if your expenses are what you expect from your plan (within the bound of normal draw down periods), if your goals have been met and if you have reached any of your worst case scenarios. Staying on top of your plan by evaluating it frequently is a vital part of survival.<br /><br /><span style="font-weight: bold;">9. Do not change your plan when it is working as planned. </span>A big mistake - perhaps one of the biggest - new traders make is to jump away from a trader system just because profitability goals are not being met. If a trading system is losing money within the programmed expenses and the 10 year simulations you have made then there is no reason to run away from your trading plan. While your draw downs remain within what you planned when you evaluate the strategy your business is actually working as planned.<br /><br /><span style="font-weight: bold;">10. Do not increase your goals or your expenses. </span>Another very common mistake made by traders who are not yet experienced at treating forex like a business is the change of their goals and expenses along the way. When a system performs well they increase the risk (to increase their profitability goals) and when it is doing badly they sometimes increase their draw down tolerance to allow the system "to recover". There is a reason why you have set goals and expenses and worst case scenarios and you should NOT change them just because of short term performance. Every change in the business plan needs a total reevaluation of goals and expenses which should always be done if any detail is changed. Committing to a set of goals and expenses and sticking to them is a big part of success.<br /><br />Although the above advice is only a small part of treating forex like a business it does gather all the most important aspects you need to take into account when you want your trading to be something serious, more predictable and less emotional. Treating forex trading like a business with adequate planning, goals and expenses is a vital part of trading which most people new to the market simply ignore or are too lazy to develop. If you follow the above advice and develop a trading plan with an idea of what the behavior of your system might be then you will be miles away from the large majority of new traders.<br /><br />If you would like to learn more about system evaluation and how you too can develop mechanical systems with reliable simulation results please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)<br /></div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com2tag:blogger.com,1999:blog-2847890102780597763.post-14133299810348472522010-09-12T04:47:00.000-07:002010-09-12T05:11:46.122-07:00Revieweing Thrust VPS a New, Cheap and Reliable Option for EA Hosting<div style="text-align: justify;">The subject of Virtual Private server hosting is a very sensitive one that affects all traders who want to use automated trading systems. Although it is possible to build a "home VPS" by setting up a raid backup server, a secondary internet connection and a large UPS this is not practical for most people and renting the service from a provider located within a data center seems like the best idea. Amongst the realms of shared VPS servers - where a single computer is shared as a host between different servers - Thrust VPS comes out as a new, fresh and reliable service that can be used by forex traders to host their metatrader 4 platforms.<br /><br />There are several problems that usually happen with Virtual Private Servers that make people very reluctant to use one or another service provider. The most common complaint of traders about their VPS servers are unscheduled reboots (usually done for updates) problems accessing their platform through remote desktop and the lack of responsiveness of some support teams. I would have to say that many of these problems occur from time to time will all VPS providers and unless you are using a dedicated VPS (which is bound to be much more expensive) then you will have to deal with this if you want to have a VPS. (note however that using auto-login solutions and adequate security settings removes about 99% of these problems).<br /><br />A few weeks ago I decided to try a new VPS solution in the market -called ThrustVPS - after hearing some good comments from fellow traders about their reliability, the speed of their servers and the great price. This company offers simple Windows 2008 VPS setups from 14.95 USD a month with 1GB of RAM, 30GB of disk space and 1TB of bandwidth each month. Compared to other VPS providers the amount of RAM is good but the amount of disk space and bandwidth seems rather limited, although much more than adequate for the needs of a regular metatrader 4 user.<br />-<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFWQiIAEI3HSXapjhJYbzhABLJS2_74ST5wpnC12M1YYBEnPzXh8HALk-wBg5V-AqGrcOmovvOicR15mol5iHDs_zvBTGqZJlgDaDH4d6gOAsjsB3zNfzl-ibytOJm8HssXyYnh4ALZ9_N/s1600/9-12-2010+7-08-03+AM.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 354px; height: 211px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFWQiIAEI3HSXapjhJYbzhABLJS2_74ST5wpnC12M1YYBEnPzXh8HALk-wBg5V-AqGrcOmovvOicR15mol5iHDs_zvBTGqZJlgDaDH4d6gOAsjsB3zNfzl-ibytOJm8HssXyYnh4ALZ9_N/s400/9-12-2010+7-08-03+AM.png" alt="" id="BLOGGER_PHOTO_ID_5515997788316829858" border="0" /></a>-<br />The payment process, setup and initial configuration of the server was quite easy and fast with everything ready within almost less than 1 business day. The server response is fast and the lag towards IBFX, FXDD and Alpari UK servers is low (5-10 ms) (of course, since the server is located in the US the lag towards Alpari UK is higher). The amount of RAM promised is available for use and the load on the VPS's processor seems to be very low at almost all times. Up until now I have not experienced any reboots or any other unusual behavior that may intervene with the Metatrader 4 platforms I have loaded within it.<br /><br />However you should bear in mind that ThrustVPS is a young company and VPS providers are generally very good in the beginning before they start to get a lot of customers and start to behave in a greedy way. As a company grows and more clients appear they may resort to piling up more VPS on a single computer instead of buying more hardware something that reflects in an overall reduction in performance for some users. Definitely in the beginning almost all VPS providers are this good but time will tell if they are going to keep this level of performance or if they will just start to fill their current computers with more and more VPS servers without any hardware upgrades.<br /><br />However right now ThrustVPS seems like a very reliable, cheap and fresh option for people looking for a new hosting provider for their Metatrader 4 platforms. This VPS company provides us with a cheap basic VPS plan with enough RAM and disk space to load several Metatrader 4 platforms with a very fast internet connection and a reduced lag to US forex brokers. As always I advice you setup adequate security measures and an auto-login solution which are absolutely necessary for reliable trading within a VPS. Hopefully ThrustVPS will remain this reliable for years but - as I said before - we won't know this for sure until the company starts receiving more customers.<br /><br />If you would like to learn more about how you can build your own trading systems to run on a VPS based on sound trading tactics with realistic risk and profit targets please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com2tag:blogger.com,1999:blog-2847890102780597763.post-20987351995135689992010-09-11T04:48:00.000-07:002010-09-11T05:18:02.341-07:00Are You Backtesting Correctly ? : Six Common Technical Mistake That Will Make Your Simulations Useless<div style="text-align: justify;">When simulating the performance of a trading strategy using historical data within the Metatrader 4 platform there are many things that you can do which will inevitably end in bad performance and unreliable results. Many of the reasons why people regard backtesting using Metatrader as unpredictable and difficult to reproduce are a consequence of one or several technical problems which can arise due to the lack of carefulness of the trader running the evaluation. Knowing about these problems and taking action so that they do not affect simulations is something necessary to arrive at reproducible and reliable results. I have proved - within several trading strategies - that simulations can be reliable and easily reproduced if special care is taken to avoid technical pitfalls.<br /><br />Within the following paragraphs I will share with you the six main technical reasons why traders arrive at unreliable simulation results that greatly over or under estimate the profitability of their trading systems. These problems can be easily avoided through some simple measures that can ensure that simulations are as reliable and useful as possible. Falling into just one of these problems can cause back-testing results to be utterly meaningless so avoiding them is of primordial importance for anyone interested in the accurate evaluation of trading systems and expert advisors. These are the technical problems you might encounter :<br /><br /><span style="font-weight: bold;">1. Using a 4 digit broker to run simulations. </span>Many people think that the most accurate simulation results for their systems are obtained when running backtests with their broker's Metatrader 4 platform. However they do not realize that backtesting data is ALWAYS downloaded from metaquotes servers and that the 4 digit broker data set downloaded from Metaquotes contains MANY errors which make simulations totally unreliable. There are major gaps in price in the lower time frames, many daily candles missing large segments of volume, introduction of Sunday daily candles on some years, etc. If you want your simulations to be reliable you need to use and ONLY use five digit brokers for backtesting which download the much more reliable five digit data set from metaquotes.<br /><br /><span style="font-weight: bold;">2. You are using the weekend spread. </span>Another very common technical problem people come across is the running of simulations on the weekend when the spread is extremely high in some cases. When you run a simulation during the weekend using this spread values you will have much worse results than what you would have when using the regular spreads provided during the trading hours of the week. In the end you should always perform your backtests in trading hours or change the spread within the Metatrader 4 platform (we use a script in Asirikuy in order to achieve this).<br /><br /><span style="font-weight: bold;">3. Your strategy trades below the 1 hour chart.</span> During the past few years I have tested and run live/back testing consistency analysis of several strategies that run within the 30 min, 15 min and 5 min time frames only to find out that their results are each and every time inconsistent with simulations. The reason why this is the case is because the lower the time frame the more prominent the effect of one minute interpolation errors when determining things such as indicator values becomes. The broker dependency also increases exponentially and when trading 5 minute charts it becomes so high that the simulations are utterly meaningless. The fact is that variability caused by broker dependency and interpolation errors within these time frames is SO high that you can have totally different results between your backtests and reality. The problem is less pronounced for the 15 minute chart and only a small effect occurs on the 30 minute chart but the problem is not almost completely eliminated until you move to at least 1 hour charts.<br /><br /><span style="font-weight: bold;">4. Your Take Profit and Stop Loss values are within 10 times the spread of the instrument you are trading.</span> When you are running simulations of systems that use these type of trading obtaining reliable results is impossible, not only due to the problem with one minute interpolation errors (which for this case is huge) but because of execution variables (such as re-quotes and spread widening) which prove to be VITAL in the actual real-life profit of these strategies. If you want your simulations to mean something and provide you with some approximation to valid profit and draw down targets then your average Take Profit and Stop Loss must be above 10 times the spread.<br /><br /><span style="font-weight: bold;">5. You are not recalculating your data before each backtesting run. </span>Something which is extremely important is the recalculation of data before starting each new simulation. When you load a chart or when your demo feed sends a tick to your platform there are sometimes history recalculations which corrupt your data and cause your simulations to become erratic and invalid. In order to correct this problem you must recalculate your data within the history center before running every back-test. This can be achieved by going to the one minute section of the instrument you want to recalculate within the history center and clicking the download button until it prompts you to recalculate data. Doing this ensures that your data will not suffer from corruption from your demo feed.<br /><br /><span style="font-weight: bold;">6. You are running a backtest over the last 1-3 months.</span> Your historical data is composed of the data you download from Metaquotes servers and the data you obtain from your live/demo feed from your broker. The last 3 months of testing data are usually downloaded from your broker while the data before pertains to the history center. Usually if there is a time stamp mismatch between your platform's live feed and the Metaquotes data there will be massive generation of errors within the past 3 months of data as the program gets "confused" from these differences. If a chart of the instrument you want to trade shows massive gaps after you do a historical data recalculation then this is a problem. You can generally avoid this by only running backtesting that end three months before the current time.<br /><br />Certainly the metatrader 4 platform has many limitations and the above restrictions limit us to the development of certain kinds of trading strategies. However this doesn't mean that simulations are unreliable but mainly that great care has to be taken in order to make the backtests reliable, reproducible and coherent with live trading results. By following all the above suggestions and avoiding this technical pitfalls you will be able to obtain reliable backtests of your trading strategies which will allow you to get a good picture of the possible long term performance of your trading strategies.<br /><br />If you would like to gain a true education around automated trading systems and how you too can design strategies that achieve reliable simulations with accurate profit and draw down targets please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com4tag:blogger.com,1999:blog-2847890102780597763.post-50639408163464526742010-09-10T05:15:00.001-07:002010-09-10T05:27:39.910-07:00September Video Reviews : New Commercial Automated Trading Systems<div style="text-align: justify;">Today I am releasing the 2nd video monthly reviews of automated trading systems. In August we saw the release of many different new trading systems, most of the expert advisors released have absolutely no proof of live trading and most of them do not even give the trader a decent glimpse at simulation results. As always there is an incredible desire of EA sellers to hide information that is easily available and to make the showing of live trading results a shadowy process based on screenshots and html statements when having transparency is as simple as offering a live, investor access verified myfxbook account.<br /><br />This month we saw the release of forex bullet proof which was pushed hardly by affiliates with a massive amount of junk email being sent. After looking at the website we then find nothing but a very dangerous martingale system with very shadowy "evidence" of profitability that is certainly NOT reliable and makes us become very suspicious about the ability of this system to be profitable in the long term. Anyway, I invite you to watch this month's videos to learn more about these trading systems and the reliability of the evidence they provide.<br /><br />If you are having problems watching the videos please remember that you need the free DivX codec or player available <a href="http://www.divx.com/">here</a>.<br /><br /><a href="http://entirely4you.com/reviews/forexbulletproof.avi">Forex Bullet Proof, an unbiased review</a><br /><br /><a href="http://entirely4you.com/reviews/forexsas.avi">Forex SAS, an unbiased review</a><br /><br /><a href="http://entirely4you.com/reviews/forexmeltdown.avi">Forex MeltDown, an unbiased review</a><br /><br /><a href="http://entirely4you.com/reviews/forexmorningtrade.avi">Forex Morning Trade, an unbiased review</a><br /><br /><a href="http://entirely4you.com/reviews/fxwealthmachine.avi">FX Wealth Machine, an unbiased review</a><br /><br /><a href="http://entirely4you.com/reviews/forexcounterattack.avi">Forex CounterAttack, an unbiased review</a><br /><br />I hope you enjoy this week's videos.<span style="font-weight: bold;"> As always please remember that the burden of proof is on the seller's live accounts and NOT on your own</span>. You should not buy any trading system out of faith and the EA sellers should ALWAYS provide reliable evidence of long term profitability. Remember that every time an EA seller avoids showing evidence, it is for a VERY good reason.<br /><br />If you would like to learn how to make your own automated trading systems and gain a true education about algorithmic trading and how to design systems with realistic profit and draw down values using sound trading techniques please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-66459827049293139392010-09-09T04:28:00.000-07:002010-09-09T05:16:24.861-07:00Are You Up for a Challenge ? A Likely Daily Long Term Profitable System That Takes 5 Minutes a Day to Trade. Part Two -System Performance<div style="text-align: justify;">Yesterday we talked about the use of a likely long term profitable system that takes only five minutes to trade everyday. The system is based on the following of momentum using the 10 period moving average inclination allowing us to get in early on long term trends and get profits in the long term on the EUR/USD. We discussed the system's rules including entries, exits, position sizing and accumulation of positions in favor of the trend if favorable movements happen. Another great aspect of the system we discussed - especially for busy people - is the fact that the system can be traded at the same time every single day, requiring very little time from the trader to actually execute the system.<br /></div><div style="text-align: justify;"><br />In order to find out if this system actually has an edge and achieved long term profitability during the past 10 years of trading I carried out a simulation of this strategy by hand using <a href="http://fxreviews.blogspot.com/search/label/Umaki">Umaki</a> and the metatrader 4 backtester. This showed me that the decision to entry/exit positions can be taken in a very small amount of time and that anyone trading this system would be able to do so every single day with just a few minutes available (I then performed a back test with the strategy coded mechanically to confirm that my results were accurate). Please take into account that the simulations were done on the EUR/USD daily charts - based only on past closed candles - making sure that backtesting interpolation errors remain to the absolute minimum. Daily simulations are most certainly back/live testing consistent due to the high reliability of this data.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGS9T8gXLaZ3qGeniF6Xl3vkyO878hkNqE_NrVFSZqMpGQEy7mO1dHzi_oa4n7zFAJa7PyeCUbdcGRDtmiSjGOp4S08am49fSX7mK-C4nr5jNT5W7h-z7wSovPtbPpPtdZC_NhcixDKuLs/s1600/9-9-2010+6-38-07+AM.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 235px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGS9T8gXLaZ3qGeniF6Xl3vkyO878hkNqE_NrVFSZqMpGQEy7mO1dHzi_oa4n7zFAJa7PyeCUbdcGRDtmiSjGOp4S08am49fSX7mK-C4nr5jNT5W7h-z7wSovPtbPpPtdZC_NhcixDKuLs/s400/9-9-2010+6-38-07+AM.png" alt="" id="BLOGGER_PHOTO_ID_5514884479080487794" border="0" /></a>-<br />So does the strategy achieve profit ? The above graph shows you the performance from January 05 2000 to June 05 2010. As you can see the system achieved profits quite consistently over the past ten years, capturing almost every major trend that developed on the EUR/USD during this whole trading period. The system took 170 positions during the past 10 years, averaging about 2 positions every three months. The average compounded yearly profit of the system is 15.85% and the standard deviation of the yearly profits is 13.41%. The best year during the test gave a profit of 35.51% while the worst one was -6.94%.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6ISabtkcniOmHTCrVU-bBMGoc5_aq8wdlU4WGskseZ_t3h4yTtOMncqub1TN2zrKNGHTqZiYMi6ryb1gyDPg1DUy0m-CtPHEXK6d1FUYAURNPGSfH9Mg-JSu3Gjnu_-tpXj6gz_QJrnGV/s1600/9-9-2010+7-08-06+AM.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 237px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6ISabtkcniOmHTCrVU-bBMGoc5_aq8wdlU4WGskseZ_t3h4yTtOMncqub1TN2zrKNGHTqZiYMi6ryb1gyDPg1DUy0m-CtPHEXK6d1FUYAURNPGSfH9Mg-JSu3Gjnu_-tpXj6gz_QJrnGV/s400/9-9-2010+7-08-06+AM.png" alt="" id="BLOGGER_PHOTO_ID_5514884613384244962" border="0" /></a>-<br />The draw down characteristics of the strategy are also very important to discuss with a maximum historical draw down of 13.81% and a maximum draw down period length equal to 554 days with an average draw down and draw down period length of 8.15% and 242 days. This gives the system a pain index value of 4.92 meaning that it will be easier to trade than the Turtle Trading system from a psychological stand point given the fact that its draw down characteristics are easier to handle.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsPni0MMT4m8hYDEh7u3I9udFEZNq4-qZe9pQGtRPPS4oTSrEg8Q37yI-VDPsj98pOkkbIl2oPbBncMnDGgNTlcmiwFgSLwtYvRRZDqviK6-vn8hFslHf2eAIJqrsWg7-0PIUKG-E4KcK4/s1600/9-9-2010+7-09-44+AM.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 242px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsPni0MMT4m8hYDEh7u3I9udFEZNq4-qZe9pQGtRPPS4oTSrEg8Q37yI-VDPsj98pOkkbIl2oPbBncMnDGgNTlcmiwFgSLwtYvRRZDqviK6-vn8hFslHf2eAIJqrsWg7-0PIUKG-E4KcK4/s400/9-9-2010+7-09-44+AM.png" alt="" id="BLOGGER_PHOTO_ID_5514884831697469602" border="0" /></a>-<br />Another very important aspect to evaluate is the distribution of monthly returns which is shown above. Months were divided into classes grouping months within a 1% profit/draw down range ((-8)-(-7)%.... 1-2%, etc) giving the final distribution shown. This analysis gives us invaluable information about the system which will help us understand how the system trades and what we can expect from it. We can see that the system took trades through only 48 of the 120 months of the test and that the probability of one of those months to come out as a winner was 45% while the probability to have losing month was higher, at 55%. However the losing months were much smaller than the winning months with the average winning month being 11.7% while the average losing month loses only -3.7%. This reflects the risk to reward ratio of this system which along the ten year testing period was a little bit above 1:3.<br /><br />So what we have here is a system that will only give you trades for about 50% of the months in which you trade it, there is a higher probability that one of those months will come out as a loser but any winning month you may have will be in average three times higher than your average losing month. This behavior is classic of daily trend following systems that aim to profit from long term trends that develop on the forex market.<br /><br />After this analysis I think that there are simply no excuses. The above is the first manual system - to the best of my knowledge - which only requires 5 minutes to trade everyday, is offered absolutely for free and has a full 10 year historical analysis showing you exactly what you can expect and how your performance is likely going to be in the longer term. Sure, it won't be easy to trade and you are bound to have a few losing years within a ten year period but the system will allow you to develop your trading skills and most importantly your discipline and your ability to execute a trading plan. Finally trading this will become even easier during the following months as an indicator I developed for this system will be shared in a magazine I'll be writing for from October... Stay tuned to find out more !<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdxplrH7kvI1JDdn37yvftUpj72cyMOgLfS0PsRCMH7UXGFpHKjEPRkaUHHnzLq3EQyOGGUgBFFCTeEZAOiW5d4JZvE9Za5j0V_WDxrmM2o9TnIQJlGrPdORECPpV5M383R3wsdiYN1rxB/s1600/trading_technique2.gif"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 300px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdxplrH7kvI1JDdn37yvftUpj72cyMOgLfS0PsRCMH7UXGFpHKjEPRkaUHHnzLq3EQyOGGUgBFFCTeEZAOiW5d4JZvE9Za5j0V_WDxrmM2o9TnIQJlGrPdORECPpV5M383R3wsdiYN1rxB/s400/trading_technique2.gif" alt="" id="BLOGGER_PHOTO_ID_5514885303095604146" border="0" /></a>-<br />If you would like to learn more about other trading systems and how you too can design and trade your own mechanical trading systems knowing exactly what the average compounded yearly profit and maximum draw down figures are please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com2tag:blogger.com,1999:blog-2847890102780597763.post-16131466638317973032010-09-08T01:00:00.001-07:002010-09-11T06:00:59.410-07:00Are You Up for a Challenge ? A Likely Daily Long Term Profitable System That Takes 5 Minutes a Day to Trade. Part One - System Rules<div style="text-align: justify;">I think it is not a secret now that I have always believed that one of the biggest problems faced by people new to automated trading - and their general lack of success - is the almost complete absence of evaluation and the use of a system that has accurate evaluation and a real statistical edge that can be used for longer profitability. This becomes evident if you start to ask traders about the long term characteristics of the systems they use or intend to use. You will find out that the large majority of people ignore the maximum draw down the draw down period lengths, the probability to have a losing or a winning month, etc. It is easy to see then why traders switch so much between different systems and why following a system is so terribly hard.<br /></div><div style="text-align: justify;"><br />Today I want to help new traders by sharing with them a simple strategy they will be able to use everyday which is adequately evaluated and has clear long term profit and draw down expectations that have been calculated according to reliable simulations, bringing them the opportunity to trade a system knowing in advance what to expect in the long term and what difficulties they will face when trading. This system also has the advantage of taking only 5 minutes to trade everyday giving you the opportunity to rely on it if you do not have the time to be "glued to the screen" many hours everyday.<br /><br />It is however clear for me to say - before I start describing the system - that the most important achievement you will get while trading this technique is most likely not going to be monetary (since the profit and risk targets are very conservative) but you will achieve a good education regarding forex trading and - most importantly - you will learn to trade a system which is likely to be extremely difficult to handle from a psychological perspective. If you want to become a better trader and polish both your psychological and trading skills then I advice you to trade this system, but do so seriously and for at least 5 years. Trading this system won't take more than 5 minutes everyday and you will learn to be disciplined and to follow a system for which the statistical expectations are clearly laid out in advance.<br /><br /><span style="font-weight: bold;">This trading system is a very simple trend following system designed to be used on the daily time frame only on the EUR/USD.</span> You should check for an entry signal everyday when your broker's daily candle closes (broker must have chart without Sunday candles, you can use the WithoutSunday EA available for free online to create a chart without these). The rules are very simple :<br /><br /><span style="font-weight: bold;">Long Trades :</span><br /><br />If the past 6 bars show an increase in the 10 period simple moving average indicator (average in bar 6 smaller than 5 smaller than 4 smaller than 3 smaller than 2 smaller than last closed bar) and the difference between the close of the last bar and the tenth bar in the past is larger than 3 times the past closed bar's 30 period daily ATR value then enter a long trade.The trade is entered with no TP and an SL value equal to 2 times the mentioned ATR's value.<br /><br />If a long trade is opened and the last bar close is higher than the close of the bar before the last long was opened open another buy trade and move the SL of the old trades to the value of the new one (which is 2 times the ATR from its opening point). Do this to open an additional maximum of 4 positions.<br /><br />If a long trade has been entered and the past 4 bars' 10 period moving average in the past show a decline ( average in bar 4 is greater than bar 3 greater than 2 greater than last closed bar) then exit all trades.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjisQ5lqhAJ2OMwVFReBPCwCYQrZgyF3t6choT8DV_a6qTZTuicMdtVf0YeLQWMwh0nvLdMsOPbVcEuLiJ7JVtunJiOmZnAQTaViUCI25svKV1_JNyAwEiWC9S5sp17ZhXzcMIBGoYLw5b7/s1600/trading_technique_long_example.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 234px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjisQ5lqhAJ2OMwVFReBPCwCYQrZgyF3t6choT8DV_a6qTZTuicMdtVf0YeLQWMwh0nvLdMsOPbVcEuLiJ7JVtunJiOmZnAQTaViUCI25svKV1_JNyAwEiWC9S5sp17ZhXzcMIBGoYLw5b7/s400/trading_technique_long_example.png" alt="" id="BLOGGER_PHOTO_ID_5514203677150245298" border="0" /></a>-<br /><span style="font-weight: bold;">Short Trades :</span><br /><br />If the past 6 bars show a decline in the 10 period simple moving average indicator (average in bar 6 greater than 5 greater than 4 greater than 3 greater than 2 greater than last closed bar) and the difference between the close of the last bar and the tenth bar in the past is larger than 3 times the past closed bar's 23 period daily ATR value then enter a short trade. The trade is entered with no TP and an SL value equal to 2 times the mentioned ATR's value.<br /><br />If a short trade is opened and the last bar close is lower than the close of the bar before the last short was opened open another short trade and move the SL of the old trades to the value of the new one (which is 2 times the ATR from its opening point). Do this to open an additional maximum of 4 positions.<br /><br />If a short trade has been entered and the past 4 bars' 10 period moving average in the past show an increase (average in bar 4 is smaller than bar 3 smaller than 2 smaller than last closed bar) then exit all trades.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhETUw4B1HwFW51vf3ZsKS77I8QkDr5ijNJ3oHA9GBNB1WR4WhJfeOW-t8d7lw0Zqm_rUTQSLvZEF8pbpxeJuEt3W4UBAq_1lbU99lFqyOPTmWGRRmx4DnE76xTF_PsKz-33YMR0muP36t1/s1600/trading_technique_short_example.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 247px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhETUw4B1HwFW51vf3ZsKS77I8QkDr5ijNJ3oHA9GBNB1WR4WhJfeOW-t8d7lw0Zqm_rUTQSLvZEF8pbpxeJuEt3W4UBAq_1lbU99lFqyOPTmWGRRmx4DnE76xTF_PsKz-33YMR0muP36t1/s400/trading_technique_short_example.png" alt="" id="BLOGGER_PHOTO_ID_5514203799189628178" border="0" /></a>-<br /><span style="font-weight: bold;">Lot Sizing</span><br /><br />The lot size is defined by a very simple equation outlined below. This equation adjusts lot size against market volatility and account equity.<br /><br />Lot size = 0.01*AccountBalance/(ATR*ContractSize)<br /><br />The ATR is the value of the 30 period ATR as calculated on last bar's close. (ATR of the last closed bar) (value of the ATR as absolute price, (for example 0.0102)). The contract size is the contract size per STANDARD lot.<br /><br />As you see the system is very simple and the entries can be checked very easily using just 5 minutes of your time everyday. Unlike other trading strategies with a similar approach - like the turtle trading system - this strategy does not require you to be constantly monitoring the market for breakouts and the addition of positions but it works your way so that every trading decision is executed at the exact same time each day - what I would call a perfect system for a beginning trader busy with a full time job.<br /><br />On tomorrow's post we will learn more about this trading strategy as well as its results over 10 years of simulations, we will talk about the challenges this strategy poses to traders, the rewards you would expect to get and why challenging yourself to trade this everyday (even if only on a small 100 USD live account) will prove to be extremely beneficial in the long term not only regarding possible profits but also regarding what you will learn from both yourself and your psychological characteristics as a trader.<br /><br />If you would like to learn more about how strategies like this can be turned into mechanical systems for their accurate evaluation and analysis please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-28718443096214437902010-09-07T01:27:00.000-07:002010-09-07T01:27:00.543-07:00Elegant Automated Trading Systems : A Key to Success in Mechanical Trading<div style="text-align: justify;">Even though there are many ways in which you can define successful automated trading systems I think that the word that describes them best is : elegant. While the large majority of traders seek systems that promise -and yet don't deliver- massive amounts of profit those few of us who succeed by using automated trading systems have done so through the creation of systems that fulfill a series of very simple characteristics that make them robust, reliable and likely to succeed as market conditions change. On today's post I want to share with you the characteristic of elegant systems and how this type of mechanical solutions are one of the many ways in which traders can actually find long term success in forex trading.<br /><br />What is an elegant system ? To put it simply, elegant trading systems are those which are extremely simple regarding their coding and trading logic and yet extremely rich and deep in regards to the market inefficiencies they exploit. For example Watukushay FE, a trading system I developed which is available for free (<a href="http://watukushayfe.blogspot.com">http://watukushayfe.blogspot.com</a>) uses a trading tactic that focuses around the RSI. The whole entry, exit and lot sizing aspects of this system can be coded within less than 50 lines of code, however the system exploits a very deeply meaningful aspect of market behavior that makes it extremely deep in meaning.<br /><br />Watukushay FE is therefore a perfect example of what I consider an elegant trading system. You have a system that seems extremely simple but within it there is a very large amount of understanding and the solution to many important problems faced by mechanical trading systems. For example, Watukushay FE adapts its position sizes and exits against changing market conditions as well as using an internal closing mechanism to cut losses short and let profits run. This system contains within it the ability to follow trends, enter trends upon retracements and adapt to changes in market conditions all within a very simple coding framework. Watukushay FE shows you that it is meaning and NOT complexity what is bound to make trading system successful.<br /><br />There are also many other advantages inherent to simplicity that make "elegant systems" much more robust and reliable than other more complex implementations. One of the biggest advantages of this type of systems and their low level of coding complexity is the fact that curve fitting them to past market conditions becomes very hard since the number of parameters - and the way in which they affect performance - is very limited. A simple system like Watukushay FE that works along a 10 year backtesting period shows that simplicity is able to maintain profitability amongst very varied sets of different market conditions.<br /><br />In the future when you start developing your own automated trading systems bear in mind then that the complexity has to be within the amount of problems solved by the system and not by the amount of lines of code or indicators used by the system. The idea here is that complexity must be an inherent characteristic of what the system is doing and not of how it is being done. So even though the techniques used by Watukushay FE - for example- are exceedingly simple, they solve a very wide array of complex problems encountered in mechanical trading system development.<br /><br />If you would like to learn more about automated trading system development and gain a true understanding and education regarding their use and development please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com2tag:blogger.com,1999:blog-2847890102780597763.post-43668537293773663862010-09-06T04:38:00.000-07:002010-09-06T05:01:55.689-07:00Confused by Your Charts ? How About Trying a Simple Line Chart for Trading ?<div style="text-align: justify;">There is a very common term used in trading called "paralysis by analysis". This is what happens to someone who is so overwhelmed by the amount of information on their screen that they are unable to make decisions regarding whether or not to trade. This is something that happens to every trader at some point in their career, a fruit of the desire to get very good entries without having significant risk. Usually people who suffer from this paralysis will have dozens of indicators loaded on their charts with a lot of contradictory signals that are difficult - if not actually impossible - to interpret in a meaningful and useful way to actually enter and exit trading positions. On today's post I want to talk about a way in which you can tackle paralysis by analysis and restart your trading in the simplest of ways. Through this post you will learn what I have learned works best to eliminate "paralysis by analysis".<br /><br />You start your trading day and your screen is filled with indicators and clutter. The obviously beautiful layouts, tons of trend lines, support and resistance levels and indicators are nice to look at but interpreting what they say is difficult. You have a 20 period RSI giving a signal that you would normally take but you do not do so because you have a 100 MA that contradicts what it has to say as well as a Parabolic Sar indicator and a candlestick pattern formation you don't like at all. Even though the setup is pretty good you do not take it because you are paralyzed by the amount of technical data you are having to analyze. You have been officially paralyzed by your own analysis.<br /><br />This "paralysis by analysis" is far more common that what people usually think it is. It happens especially to traders who have been into trading between 6 months and one year which is the period in which people become a little bit obsessed with perfecting their entry techniques (from what I have seen at least). Paralysis by analysis is not good as it is usually a symptom of lack of confidence and the need to have what people believe are "high probability setups" by putting up as many signals as possible together. Traders who get paralyzed usually believe that they need to see "agreement" between many different indicators and that this - in itself - will provide them with the statistical edge they need.<br /><br />If you feel you are in this situation, then you need to make a change. When I got paralyzed by my analysis I found out that the absolutely best solution was to go back to the simplest form of a trading chart, the simple line chart. This is a setup that shows you price action merely as a line moving on your screen, it is fantastically easy to interpret and it shows support and resistance levels with a clarity that is not rivaled by any other type of chart (perhaps only by renko charts). The simple line chart easily allows you to determine where price is headed and to draw support and resistance levels without breaking a sweat. Below you can see an example of this.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-4F8ks4bXlk6ODjVloKAu3IkWvGC31PbeQrceGG9yuuHpdKhyphenhyphenPhyphenhyphen6Mw7QDdhVtRxyMYL1lNRDuYwYbFxoKFihY4U6pKLLjTyf1G6yfg97JMIOYuvUAH05NLfFYsEIOQIcguB0uvyCQcw5/s1600/9-6-2010+6-49-56+AM.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 245px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-4F8ks4bXlk6ODjVloKAu3IkWvGC31PbeQrceGG9yuuHpdKhyphenhyphenPhyphenhyphen6Mw7QDdhVtRxyMYL1lNRDuYwYbFxoKFihY4U6pKLLjTyf1G6yfg97JMIOYuvUAH05NLfFYsEIOQIcguB0uvyCQcw5/s400/9-6-2010+6-49-56+AM.png" alt="" id="BLOGGER_PHOTO_ID_5513766777499326194" border="0" /></a>-<br />The main advantage of the simple line chart over other types of charts used in trading is that it is extremely simple. Even though price action may seem difficult to follow and price patterns hard to spot and interpret on a candlestick or similar chart, on a simple line chart such things as price patterns and price direction simply jump off the screen. Traders usually do not resort to a line chart because they consider them exceedingly simple and "lacking" in the amount of information they give them regarding price action movements but the truth is that line charts offer you one of the clearest pictures of overall market action and - most importantly to new traders - it is the most intuitive chart to interpret.<br /><br />While spotting trends and support and resistance levels on a candlestick chart can be harder, doing so in a line chart is totally easy as these things are evident most of the time. For this reason I have found that for traders suffering from paralysis by analysis, the line chart provides an extremely valuable tool to get rid of all the analysis tools and come back to what actually matters in trading, price action.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOS8jKGPzofsZhv-U_jaAgVBWlPrWnWaOhF1516v40SvcbxgXGU09agffyqWrsWt-OGMMEE3gWVXTvohD3CTnutr4csx2pkbX-MgzQ9t6_ahGlwEsAR-N7IWUwYd4BiwfO92llZK0YAaGU/s1600/9-6-2010+6-56-15+AM.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 246px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOS8jKGPzofsZhv-U_jaAgVBWlPrWnWaOhF1516v40SvcbxgXGU09agffyqWrsWt-OGMMEE3gWVXTvohD3CTnutr4csx2pkbX-MgzQ9t6_ahGlwEsAR-N7IWUwYd4BiwfO92llZK0YAaGU/s400/9-6-2010+6-56-15+AM.png" alt="" id="BLOGGER_PHOTO_ID_5513768503032378866" border="0" /></a>-<br />So even though simple line charts are no miracle tool and they won't make you a profitable trader on their own they will provide you with a very clear, simple and effective analysis tool that will greatly help you improve your trading and remove any paralysis you might actually have that could be eliminating your ability to trade in a reliable and long term effective manner.<br /><br />If you however would like to learn more about my work in automated trading systems and gain a true education in their use and design please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-51935066608898166152010-09-05T04:24:00.000-07:002010-09-05T04:51:21.846-07:00Five Steps to Build a Forex Trading Plan : What Every Trader Should Now<div style="text-align: justify;">When you go online and start searching for ways in which to become profitable as a forex trader you soon realize that the internet is filled with what seems like very meaningful yet hollow advice. People around forums and educational websites will tell you several key points of advice such as "plan your trade, trade your plan", "cut your loses short" and "follow the trend" but they always fall short of telling you any practical ways in order to achieve the above mentioned objectives. This is one of the main reasons why it is so terribly hard for new traders to achieve success, there is an inherent lack of practical advice online which means that most traders have to learn how to do things from experience, a very lengthy and painful process that usually carries with it a lot of financial loss and frustration.<br /><br />On today's post I want to make this easier for those out there who have just started or those who are still looking for some guidance in how to become profitable in the long term. In the following paragraphs I am going to highlight the first five practical steps you should go through when building a trading plan. I can guarantee that if you follow these steps it will be much easier for you to become profitable since you will gain a deeper level of understanding of what you are doing and what the outcomes of your trades will possibly be.<br /><br />But what is a trading plan ? A trading plan is merely a set of rules that allow a trader to make decisions under any possible set of conditions. I allows you to remove emotions from trading and to be able to face different circumstances knowing what you will do in advance independent of the way in which market movements develop. Having a trading plan is the first key to success in trading since it allows you to tackle the market without surprises and without using your emotions when your knowledge fails. Since a trading plan covers all possible scenarios, emotions can be left out completely. How do you come up and make a trading plan ? Keep reading to find out.<br /><br /><span style="font-weight: bold;">Step 1. Figure out the type of market movement you want to capture.</span> The first thing you need to do is figure out what type of movement you will attempt to exploit for profits. Here you need to take into account the amount of free time you have and the amount of stress you can withstand. If you cannot stare at the screen 12 hours a day choosing small time frames will be a bad idea. In general I advice new traders to use the 4 hour or daily time frames as these allow them to have a trading plan that only requires them to be in front of the computer an hour or just a few minutes each day. Aiming for daily or 4 hour trends is a good way to start as a trader.<br /><br /><span style="font-weight: bold;">Step 2. Design your first entry logic.</span> Analyze several trades you would have liked to get into and come up with an entry logic that would allow you to get into the market on those trades. Now you need to take that logic and EVALUATE it over extensive periods of time (5-10 years) so that you can know if your entry does indeed have a positive mathematical expectancy. On this first analysis you merely want to see if price does move in your favor and for how much it moves in your favor when entering trades based on this criteria. The main reason why new traders never use systems that work and second-guess their systems all the time is their lack of statistical analysis. Many traders use systems that don't even have an edge over their entries without ever realizing that this is the case. If you use something that is doomed to fail for the beginning your chance of success will be easily reduces. <span style="font-weight: bold;">If you are a manual trader you should consider getting </span><a style="font-weight: bold;" href="http://fxreviews.blogspot.com/search/label/Umaki">Umaki</a><span style="font-weight: bold;"> to help you backtest your discretionary strategy over a long period of time. </span><br /><br /><span style="font-weight: bold;">Step 3. Make sure your systems is not static. </span>Now that you are going to design the exits for your system you should take into account that systems that are static (for example a system that uses a 20 pip stop loss and a 100 pip take profit) almost always fail as market conditions change since their ability to adapt to the way in which market volatility fluctuates is nonexistent. Your exits should be dynamic (based on indicators or discretionary criteria (S&R levels for example). You can also use volatility adjusted fixed TP and SL levels if you want to or you can design these levels around support and resistance levels (this is the best solution if you are designing a discretionary strategy).<br /><br /><span style="font-weight: bold;">Step 4. Design Exits and Lot sizing.</span> After coming up with an entry logic that has a positive mathematical expectancy in the long term you should now design and evaluate exit and lot sizing criteria to exploit this inefficiency. Since you have already done an analysis of where price goes in average once you enter a trade some exits will be obvious to you. For example price may tend to rally up to the next important support or resistance level or it may go in your favor 50% of the daily range. Once you have an initial mathematical expectancy analysis coming up with exits won't be very hard and it will allow you to build discretionary or mechanical exit points that will work with your strategy.<br /><br /><span style="font-weight: bold;">Step 5. Understand the Risk and Profit characteristics of your plan.</span> The large majority of new traders start trading systems for which the profit and draw down characteristics are absolutely unknown. I have always been amazed at how people can trade a strategy without the slightest idea of how deep draw down periods will be, how monthly returns are distributed or what draw down level will suggest that the plan is no longer working. The MOST IMPORTANT THING you need to do is to evaluate your plan through a LONG period of historical testing so that you know what you will be facing.<br /><br />In the end your ability to succeed in trading will depend simply on how sound your trading plan is and how capable you are of executing what you have designed. If you have designed your trading plan correctly you can then answer simple questions like :<br /></div><ul style="text-align: justify;"><li>What is your expected maximum draw down ?</li><li>What is the average draw down period length ?</li><li>What is the distribution of monthly returns expected to be ?</li><li>What is the average compounded yearly profit ?</li><li>What is the probability to have a winning or a losing month ?<br /></li></ul><div style="text-align: justify;">If you are unable to answer the above mentioned questions then your trading plan is currently flawed or at least you have not evaluated or understood it very well. Understanding of what you are trading is VITAL for success and failing to know if your trading plan does indeed have a statistical edge and a possibility to survive in the long term will mark a constant failure for most traders. My advice is therefore simple, develop a plan you KNOW has a positive statistical edge, a plan you know and a plan you understand fully from a statistical point of view.<br /><br />If you would like to learn more about trading plans and how you too can develop mechanical trading systems with a full evaluation of all their statistical characteristics please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-52505749702743916202010-09-04T05:23:00.000-07:002010-09-04T05:54:02.868-07:00Being Close Minded and Being Cautious, Two Very Different Things<div style="text-align: justify;">I consider myself an investor in the sense that I do not take decisions regarding my trading very lightly, every time I decide to run a system on one of my personal or managed accounts I always take as many steps as possible to ensure that capital preservation and low risk will be the highest priorities. Of course, many people - especially those newer to the scene - view this as being "close minded" and having problems dealing and implementing new ideas. On today's post I want to write a few paragraphs about the difference between being close minded (which refers to being unable to embrace new ideas) and being cautious (taking care of one's capital and risk taking levels). In the end I hope that you will see how both of these things are completely different and how one does not necessarily imply the other.<br /><br />So why do people view conservative traders as being "close minded" ? The answer to this questions is actually not that complex and goes into the way in which new and experienced traders view trading and how they differ in the way in which they approach their trading accounts and the way in which they trade this money. For new traders there seems to be an urge to gain high returns with small amounts of money, something which is very understandable and aligns perfectly with all the hype and risk taking that can go on with small amounts of money. Since the amounts of money risked by new traders are usually small the sense that the potential reward is much higher than the potential risk is very important.<br /><br />You will see that new traders will be very easily convinced to use any trading tactic that promises large returns, merely due to the fact that the balance of possible benefit and loss is heavily tilted towards the rewarding side. New traders are therefore much more likely to try new trading tactics which don't have proved long term profitability in order to face the potential and very tempting reward. On the other hand, experienced traders are very reluctant to trade anything that has yet not shown long term profitability because the stakes are - in most cases - much higher (in absolute money terms).<br /><br />Experienced traders also have an advantage here regarding the number of systems they have seen in the past and which ones they have seen succeed and fail as the years have gone by. Most professional traders will know that certain systems are - by experience - very bad ideas while others are more sound approaches. The answer of new traders to this argument is generally that the fact that no one has done it doesn't mean it cannot be done, which is a valid, yet dangerous argument.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfqrTUhlMUs2Vz9NIHJdvGQobJXsUMVR8aQDEeZ67XISw0o7ZbyEXxtWCEusfcGoywPaW291vI1UHggXvbheq70_GQBVskAH-RpyPc5k6hwKLqEmprD7Kdya89qahz5PRc2wYMYzH3u8xb/s1600/closemind.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 301px; height: 400px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfqrTUhlMUs2Vz9NIHJdvGQobJXsUMVR8aQDEeZ67XISw0o7ZbyEXxtWCEusfcGoywPaW291vI1UHggXvbheq70_GQBVskAH-RpyPc5k6hwKLqEmprD7Kdya89qahz5PRc2wYMYzH3u8xb/s400/closemind.jpg" alt="" id="BLOGGER_PHOTO_ID_5513040631943873874" border="0" /></a>-<br />Professional traders are more focused in the long term ability of their systems to succeed while new traders are more comfortable in using new systems which have a very high probability of failing. In the end it is not that professional traders are unable to embrace new ideas, it is simply that they require these ideas to be put to the test rigorously since every time they have been used they have shown to fail in the long term. This is analogous to the people who attempt to build perpetual motions machines, which would violate the laws of thermodynamics. Since these laws are based on vast amounts of observational data for which an exception to the rules has never been found, there must be an overwhelming and convincing amount of experimental evidence to disprove any of them. In the end the people who do not attempt to build perpetual motion machines are not "close minded" they just know that the laws of thermodynamics work on all the observations of our universe that have been made and therefore such an endeavor is most likely a waste of time.<br /><br />In trading things work the same way. Conservative traders do not develop martingales and scalpers with very bad risk to reward ratios because they know that these systems have always failed in the long term, even if there is no absolute proof saying that a very profitable scalper or martingale cannot be made, professionals know that this is most likely a complete waste of time since from a very large amount of attempts, none have succeeded. It is not that conservative traders are "close minded" since they will eagerly test new ideas which have not proved to fail so dramatically during the past, it is merely that they are being careful and applying the experience most traders have had in order to trade only systems that can reward them in the long term.<br /><br />So in the end it is not a matter of traders being "close minded" when they do not embrace ideas that seem to put extreme amounts of risk on equity, it is merely that these same ideas have already shown to fail time and time again in the past. It is therefore not a matter of being "close minded" but a matter of being cautious aiming to put your money in the hands of trading systems that are likely going to work for you in the long term. Where would you rather put your money, in a new company that promises you 100% returns each month (knowing that all of these companies in the past have turned out to be ponzies) or into an investment fund that has given its customers an average 15% compounded yearly profit during the past twenty years ? The same applies to choosing trading systems for your forex account.<br /><br />If you would like to learn more about how you too can build and design your own trading systems with sound trading tactics that are likely to work in the long term please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-61362499665945569292010-09-03T06:15:00.001-07:002010-09-03T06:51:11.118-07:00Why are Five Years Statistically Significant for the Evaluation of Trading Systems ?<div style="text-align: justify;">Every time someone asks me what I consider to be the minimum necessary period to evaluate a trading system to know if it has a chance of being profitable under future market conditions I unequivocally say "five years". However - although I have explained vaguely in the past why - I have never written a precise explanation that tells people exactly why this is the case and why systems evaluated over at least 5 years have a better chance of surviving than those evaluated over a 1 or a 2 year period. Through the following paragraphs I will tell you the reasons why this is the case and why using this as a minimum period of evaluation guarantees that systems will have a certain degree of adaptability and the possibility to survive to future market conditions.<br /><br />The first thing we need to ask to understand the 5 years argument is : What changes when market conditions change ? When you analyze any trading instrument and look for changes in the different quantitative characteristics of the market you will notice that changes in market conditions are usually accompanied by changes in volume. This happens mainly because market participants trade more under rough market conditions and less and more orderly under growing market conditions. In the end what you have in an economic cycle is a series of cycles in volume. Since volume is proportional volatility (which is just a way to measure the length of the movements within an instrument) we find that volatility changes as market conditions change. Generally markets in which the economy is growing are steady and quite non volatile while markets where there is a lot of economic turmoil are extremely volatile.<br /><br />If we then consider that changes in market conditions correspond to changes in volatility then in order to have a sufficient variety of market conditions for the evaluation of a trading strategy we need to have a large enough amount of change in longer term volatility. When you look at the daily or weekly charts of any given instrument, you will notice that volatility within most years tends to change very little while periods of 5 years usually contain large changes in volatility. The graph shown below of the EUR/USD weekly chart clearly shows you the changes in volatility during the past 10 years (as the 14 period ATR indicator). You can see how any given one year period has an almost static volatility while periods of several years, especially 5, have large changes in volatility.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaU4w4VFHKuoF77K8q8Me0zSi40q5DYpA4hrABwyEJFaObI0SsnDMtimcyhepgHjth3icuqt4f49olwE9p421-sGxRvn7SZpn0nyyjbJ_sGqiy9FneoX-FqsFB4OsYtrAT4v5ievWrCDf3/s1600/eurusd_atr.gif"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 300px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaU4w4VFHKuoF77K8q8Me0zSi40q5DYpA4hrABwyEJFaObI0SsnDMtimcyhepgHjth3icuqt4f49olwE9p421-sGxRvn7SZpn0nyyjbJ_sGqiy9FneoX-FqsFB4OsYtrAT4v5ievWrCDf3/s400/eurusd_atr.gif" alt="" id="BLOGGER_PHOTO_ID_5512682247937107362" border="0" /></a>-<br />The period of 5 years comes from an analysis about these variations in volatility. If we take a look at any instrument and consider the time it takes for an instrument to go from its average level of volatility to a new high and a new low and return to the original level we find that this period is roughly 5 years (like how it is shown above). This means that after a period of five years there is a large amount of different market conditions that a system needs to tackle if it wants to be successful. Therefore a system that survives to testing periods of more than 5 years has a high like hood of surviving to changes in market conditions in the future since it contains - within itself - the capability to adapt to changes in market conditions.<br /><br />Of course, a 5 years period does not implicitly guarantee that any given system will be able to achieve success in the future since the market can change further or at a faster phase than what the system sustained during that 5 year testing period. However it is true that to survive profitably through such a long period a system needs to have some degree of adaptability that is not necessary to survive to shorter testing periods when hardly any changes in volatility happen during most years. It is for this reason that evaluation of strategies through prolonged periods of time is necessary since short tests of just a few years may only show how the system behaves under some very specific market scenarios. Of course, the longer the period you use for your tests and the larger the overall chances in volatility, the more robust your system will need to be.<br /><br />If you would like to learn more about the evaluation of automated trading systems and how you can evaluate and create your own systems that return profits after 10 years of evaluation without exploiting any backtesting faults please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-20299691182357869092010-09-02T01:00:00.000-07:002010-09-02T01:00:04.515-07:00New CFTC Rules : What They Mean and What They Try to Achieve<div style="text-align: justify;">During the past few days one of the most important news in the forex market has been the introduction of some new regulations by the CFTC which will become effective before November the first. These new regulations include a lot of modifications to the way in which forex trading is currently done, particularly regarding leverage and broker regulations. On the next few paragraphs I will discuss with you what these new rules mean, the restrictions they pose on US traders and the potential effect they may have in the short and longer term for people trading from US territory.<br /><br />So what is the CFTC ? The Commodity Futures Trading Commission is an agency which is responsible for the regulation of certain trading bodies within the US. The CFTC deals with the regulation of all non-bank foreign exchange trading entities, something which includes non-bank forex brokers such as FXCM, Forex.com and IBFX. The CFTC had been thinking about restructuring regulations pertaining to these forex brokers for the past year, particularly because they considered the market to be extremely dangerous for retail traders as a very large number of them lose their investment, something which is evidently detrimental for the community in general. The CFTC was also worried about broker funding requirements and other such rules that were just too "loose" and showed a lack of protection for the safety of traders' capital.<br /><br />Regarding brokers and the protection of retail traders, the CFTC decided to reduce leverage from the previous 1:100 level to a maximum level of 1:50 for majors and 1:20 for minors. This means that if you previously needed only 10 USD to open a 0.01 lot position now you will need 20 USD. Personally I believe that this level is sound and allows most people who use scalping or such other "fast positioning" trading techniques to remain profitable while it also protects new traders from taking extremely large positions and wiping their accounts. From my personal perspective this change in leverage is not that important as my systems can work with levels of leverage as low as 1:5 without having to increase capital requirements. This is due to the fact that small amounts of equity are risked over large movements so small lot sizes are always used.<br /><br />Many people think this change in leverage is unfair and that it is unjustified as the government has "no business" in controlling how people wish to invest their money or how they handle those investments. The truth however is that when so many "little guys" are losing their money in a manner that is easily preventable it makes sense to change this so that these guys are protected more. Certainly the government does not try here to "protect people from their stupidity" but they just act according to the facts. If 90% of the cars on the street caused people serious injury the government would certainly do something about it, this is also true about forex trading.<br /><br />There are also some other provisions of the CFTC rules that are good and some others that should cause warning to traders -especially US traders - who trade strategies that require these high levels of leverage or the use of other non-compliant features (such as hedging or lack of FIFO). The CFTC has increased the minimum necessary capital for brokers to start at 10 million dollars (a sound decision) but it has also left an ambiguous road related to whether or not US traders can open accounts in off-shore brokers. If you take the regulations literally - which is the only way to take them I guess - then US traders will not be able to open up accounts with brokers anywhere else except on US soil since the government only considers CFTC regulated brokers legal for US citizens from now on.<br /><br />This means that if you are currently living in the US you will probably be restricted in the future to trade only on brokers that have no hedging, obey the FIFO rule and are restricted to a 1:50 leverage. This does not mean that profiting will become impossible, since certainly there are many strategies that can be successful using these rules but it will certainly mean that many traders who rely on strategies that do not obey these rules will have some trouble finding a way in which to get their profit. Traders using off-shore brokers (which would probably be the less-ideal brokers since the larger ones will probably stop receiving US citizens due to these regulations) will probably face account freezing and civil prosecution if they reach certain transaction volumes or if the rules are enforced very strongly.<br /><br />To people trading Asirikuy systems or Watukushay FE, there is no need to worry, as I said before the systems currently trade with very small lot size relative to account size and for this reason they are safe to use under these new CFTC regulations. I personally believe that current CFTC regulations do have the larger amount of new retail traders in mind and that the people who will benefit from these changes are much larger than those that will be unable to profit or those who will lose their ability to live from trading. In the end - although these regulations may make trading harder for some - it is very achievable to profit under these rules (and probably mush harsher ones) using longer term systems as the ones we trade at Asirikuy.<br /><br /><span style="font-weight: bold;">Do you have any opinion about the new regulations ? How do they affect your trading ? Would you be concerned if you lost your ability to trade on non-NFA brokers ? Please leave a comment with your opinion so that we can further discuss this very important matter :o)</span><br /><br />If you would like to learn more about mechanical trading and how you too can use likely long term profitable systems that need low leverage please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)<br /><br /></div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com4tag:blogger.com,1999:blog-2847890102780597763.post-38920532199304657012010-09-01T04:45:00.001-07:002010-09-01T05:45:00.700-07:00The September Effect : The Ghost Around the Corner ?<div style="text-align: justify;">Today we have started the month of September, a month which is usually filled with interesting and decisive economic movements that have very important consequences in the long term for the world's largest economies. What is so special about the month of September ? What is the "September effect" market analysts talk about ? On today's post I will talk a little bit about September trading and the movements that usually take place within this month, I will explain what the September effect is and what it means to the regular world citizen and - more importantly - to the professional forex trader.<br /></div><div style="text-align: justify;"><br />September has many unique characteristics that make it an important month, above all others its most important quality seems to be that it is the first month after summer trading and the first month of the last quarter of the year. This means that a combination of factors happen within September that are not present in any other month. First of all, this month starts right after the release of the third quarter's economic data and second, it happens after a regular decrease in volume over the summer trading months. This means that September usually sees a large increase in volume when compared to August, most of the time accompanied by important directionality since institutional traders adjust their positions to whatever economic news were released in the previous 2-3 months.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8h6fnXDIJ5J82qd8O-hMETp59UNXOqScLcRM8ga1RyvlNnNZNxWncN6onx1i0d-5AMb0fp010YuQXYTiOLf7aJ5POQ2trgRmSTW5C595VUVzxyztXIq1JBNV2h_2swR-pB8uJWlfDGrkj/s1600/cartoon06.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 303px; height: 237px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8h6fnXDIJ5J82qd8O-hMETp59UNXOqScLcRM8ga1RyvlNnNZNxWncN6onx1i0d-5AMb0fp010YuQXYTiOLf7aJ5POQ2trgRmSTW5C595VUVzxyztXIq1JBNV2h_2swR-pB8uJWlfDGrkj/s400/cartoon06.jpg" alt="" id="BLOGGER_PHOTO_ID_5511917317077749826" border="0" /></a><br />-<br />However this inherent qualities of September are not - by themselves - what market analysts call the "September effect". This phenomena has a much darker side which is related to the fact that September has always seen the beginning of major economic depression and recession periods in the United States. Since September sees a surge in volume with high directionality it is easy to see why panics can easily happen and lead to sell-offs during this and the following months if sentiment and risk aversion are at the right place. The "September effect" has earned its name based on the economic data of the past 150 years, the crisis in the end of the nineteen century, the 1929 depression, the 1987 stock crash and the 2008 global crisis all began in the month of September.<br /><br />After the United States went through several market cycles that seemed to reach abrupt and dramatic ends in September, it seems that this is not a mere coincidence but the consequence of a series of factors that caused this to happen. What is important right now - under our current economic conditions - is if we will see a double dip (a second recession period) this year as a consequence of deteriorating conditions in the US. Definitely September is not a very good month to get into buy and hold assets (like stocks) since -if a recession is bound to happen - it would start in September and we would be getting into these assets at their highest price before they drop like a rock when risk aversion peaks and we see massive sell-offs in these markets.<br /><br />The most prudent position for longer term buy and hold investments right now is to remain on the sidelines - until calmer months like November arrive - and to focus on investments that could potentially get profit if such a breakdown period starts (not trying to predict that it will start but getting in quickly if it does). In forex trading we get a very good opportunity to do this since a surge in risk aversion and massive sell-offs in the stock market trigger massive buying of US safe haven assets (government issued bonds) that require exchanging foreign currency to US dollars. So in the end- for us in forex trading- sell-offs in the stock market are a good thing in the sense that they mean strong directionality and an almost always easy opportunity to profit from these massive trends.<br /><br />It is interesting how most commercial system sellers take praise in the fact that their systems "survived" the 2008 economic crisis when this was one of the most profitable and easiest to trade periods for almost all the mechanical systems out there. Trend following systems - like those in Asirikuy - would have made very large amounts of money within that very directional market. In the end what matters to us in forex is directionality and this type of periods allow us to take advantage of fast-developing and "easy-to-follow" market conditions.<br /><br />Of course, I am not wishing for an economic crisis, that would be utterly cruel and unethical as it is also possible to profit from trends that are generated as signs of economic recovery. What I am saying here is that the "September effect" is a reality and that you should be aware of this fact when you take decisions regarding your investments and asset allocation for this month. This is especially important when housing and other data from the third quarter was importantly disappointing and the chances of a double dip stand now at an almost 50/50 (for some economists at least). You should be aware that there is a real risk that the September ghost will take its toll, so be prepared, take intelligent investment decisions and follow the market in whatever way it develops.<br /><br />If you want to prepare to follow a possible developing trend and you would like to learn how you too can code your strategies and use systems that have adequate analysis and realistic profit and risk targets please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-78187645523354158002010-08-31T03:15:00.000-07:002010-08-31T04:11:05.160-07:00The Pain Index : A Measurement of How Hard it is to Trade a System from a Psychological Perspective<div style="text-align: justify;">It is always said - with very good reason - that the biggest obstacle to trading systems profitably is the trader him or herself. There are many reasons why this is the case but perhaps the large amount of self-sabotaging, the inability to trade through draw down periods and the second-guessing about the profitability of different strategies is what makes unprofitable people turn their accounts into dust in the longer term. It is therefore interesting to ask ourselves if there is a way to measure this psychological hardship and estimate if a given system will or will not be difficult to trade from a mental stand point. It becomes clear that some systems - even if account wiping in the long term - are very psychologically easy to trade while systems that are very robust and long term profitable tend to be extremely hard to trade (and therefore almost never traded).<br /></div><div style="text-align: justify;"><br />On today's post I will share with you my solution to this problem - the pain index - which is a measurement of how hard it will be - from a psychological point - to trade any given system. This scale gives us a quantitative way of comparing trading systems and it allows us to easily picture how easy or hard it will be to trade a given strategy in the long term. The lower the pain index, the easier a strategy will be to trade while strategies with a higher pain index reading will be excruciating and tremendously difficult to follow. Now bear in mind that the pain index does NOT tell us anything about profitability and there can be systems with extremely low pain index readings that will wipe accounts (as there are in real life), the pain index merely attempts to measure the psychological pressure on the trader rather than the ultimate effect on the account balance.<br /><br />When attempting to come up with a measure to calculate how hard it is to trade a given system it became obvious to me that the most important factors were the maximum ten year draw down of a strategy and the maximum draw down period length. Trading systems with higher draw downs or longer draw down periods are harder to trade and the combined effect of these characteristics should be shown in any attempt to calculate the "pain" different strategies cause a trader. However it then became clear that both of these parameters do not have the same effect as deeper draw downs are much more important from a psychological point of view than longer draw down periods. Most traders would be able to bear a 1 year draw down period with a maximum draw down at 5% while doing the same thing with a 30% maximum draw down will be significantly harder.<br /><br />After doing this analysis I came to the conclusion that maximum draw down should increase difficulty exponentially while draw down period length should do so linearly. Since the above introduces an exponential term I decided to use a logarithmic function (base 10) to normalize the pain index to values that would be between 0 and 10. The formula for the pain index calculation is shown below :<br /><br /><span style="font-weight: bold;">MD =</span> <span style="font-weight: bold;">maximum 10 year draw down as a percentage of account equity</span><br /><br /><span style="font-weight: bold;">MP =</span> <span style="font-weight: bold;">maximum 10 year draw down period length in years</span><br /><br /><span style="font-weight: bold;">pain index = 2*(Log( MD^2 * MP))</span><br /><br />The scale goes from 0 to 10 since 0 is a hypothetical system that never loses (a system that would be extremely easy to trade, a system that doesn't exist) while 10 is a system that loses all trades within a ten year period except the last one which takes the account back into profit. So the easiest system to trade is a system that never loses while the hardest system to trade is a system that has a maximum draw down close to 100% and a maximum draw down period length close to 10 years (a system that would be effectively impossible to trade from a psychological standpoint).<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjm08aCifKUIwoh-uiiGmJ5z2Tb0shpSc9Eg6wxFgIIGEEgRzGpj7zNLtkoCP1BCZAghDI9_QWd0o_jAsF1J7fDfUacaKoAt6o6GrwAoBrF_BwCyj7imOYx6S1s1YQtCvre9rW8362Orsyl/s1600/post33.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 213px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjm08aCifKUIwoh-uiiGmJ5z2Tb0shpSc9Eg6wxFgIIGEEgRzGpj7zNLtkoCP1BCZAghDI9_QWd0o_jAsF1J7fDfUacaKoAt6o6GrwAoBrF_BwCyj7imOYx6S1s1YQtCvre9rW8362Orsyl/s400/post33.png" alt="" id="BLOGGER_PHOTO_ID_5511523716581874802" border="0" /></a>-<br />As you can see on the above graph which shows the evolution of the unnormalized (without the longarithm) pain index as a function of maximum draw down and draw down period length you can see how deeper draw downs increase the pain index rapidly while the duration of the draw down causes a linear increase. Now pay special attention to the fact that you can have systems with draw downs that can be extremely deep (even close to account wiping) but if their draw down period length is very small (just a few weeks or days) the actual pain index will be low. This is the reason why martingales and scalpers with very bad risk to reward ratios are so successful, even though these systems are dangerous to capital preservation and overall long term profitability they are extremely easy to trade from a psychological stand point since draw downs rarely happen and psychologically challenges will only come very sporadically (and perhaps when they happen the account will be wiped). <span style="font-weight: bold;">It is fairly easy now to understand why these systems are tremendously dangerous, very easy to trade from a psychological perspective but extremely dangerous for account equity. </span><br /><br />The obvious thing now was to take this new pain index measurement and calculate its value for several Asirikuy systems, risk levels and portfolios to see the actual difficulty to trade the different systems I use in live accounts. The results are actually very interesting and they do reflect the psychological difficulty in trading all these systems. Below you can see a scale showing several examples and their pain index values :<br /><br />0 - system that never loses (does not exist)<br /><br />2.59 - Watukushay No.2, Risk 1 EUR/USD<br /><br />2.93 - Atinalla No.1 Portfolio (Risk 1 on all systems)<br /><br />3.07 - Teyacanani, Risk 1 EUR/USD<br /><br />3.60 - Watukushay No.5, Risk 1 USD/CHF<br /><br />5.08 - Atinalla No.1 Portfolio (Risk 3 on all systems)<br /><br />5.51 - Kutichiy EUR/USD Risk 1<br /><br />5.79 - EUR/USD Turtle Trading System (original rules)<br /><br />5.99 - GBP/USD Kutichiy Risk 1<br /><br />6.71 - Kutichiy (EUR/USD, GBP/USD, USD/CHF, USD/JPY) (Risk 1 on all instances)<br /><br />10 - system that loses everytime for ten years except on one trade that takes it to profitability<br /><br />It is very interesting to see how this indexing falls in line with what we experience with the real live systems. The turtle trading system is extremely difficult to trade while systems like Teyacanani are far easier to use. Since this scale is logarithmic the pain index predicts that it is about 10 thousand times easier to trade teyacanani with a Risk = 1 setting than to trade the Turtle trading system on the EUR/USD. Shorter draw down periods and small maximum draw downs account for this difference. Of course we can also see the effect of increasing risk and how trading Atinalla No.1 on a Risk = 3 is almost 100 times worse psychologically than trading it from a Risk = 1 setting (due to the 3 fold increase in the expected maximum draw down). Overall it seems that systems with pain index levels above 6 start to become extremely hard to trade since they would put enormous psychological pressure on their use both through long and deep draw downs.<br /><br />I hope that you can use this new pain index measurement to get an idea of how hard it will be to trade your systems from a psychological stand point, it will also help you understand why you have traded systems with unsound trading tactics in the past and how this is justified through the "small pain" that these unprofitable systems cause traders. This also shows that long term profitable systems - especially when aiming for yearly profits above 30% - are extremely hard to trade and why very few people actually achieve long term profitability from automated trading systems.<br /><br />If you would like to learn more about automated trading and how you too can learn how you analyze systems in depth and come up with reliable long term profit, draw down and worst case scenario targets please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com6tag:blogger.com,1999:blog-2847890102780597763.post-47426825807477772762010-08-30T06:05:00.001-07:002010-08-30T06:34:21.910-07:00Preserving Your Capital : Five Signals You are Taking Too Much Risk with Your Forex Trading<div style="text-align: justify;">If you asked me what the most important aspect of trading is I would say : to preserve capital. This is something which is common to at least all the professional traders I know and something all new traders seem to lack. People new to forex trading like to trade their money like when they are gambling - the focus is to make money - while professionals trade so that they take the least possible risk on their capital (the focus is on preservation). I remember that when I was a new trader it was very hard to see when I was taking excessive risks, since the focus for new traders is in short term results, the real risk characteristics of the systems they use don't seem apparent until the market cashes on this risk and wipes the account or causes substantial losses.<br /></div><div style="text-align: justify;"><br />On today's article I am going to give you some pointers that will let you know if you are trading with excessive risk. Certainly they won't cover all risky scenarios but you can be absolutely sure that if you feel identified with any of the signals highlighted below it is very likely that you will not be able to achieve long term profitability (at least until it is fixed) since you are taking a great exposure on your account which the market will eventually (with certainty) cash on. What are the red flags or signals that you are knee-deep into risky territory ? Keep reading to find out !<br /><br /><span style="font-weight: bold;">1. One loss has a significant emotional effect on you.</span> When you are trading an account and a losing trade causes you any type of anguish, sadness or frustration it means that you are trading with a risk which is too high for you. One of the key ways to eliminate emotions in trading is to have short term results become meaningless to you from an emotional perspective, if a loss means something then it should be much smaller. Imagine that you had to burn a check for a given amount of money every single day. How small would that check need to be so that you could do it without any pain ? That is the maximum amount of money you should lose on each trade.<br /><br /><span style="font-weight: bold;">2. Your system has a historical ten year maximum draw down higher than 50%.</span> When you are trading a system which in the past showed a maximum draw down higher than 50% it is very likely that this draw down will be much larger in the future. What happens here is that you are trading with a large enough risk so that your account will be wiped with a very good probability under evolving market conditions. The past - although a good guidance - should not be taken as if "the worst has already happened" always consider that a system will be able to double its maximum draw down in the future. As a rule of thumb you should reduce your risk so that the historical maximum draw down never reaches above 25%.<br /><br /><span style="font-weight: bold;">3. Your system cannot face twice the maximum number of historical consecutive losses.</span> Also based on the above, the fact that a system has a given number of consecutive losing trades in the past does not mean that it will not have more in the future. It is undoubtedly possible and actually it happen rather frequently, that your system will face a "worse worst streak" in the future as market conditions evolve. You should always trade a system that can withstand twice the maximum number of past consecutive losses, otherwise you are assuming that the past already showed you the worst it could be, a rather naive assumption.<br /><br /><span style="font-weight: bold;">4. You cannot sleep.</span> One of the easiest ways to recognize that you are using excessive risk levels in your trading is when you cannot sleep because you are thinking about the system you are using or the trades you have left open. If trading starts to mess with your sleep it is an absolutely clear and unequivocal sign that your risk level is way too high. As I said before, one of the keys to success is to make short term results meaningless and trading with low enough risk makes this a certainty.<br /><br /><span style="font-weight: bold;">5. You don't fully know your system or plan.</span> Certainly a very risky element in trading is lack of knowledge about what you're doing. If you are trading in a certain way in which the long term profit and draw down targets are unknown then there is no way in which this system can be traded successfully over the long run. Trading a system or plan which has unknown profit and draw down characteristics is dangerous because you don't know the magnitude of the system's market exposure. It could cost you a significant portion of your account due to your lack of understanding.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIMqgpvaB47f0amt_HqxJ4_TRKQUYluiD5f25F3bzimRylZNMJiE1Bn3z-FVkzIY64HEjIVgdmqD39qgY8fGkbOZ7g82fx96q4IzSN9krsp1I1ZQ7CK7nY-Y8rQ0Ii-A2_3NMQmxyPoUvm/s1600/rman3582l.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 290px; height: 300px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIMqgpvaB47f0amt_HqxJ4_TRKQUYluiD5f25F3bzimRylZNMJiE1Bn3z-FVkzIY64HEjIVgdmqD39qgY8fGkbOZ7g82fx96q4IzSN9krsp1I1ZQ7CK7nY-Y8rQ0Ii-A2_3NMQmxyPoUvm/s400/rman3582l.jpg" alt="" id="BLOGGER_PHOTO_ID_5511195583577696290" border="0" /></a>-<br />Definitely my experience has shown me that a trader who answers "yes" to any of the above signals will face very hard problems in the long term as there is ample road for disaster. The good thing here is that simple steps can be taken to correct all these problems, understand the systems you are using, analyze their profit and draw down characteristics and trade with lot sizes and short term results that become meaningless to you.<br /><br />If you would like to educate yourself in the building and creation of automated trading systems that are likely long term profitable with realistic and sound profit and draw down targets please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-67881464815922325392010-08-29T04:37:00.000-07:002010-08-29T05:24:40.696-07:00The Indicator Series : The Awesome Oscillator - A Tool to Measure Momentum<div style="text-align: justify;">On today's article we will be discussing a very interesting indicator which forms part of Bill Williams "chaos trading" theory in which several indicators are used to attempt to trade the markets profitably. This indicator- called the Awesome Oscillator - was developed as a means to get an idea about short term momentum on a given trading instrument. Within the next few paragraphs you will learn more about how this indicator's values are calculated, what it really tells us about the market and how we can use this information for the building of likely long term profitable automated trading systems. As a part of the "indicator series" this article will attempt to give you an idea about the essence of the indicator and the real nature of the information it conveys.<br /></div><div style="text-align: justify;"><br />So what is the Awesome Oscillator about ? What makes it so awesome ? This indicator - usually plotted as a histogram - uses a very simple calculation to measure what we would call "market momentum". The indicator's value is obtained as the difference between a 34 and a 5 moving average calculated around the median price (which is the (high-low)/2 of each bar). Putting it simple, the values are obtained with this simple equation :<br /><br />Awesome Oscillator = SMA(MEDIAN PRICE, 5)-SMA(MEDIAN PRICE, 34)<br /><br />You might have also noted that the awesome oscillator contains red and green colors which depend on the increasing or decreasing nature of the values. If the last value is lower than the current values the current bar is green while the opposite case makes the bar red. To sum it up the awesome oscillator tells us if the 34 and 5 period average values of median price are coming closer or falling further apart. When the values are falling apart there is momentum (since short term price is - in average - moving away from the longer term average, when the values are closer then we have the opposite.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnv12sCUOufVx0AEwushFK0ZqnT-R_SlqnzzstRnNVqBeRtV7aR9mcWYYRgpJRju1n0BrZVJietMx-bEpG2jVjVS9QsNlc6u3fsAfxF5ksm1l1bKgWrdrrHML0yREsVf66mVnG5UtuhtUB/s1600/POST32.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 275px; height: 400px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnv12sCUOufVx0AEwushFK0ZqnT-R_SlqnzzstRnNVqBeRtV7aR9mcWYYRgpJRju1n0BrZVJietMx-bEpG2jVjVS9QsNlc6u3fsAfxF5ksm1l1bKgWrdrrHML0yREsVf66mVnG5UtuhtUB/s400/POST32.png" alt="" id="BLOGGER_PHOTO_ID_5510806393276324306" border="0" /></a>-<br />It may now seem more evident how this indicator might be traded. We can build a system that trades the cross of the 0 line (which is equivalent to the simple moving average cross system of the 34 and 5 period MA values calculated on median price) or we can trade changes in direction (changes from red to green) to attempt to capture changes in momentum which may forecast an eventual cross of the moving averages. However the fact that the oscillator only gives us information about the momentum change taking into account a relatively small number of bars means that its success on lower time frames is bound to be very limited. When using this indicator on time frames lower than the daily you will see that it gives extremely confusing signals since the 34 and 5 median calculated moving averages cross a lot, something that makes the finding of an inefficiency quite hard.<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiA0syirnMtoSjSQ1Yk0D9XhyphenhyphenUDBNya0vMi0mV3j-FRJKAzLHpQFiME-bdEof1XC1j_C5f2uWIGQO57xhZcNn3pXjoFYzgzjBJWcY5Qx9AckEwrdG3zjZblaMn6vjIYb7foHcwk10cbrkg-/s1600/POST32.png"><br /></a>Added to that is the fact that the awesome oscillator momentum "changes" (color changes from red to green) can happen during a single bar and therefore give a lot of fake signals. For this reason most people will advice to trade this indicator on three bar signals to gain a better perspective and eliminate signals that are simply spikes that might only "seem" like changes in momentum. By doing this we can gauge changes in momentum better and build a system that reacts quicker to changes in market direction. Exiting trades when the first opposite bar appears also seems to be a good exit strategy since usually this won't happen after the majority of the large move happens. Of course, the success of such an approach is bound to be minimal on lower time frames, again due to the inherent problems of the low period usage of the awesome oscillator on these charts.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIdsfpPB1QrVK2e7F4JkwPBsTRrAWuw__Lp_j7NCKmudJRz_L7VcIapjsUzi5N8mC6r_kfg2cb4LVYgOGiJMOE-XUFPiZRK8LWUkHLOAEYlyAiQea59Vhxqw3Mnm83kBqIGX5AxtbsgP4o/s1600/post31.gif"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 300px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIdsfpPB1QrVK2e7F4JkwPBsTRrAWuw__Lp_j7NCKmudJRz_L7VcIapjsUzi5N8mC6r_kfg2cb4LVYgOGiJMOE-XUFPiZRK8LWUkHLOAEYlyAiQea59Vhxqw3Mnm83kBqIGX5AxtbsgP4o/s400/post31.gif" alt="" id="BLOGGER_PHOTO_ID_5510801860237422402" border="0" /></a>-<br />Above you can see a USD/CHF daily chart with some of the possible signals during the financial crisis which was a very trending period for this and other currency pairs. You can see here how the awesome oscillator would have captured moves with very good accuracy. Of course, the system is not going to be perfect and under conditions when the 34 and 5 MA comes close for large periods of time the system would suffer large amounts of losses (this is the system's market exposure so that it can get into this very good trades when they develop). The above mentioned signals also allow us to get back into trends after retracements, so they are definitely a necessary compliment since they help us fully exploit large runs without missing a large part (as if we only entered shorts above 0 and longs below 0).<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6p0aPCY7d-45nWNUuBWYVzI3-KErkKMhtnzKXtyBVb4CKx684nw8f0giczLrc71uCA8pDgWdyU_vBT9hEVYEDBx-B3Xn93W918LSvWrYvuHu5mgnjN-J54BulVV4c2yKbzgOb2mCcUYHQ/s1600/post33.gif"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 300px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6p0aPCY7d-45nWNUuBWYVzI3-KErkKMhtnzKXtyBVb4CKx684nw8f0giczLrc71uCA8pDgWdyU_vBT9hEVYEDBx-B3Xn93W918LSvWrYvuHu5mgnjN-J54BulVV4c2yKbzgOb2mCcUYHQ/s400/post33.gif" alt="" id="BLOGGER_PHOTO_ID_5510806613052900114" border="0" /></a>-<br />So as you see, the awesome oscillator is really not that awesome, it is simply a tool to measure momentum which compares the prices of two simple moving averages calculated on median price values. This information is bound to be useful for the development of a momentum based automated trading system, especially on large time frames - like the daily - where these signals are much more meaningful than on lower time frames when the low periods used by the oscillator will make the finding of inefficiencies extremely hard, if not actually impossible.<br /><br />If you would like to learn more about automated trading and gain a true education in the development of likely long term profitable mechanical trading systems please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com4tag:blogger.com,1999:blog-2847890102780597763.post-2903313389500622582010-08-28T05:54:00.000-07:002010-08-28T07:42:25.620-07:00It's Really Much More than Staring at the Screen : Become a Trader the Active Way<div style="text-align: justify;">There is a general myth in trading saying that anyone who stares at a trading screen long enough will start to gain some understanding about the underlying aspects of the market and how to trade it successfully. Many people spend a lot of time going through historical data and trading live demos so that this sort of "eureka moment" kicks in, a moment where finally everything starts to make sense and the person starts to just "see it clearly" and trading becomes an easy thing to do. Sadly trading is not something you can tackle this passively and obviously there are different degrees of success depending on how you face the challenge of becoming a long term profitable trader.<br /><br />I have to be truthful with you and tell you that time and effort spent alone do not guarantee success in trading and that you could spend a decade trying to learn to excel at this job without achieving your first profitable year. Not only does this depend on the personal aptitude of the individual attempting to learn how to trade but it also depends on the way in which the forex educational challenge is taken. Some traders are exceedingly passive spending their time searching for someone who has developed something they can use to profit or just staring at the screen for days in an attempt to start to get a true understanding of price action.<br /><br />It is important now to realize that success in trading comes from what you are doing and not from what anyone else in the world does so you should take an approach that exploits your potential and qualities and minimizes the expression of your defects so that learning how to trade can be an easier and a more rewarding thing to do.<br /><br />When I talk to the few professional traders I know who have walked this road by themselves (from rookie to expert) it becomes obvious that the quickest and most rewarding way to become successful in trading is to do this the active way. This way of approaching trading is based on the building of knowledge from the ground up and the meticulous and careful analysis of trading experiences. When you get a demo or a live account and you start trading it you are acquiring a bunch of information both about yourself and the market and this information goes to waste most of the time as newbies neglect to fully analyze it. New people only like profitable results and the analysis of loses becomes a painful and seemingly unnecessary exercise since the idea most people have is "why focus on something that doesn't work ?".<br /><br />Being an active trader is not something that requires a huge amount of effort as it requires quite the same - or perhaps even less - effort than the testing of the hundreds of different forum strategies and commercial systems that do not enrich the knowledge of the trader about the market or how to truly become profitable.<br /><br />Finally <span style="font-weight: bold;">what I always advice new traders is to take a very active approach to trading</span> and to learn from every small bit of experience that you get. Keeping a trading journal is a very important part of this and doing statistical long term historical analysis of mechanical and discretionary strategies is also a huge part in the development of adequate expectations and understanding about how trading systems really work and how they can be used towards the success of each trader. Remember that every time you fail to do something because of lack of time/effort someone else will and that someone will reach the spot as a profitable trader you are missing.<br /><br />Through the next few months I will try to write a series of posts on how an active trader trains and what practical exercise you can do to get yourself closer to a deep understanding of trading and how long term profitability can be achieved. Remember, it is really much more than staring at the screen, it is learning from your mistakes and squeezing all you can from every small trading experience on your way.<br /><br />If you would like to lean more about getting an education in automated trading to develop your own algorithmic systems with realistic draw down and profit targets please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)<br /></div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-23816669970742984512010-08-27T03:45:00.000-07:002010-08-27T04:56:33.148-07:00Three Way (Triangular) Arbitrage in Forex : Does it Work ?<div style="text-align: justify;">One of the most interesting ideas in forex trading comes from what would seem to be a fundamental market inefficiency that would seem very easy to exploit by most market participants. Three way arbitrage is a trading technique that seeks to exploit inconsistencies in exchange rates arising from trading activity, inconsistencies that supposedly lead to tradable market inefficiencies. On today's article I will write a little bit about three way arbitrage, what it is, how it is traded and what the potential rewards may be. I will tell you why I think this cannot be done successfully by regular retail traders and why the rewards - if any - would be much lower than those of a regular long term profitable trading system.<br /></div><div style="text-align: justify;"><br />When we have a large group of currencies and all their combinations are available as different currency pairs there is a basic consequence that leads to the trading of several pairs being equivalent to the trading of some crosses. For example if you are buying 1 lot EUR/JPY it would supposedly be equivalent to going long an equivalent on the EUR/USD and going long one equivalent on the USD/JPY. The idea is that your profits are dependent on the EUR/USD and the USD/JPY exchange rates such that the USD exposure is canceled and your net exposure comes from the indirect relationship of the EUR with the JPY. The below graph better explains this idea (using the EUR/USD, GBP/USD and EUR/GBP) (the graph was taken from <a href="http://thismatter.com/money/forex/currency_cross_rates.htm">here</a>, where the concept is also further explained).<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinHfx4wrSklW2eiHnpJnJJQG5lAFGMNEsTyXe_zU3CmfjKRHnTnL0g_0ckVX9dsZ2RbszOzbnttAlEO1aUKzgLWv_Bdap-TWhwlUfEYX3muca1QGh5Ya9sthyiBaRaZP_hVT4kWuyW368Z/s1600/arbitrage.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 161px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinHfx4wrSklW2eiHnpJnJJQG5lAFGMNEsTyXe_zU3CmfjKRHnTnL0g_0ckVX9dsZ2RbszOzbnttAlEO1aUKzgLWv_Bdap-TWhwlUfEYX3muca1QGh5Ya9sthyiBaRaZP_hVT4kWuyW368Z/s400/arbitrage.png" alt="" id="BLOGGER_PHOTO_ID_5510056258169222946" border="0" /></a>-<br />The three way arbitrate inefficiency now arises when we consider a case in which the EUR/JPY exchange rate is NOT equivalent to the EUR/USD/USD/JPY case so there must be something going on in the market that is causing a temporary inconsistency. If this inconsistency becomes large enough one can enter trades on the cross and the other pairs in opposite directions so that the discrepancy is corrected. Let us consider the following example :<br /><br />EUR/JPY = 107.86<br />EUR/USD = 1.2713<br />USD/JPY = 84.75<br /><br />The exchange rate inferred from the above would be 1.2713*84.75 which would be 107.74 and the actual rate is 107.86. What we can do now is short the EUR/JPY and go long EUR/USD and USD/JPY until the correlation is reestablished. Sounds easy, right ? The fact is that there are many important problems that make the exploitation of this three way arbitrage almost impossible.<br /><br />The first problem is the trading cost. This three way arbitrage is based on taking very small profits from the market and as such it becomes extremely vulnerable to spread variations. A bad spread means that you will lose most of the profitability or that you will need to search for very large arbitrage gaps which are rare and often fall in line with news events when trading spreads are much higher and trading becomes much harder.<br /><br />The second and biggest problem is execution. Not only will it be extremely hard to get into these orders without any slippage (since your profitability depends on it) but getting out might be even harder as you will be trying to squeeze a very small amount of profit from the market. These arbitrage opportunities are also searched by funds with ultra fast computers and direct connections to banking feeds and therefore the liquidity related to them will dry up terribly fast.<br /><br />The simple fact when trying to trade three way arbitrage is that for a retail trader it will be almost impossible to profit given the amount of trading cost, the rarity of very good opportunities and the speed in which these opportunities "dry up" as traders with access to much faster computing power take advantage of them. In the end trying to exploit one of these trading techniques is bound to be MUCH harder than trading a simple long term profitable system since their profitability will depend on too many factors which the regular retail trader cannot control. As a matter of fact, the exploitation of every arbitrage opportunity greater than trading costs is something that banks and hedge funds do constantly, a practice that aids to keep exchange rates equalized also making these opportunities for retail traders practically nonexistent.<br /><br />As always there is no "free lunch" in forex trading and success comes from knowledge and understanding and not from the exploitation of some "magical" trading system that no one else takes advantage of.<br /><br />If you would like to gain an education around automated trading and learn how you too can make up your own systems with sound profit and draw down targets please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, 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)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-27132807246729394032010-08-26T08:46:00.000-07:002010-08-26T09:15:13.986-07:00Finally Some Real Competition for Metatrader 4 : FXCM's Strategy Trader<div style="text-align: justify;">Through the past 4 years all of us have used the metatrader 4 platform for most of our automated trading Forex needs. Although this platform is not the only one available with such capabilities (tradestation and ninjatrader do this same thing) it is in fact the only one which is available to all retail traders since the platform is free to download and the live feed and historical data is also entirely free. A large part of Metatrader's huge success focuses on this free character which makes its use by people new to forex and aspiring traders a reality. This alone has generated a very large automated system sales industry, showing that the decision to make a platform and its price data freely available is indeed an excellent one. Up until now we didn't seem to have any alternatives with similar free character and the potential to become so massive but now we seem to have a new competitor that may want to take Metatrader 4 and 5 to the boxing ring. Today I will share with you some of my first impressions around this software and my opinions about its potential against the Metaquotes monopoly in retail automated trading.<br /><br />So what's the name of this software ? The company who dared to fight the rule of Metaquotes in the retail forex industry is actually a broker in itself- FXCM - and the product they are using to compete with MT4 is actually a very young and still under development platform called Strategy Trader. The reasons why they developed this software seem to be both economical and technical since having a monopoly on a better-than-metatrader product would make them a must-use broker for many people and the fact that they have absolute control over the implementation means that they can better handle the straight through processing (STP) with their server implementation.<br /><br />Is it really that good ? I have to say that I am surprised at many of the things that the people at FXCM seem to be getting "right" from the beginning with their software. It seems that they have really paid attention to what people want, not taking the position of metaquotes which simply turns a blind eye on anyone who wants to give some suggestions about the features and implementations within their platform. FXCM has actually already implemented many features that are obvious and that metatrader simply refuses to use. For example, FXCM has the ability to select ANY custom time frame and to create range bars and tick bars with ANY values. This is an obvious addition 99% of traders want and something Metaquotes has simply been "too lazy" to do.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhB58jBXLVYwPY7mKo8w-UmD-jrCXOYj-YKxu9GMFmUpkCz-PRYbFYTOikwqLUG07rWNihfAVn1Z6B5hw7w2eiFPe0AFLYaTcQbLvsdyG_pQTNkhpQaIEiQ13xiH7JVDIJsVy6DeTIAz3sR/s1600/strategy-trader.png"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 324px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhB58jBXLVYwPY7mKo8w-UmD-jrCXOYj-YKxu9GMFmUpkCz-PRYbFYTOikwqLUG07rWNihfAVn1Z6B5hw7w2eiFPe0AFLYaTcQbLvsdyG_pQTNkhpQaIEiQ13xiH7JVDIJsVy6DeTIAz3sR/s400/strategy-trader.png" alt="" id="BLOGGER_PHOTO_ID_5509752261097865106" border="0" /></a>-<br />Another great advantage of the FXCM Strategy trader is the fact that the feeds are updated and the charts are created as a function of actual ticks taken from a server and not through one second updates as it is done in MT4 and 5. This allows you to have more precise charts and to have a more accurate picture of what is going on. Instead of just sending one package every second with whatever happened, the Strategy trader gets a package for every tick that happens. A feature which although harder to implement is far more robust for the end trader.<br /><br />Regarding simulations - which I bet is what many of you want to know about - I have to say that FXCM has done a good job. Although the data is still reduced to one minute bars instead of ticks due to the practical size problems involving direct tick data for backtesting the fact is that there are several advantages. First of all, the data from the Strategy Trader is data from FXCM so the actual sources and reliability of the data are known from the beginning. Metaquotes does not disclose the source of their data and this makes it shady and more difficult to trust by traders all over the world. Another great advantage is the Bid/Ask data sources which means that actual spread values from real trading can be known with much better precision than with actual Metatrader data which simulates the spread.<br /><br />Sure, the Strategy Trader is only in its infancy and it is still a much less stable, robust and of course used platform than Metatrader 4. However I think that FXCM has done a great job so far probably due to the fact that they have listened to what people want and they have created a platform to reflect this. In the future I would say that if FXCM continues with their efforts and decides to sell this platform to other brokers this might come to be the preferred industry standard over the currently more popular Metatrader series. I'll continue to follow up on its development and I'll share some future posts about my experiments with it in the future.<br /><br />If you would like to learn more about automated trading and how you can gain a true education in the use and development of algorithmic trading systems please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, 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)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-35216351080560148222010-08-25T04:03:00.001-07:002010-08-25T04:34:57.952-07:00How To Get Umaki : The Trader Builder<div style="text-align: justify;">If you have been reading my blog recently you might be aware about the development of a trading tool I have built to use the metatrader 4 strategy tester as a "live" trading platform that would let us speed up the process of manual or discretionary system evaluation to a great extent. The tool allows us to use the visual backtesting feature of the strategy tester to trade on "live evolving charts" as we would trade the real market. You can read more about this tool and what it does <a href="http://fxreviews.blogspot.com/2010/08/getting-years-of-manual-forex-trading.html">here</a>. On today's post I want to talk about the meaning of the word Umaki and how you can get this useful tool to increase the speed in which you learn to trade manually and understand the forex trading market.<br /></div><div style="text-align: justify;"><br />What does Umaki mean ? Contrary to my general expert advisors which use words in Quechua or Nahuatl as their names (all experts of the Watukushay project use them) this trade-learning tool uses a word in Zulu, the language of a very well known group of Southern African tribes, to describe the EA. Umaki means "builder" in Zulu, I named it this way because I consider Umaki to be a "trader builder" a tool which can be used to get to successful manual trading much quicker - yet with a LOT of additional effort - in currency trading.<br /><br />Why Zulu ? You might be asking. The reason for this is because of the way in which Umaki will be shared with all of you. Since Umaki does NOT have anything to do with automated trading but just with manual and discretionary trading I decided not to make it available within Asirikuy but to use it as a way to do something better.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYKbBldPBm6VDBTJpP9F-DcqSIk3WSsW-TDI2419gumpC5Y98V-e_O2sJ9cLJ6e-KRQzPsS_dLUZObvOEEQ4E890V6gRiCwFPF-nKFlwf641ARf5n_fwLbLmgVYrp-ev6NsK_Z7ipScVn-/s1600/Antoni+and+Ali.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 267px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYKbBldPBm6VDBTJpP9F-DcqSIk3WSsW-TDI2419gumpC5Y98V-e_O2sJ9cLJ6e-KRQzPsS_dLUZObvOEEQ4E890V6gRiCwFPF-nKFlwf641ARf5n_fwLbLmgVYrp-ev6NsK_Z7ipScVn-/s400/Antoni+and+Ali.jpg" alt="" id="BLOGGER_PHOTO_ID_5509306312954555938" border="0" /></a>-<br />This is when I remembered the <a href="http://www.treasuresofafrica.org/">"Treasures of Africa" foundation</a> one of my favorite charities dedicated to the protection and shelter of children in Tanzania. This foundation is run by a group of very dedicated and selfless Christians who attempt to do the impossible day after day to bring some hope into the heart of Africa. I have to say that the job they do is absolutely amazing and I have always greatly enjoyed to help them in as much as I can with what they need. I have to say that I also think the name of this charity is absolutely incredible, I can assure you that after you see their pictures you'll understand that diamonds are not the true treasures of Africa.<br /><br />When I programmed Umaki it seemed like the perfect opportunity to help them and to do something to make the world better, even if it is only a grain of sand. If you want to get the Umaki EA to further develop your manual trading abilities please donate some amount of money (any amount you want) to the "Treasures of Africa" foundation. It would be absolutely great if you not only donated some money but also committed to the sponsoring of one of their children. Sponsoring a child is an absolutely wonderful endeavor and I can assure you that it is a true way in which you can make a difference to change some of the bad things happening around the world.<br /><br />If you have made your donation or have started sponsoring a child please send me an email to ekans_(at)hotmail.com with a copy of your payment receipt and I'll be glad to send you the link to download the Umaki mql4 code along with a small set of instructions on how to use the EA. <span style="font-weight: bold;">The download link and instructions will be sent to you within 24 hours after I receive your email</span>. I believe that for people who want to become serious discretionary traders Umaki will be a very good tool and for everyone who sponsors a child rewards will go far beyond those of trading. <span style="font-weight: bold;">Also remember that the donations you make to this charity are entirely tax deductible (at least under US law)</span>.<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJV0BJqrk1_cJLdaXkIbHdX2Ck5Yr7_cH3yvwvhuY2dfj3_2GRro6yF8wAfSkeOYgP4utPvwJOaVeje_Q086Tvk0OOhL7U9SnZ5-cIH0dEVIggfvMDvVrfHvtpjPZWpmO5c3vb6cLBkAlE/s1600/3+-+Diamond,+Moses,+Justice,+Zoe,+Maria+and+Joan.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 300px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJV0BJqrk1_cJLdaXkIbHdX2Ck5Yr7_cH3yvwvhuY2dfj3_2GRro6yF8wAfSkeOYgP4utPvwJOaVeje_Q086Tvk0OOhL7U9SnZ5-cIH0dEVIggfvMDvVrfHvtpjPZWpmO5c3vb6cLBkAlE/s400/3+-+Diamond,+Moses,+Justice,+Zoe,+Maria+and+Joan.jpg" alt="" id="BLOGGER_PHOTO_ID_5509306846629938530" border="0" /></a>-<br />If you however would like to learn more about educating yourself to be successful in automated trading please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, 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)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com3tag:blogger.com,1999:blog-2847890102780597763.post-81460380792819648742010-08-24T01:00:00.000-07:002010-08-25T04:20:33.133-07:00Getting Years of Manual Forex Trading Experience in Only Weeks : The Umaki Trader Builder EA<div style="text-align: justify;">Sure, we have all heard about the huge effort and thousands of hours that traders need to put into this business before they even start to turn a profit. One of the first thing that people new to the market first fight with is this inevitable need to acquire experience and the painful but real fact that demands this experience to be acquired through actual real trading, experience that needs to be taken by watching the screens and by losing money on the market (demo or live). If you want to become successful in trading then you will probably need to trade live for years before you actually come up with a true system (mechanical or discretionary) that has a positive long term statistical age and some - even remote - guarantee of bringing you stable profits. Is there any way to short-cut this road through effort ?<br /></div><div style="text-align: justify;"><br />On today's post I want to discuss with you a way in which I believe that the time invested in trading can be exponentially reduced, reduced to the point where you will be able to gather a large amount of what would take years to get in just weeks or months. The catch however is that you will need to make the actual same effort so what we would change would be more precisely described as the "effort density" instead of the actual effort or time required. The solution I propose within this article will allow you to experience the markets in a much faster fashion, develop an excellent sense of discretionary trading and accurately evaluate your trading potential efficiently.<br /><br />It occurred to me that the only way to gather true experience from the market is actually through trading a chart on the end of the right hand-side. Of course, evaluating discretionary strategies and developing a sense of the market when examining historical charts doesn't work very well because you are not taking or simulating decisions as you would in live trading - at least most beginners won't - and therefore it becomes primordial to be able to tackle the market in a "live" way.<br /><br />Then I realized that there are simply no easily available tools that allow us to do this in a simple and quick fashion. It would be great if there was a way in which you could simulate live trading on a chart which had a controlled live evolution, a chart in which you could also place positions, keep track of you results and evaluate your performance when the test ended. However the closest thing we have - the visual strategy backtests in MT4 - do not allow you to take any positions and do not allow you to have an idea about the performance of a given discretionary trading style in the end.<br /><br />My idea was then to develop an EA that would allow us to use the metatrader 4 visual backtester with the possibility to actually use it as a "live testing platform" in which we could actually take positions and evaluate the performance of a strategy in a live evolving, quickly moving right edge. This is how I created Umaki, the Trader Builder. This EA allows you to use a metatrader 4 visual backtest as a live market feed - only much faster - so that you can evaluate your discretionary strategies just like you would under live trading conditions (regarding chart movement and information available). (a picture of Umaki in action is shown below)<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdHK5I01_dw1lqXPpRXAfUcWyvK-OACS-cRwKcF5XmWDu1_igVm1G-hjsEOIW3FUFvW3mT6ismpnTZQa5v7sqGzAhExVNI6Pu0NoxdGHXRCJBTzCVYdiBChqBQnVQCQfLWYKR8zoTN4Lkc/s1600/trade_builder.gif"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 300px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdHK5I01_dw1lqXPpRXAfUcWyvK-OACS-cRwKcF5XmWDu1_igVm1G-hjsEOIW3FUFvW3mT6ismpnTZQa5v7sqGzAhExVNI6Pu0NoxdGHXRCJBTzCVYdiBChqBQnVQCQfLWYKR8zoTN4Lkc/s400/trade_builder.gif" alt="" id="BLOGGER_PHOTO_ID_5508770284285551330" border="0" /></a><br />-<br />If you want to evaluate a strategy over a statistically significant period of time (which is longer than 5 years) then Umaki provides you with the tools to do so. Simply place Umaki on the charts and use it to trade the system as you would in a real, live evoling market. You can then look at the backtesting results in the end and realize how your manual system would have performed over this entire period. Of course, Umaki is by NO MEANS a shortcut to effort but it allows you to study the forex market on your own time and develop trading skills and strategies when it is most convenient for you. Maybe you don't have the time to spend long hours within the week staring at live evolving screens but you do have a space of 10 hours during the weekend in which you can perform a ten year Umaki 4 hour run. As I said earlier, this tool allows you to increase the speed in which you evolve as a trader by increasing the effort density (much more effort in less time) and it will bring an experience as similar as possible to actual trading the real market.<br /><br />Of course, a lot of honesty is required if this tool is to be used successfully (since the history of the market is anyway known) so you would have to take mechanical or discretionary decisions regardless of your knowledge of "future events". For example we all know that there was a huge EUR/USD drop in late 2008 due to the economic crisis but trading this simply because you know in hindsight is not honest and would defeat the purpose of Umaki. In the end it depends upon yourself to use the tool appropriately and to take the largest advantage from it by earning a "concentrated" live trading experience on a simulated "fast live evolving" trading platform. Also bear in mind that Umaki suffers from the limitations of the metatrader 4 backtester one minute interpolation problems so the evaluation of strategies with very low TP/SL values or on time frames below the 30 minute chart is NOT recommended in anyway.<br /><br />For those of you who are curious and want to know how you can get this EA, don't worry, a post will come tomorrow just about that (also don't worry, I don't plan to sell it :o)) along with the meaning of this word. Anyone wants to take a guess ?<br /><br />If you are not interested in discretionary trading or Umaki but you would like to learn more about automated trading and how you too can develop systems with sound profit and risk targets with a very good understanding about their logic and merit please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, 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)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-55001077255259109262010-08-23T04:17:00.000-07:002010-08-23T05:00:48.404-07:00Easy Profit in Automated Trading, Logical Proof of its Nonexistence<div style="text-align: justify;">Isn't hassle free profit from the forex market all we want ? Definitely the goal of every person that starts to look for an expert advisor - or most at least - is to find a trading system they can simply "set and forget", a trading system that just collects money from the market in a consistent manner with minimal or limited draw down. A "holy grail", so to speak. However, it becomes obvious after a while of being in this business that if it is too good to be true it probably is and that no trading system can provide the owner with profit without an effort to develop knowledge and understanding. However the fact that the other road seems plausible makes a lot of people continue to search for this nonexistent trading system, a quest that brings nothing but disappointment and financial loss for most new traders. On today's post I will be giving you a logic based demonstration that shows why easy profit in automated trading is impossible and why this search is meaningless and will never arrive at your intended result (a system that easily gets you money without any effort).<br /><br />First of all we must understand the very basic aspects about logic based demonstrations. When we are faced with a given hypothesis there are several ways in which it can be demonstrated to be true. In mathematics this is done in several ways but one of them is of particular interest to my article. You can demonstrate that something is false if the assumption that it is true leads to absurd results. For example, let us test the hypothesis that the addition of two even numbers gives us an odd number (which is false).<br /><br />Assuming this to be true :<br /><br />n, m and k are integers (2n is the definition of an even number, 2k+1, the definition of an odd one)<br /><br />2n+2m = 2k+1<br />2n+2m-2k = 1 subtract 2k from both sides<br />2(n+m-k) = 1 factor 2 out<br />2a = 1 since n, m and -k are integers their addition is another integer (a)<br /><br />Since 2a is an even number by definition and it is said to be equal to 1, we have an absurd result. No integer times 2 is able to give us 1 as a result. <span style="font-weight: bold;">The hypothesis has been proved false because the assumptions that it is true leads to absurd results.</span><br /><br />When it comes to making money from a system without any effort we can do the exact same thing. Let us suppose that there is a system that generates a 200% yearly income which can be traded from 100 USD and used successfully by anyone who buys it. Looking into the sales of the most popular experts we could expect this system to be used by at least 30K people during the first 2 years. This means that 300K USD - assuming each person trades the minimum - will be traded within the first 2 years. After ten years the return of this system would have been 17714700000 which is around 17 billion which is above all other market participants for this same time period. If 300K USD were added each year (of course new sales), the results would be even more staggering nearing more than 100 billion USD.<br /><br />After 20 years, results become even more absurd and the system is now making a return that would be equal to more than the volume available to be traded. That is, all other market participants would be losing money against this system. This reduces the result to absurd levels since the system's profits surpass the amount of money available from the market. In fact, all the money in the world roughly describes what this system would be making.<br /><br />The conclusions of this thought experiment are therefore quite simple and straightforward. One of the following things must be true :<br /></div><ul style="text-align: justify;"><li> If a successful system exists that anyone can trade then there is an inherent - and quite small - volume limitation to its trading that will thereafter make it lose its profitability or its "tradable by anyone" character.</li><li>If a successful mechanical system exists then there must be strong psychological barriers that make it extremely hard to trade for most market participants</li><li>If a successful mechanical system exists then there is bound to be a maximum compounded yearly profit to maximum draw down limitation that forbids it from reaching the above scenario (a limitation on profits). </li></ul><div style="text-align: justify;">Through all my research and work I have found that it is certainly possible to have successful mechanical trading systems and I suspect all the above are in fact true statements. Systems that would be easily available for anyone to use would quickly lose this character as a function of volume and become hard to trade for some reason (psychological, increases in the maximum draw down to average compounded yearly profit ratio) and systems that are already successful are bound to be hard to trade or have an inherent profitability limitation that does not allow them to reach the above mentioned scenario.<br /><br />In the end, logic is simply undeniable. The scenario portrayed before is an absurd outcome that cannot be reached and therefore limitations to its achievement must be contained within the systems themselves. Systems that may seem to show extremely high results must be volume limited and later become much less profitable and harder to trade while mechanical systems that are profitable in the long term are hard to trade by definition. The above logical reasoning also shows us that there is bound to be some form of profitability to draw down limitation which comes from the simple assumption that the above scenario must be avoided. <span style="font-weight: bold;">In conclusion, there is simply no easy long term profit in automated trading.</span><br /><br />As you see, the simple power of the "reduction to absurdity" logical reasoning allows us to gain a lot of information about the world of automated trading systems merely by the use of a very simple thought experiment. If you have any comments, suggestions, opinions or other similar reasoning exercises, please feel free to leave a comment !<br /><br />If you would like to learn more about my journey in automated trading and gain a true education around this type of systems, their uses, limitations and possibilities please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, 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)<br /></div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com2tag:blogger.com,1999:blog-2847890102780597763.post-85812064745410623442010-08-22T04:32:00.000-07:002010-08-22T05:12:40.997-07:00Yes, You ARE Looking for the Holy Grail : A Message for People New to Trading<div style="text-align: justify;">It is very interesting to analyze the answers you get when you ask people what they are looking for and if they think that what they are looking for is the automated trading "holy grail". This mythical piece of code is an EA that does NOT exist which achieves "unbelievable" results. However despite the fact that most people will utterly deny that what they look for is the holy grail - they will always say they know the holy grail doesn't exist - when you analyze the answer to the question "what are you looking for in a trading system?" you will realize that the bast majority are indeed looking for this mythical piece of code. On today's post I will talk about the holy grail and new traders and especially the relative character of the definition of this term and why so many people are looking for it even if they categorically reject to be doing so.<br /><br /><h2 class="title"><span style="font-size:78%;">What average yearly profit to max DD ratio do you consider realistically achievable ?</span><br /></h2><div class="widget-content" id="widget-content"><iframe allowtransparency="true" name="poll-widget-5751553570427328652" src="http://www.google.com/reviews/polls/display/-5751553570427328652/blogger_template/run_app?txtclr=%23333333&lnkclr=%23448888&chrtclr=%23448888&font=normal+normal+100%25+Verdana%2CArial%2CSans-Serif&hideq=true&purl=http%3A%2F%2Ffxreviews.blogspot.com%2F" style="border: medium none; width: 100%;" frameborder="0" height="200"></iframe><br /><div class="clear"></div><div style="text-align: justify;">So what is this trading "holy grail" exactly ? Its definition is actually simple and yet very complex. In my mind a holy grail is a hypothetical system which achieves results superior to the highest achievable maximum draw down to average yearly profit ratio allowed by the market in real returns over the past ten years. This means that any system that can do better than how the best REAL trader has done within the past 10 years is the holy grail. The best way to measure this "better" character is by using the above mentioned ratio which compares profit to risk.<br /></div><br />When we look at the performance of forex traders for the past ten years -and the best registered traders since then- we notice that any system that achieves an average yearly profit to maximum draw down ratio of 5:1 over a ten year period is in fact a holy grail (check my post on the Barclay index to learn more about REAL long term performance of forex traders). This means that - being realistic - a system that achieves a 100% yearly profit with only a 20% maximum draw down over ten years is a holy grail. A system that is extremely unlikely to exist due to the very nature of the markets and the long term limitations on performance it imposes.<br /><br />When we then ask new traders what they are looking for the answers are actually quite interesting. As a matter of fact, the above mentioned realistically inferred holy grail becomes the "lower standard" of a given set of return figures that are inferred from short term results and "lore" rather than from actual long term real performance records and realistic expectations. The 100% yearly profit with 20% maximum draw down becomes something that new traders perceive can be "easily achieved" and things like a 20% monthly profit with a 5% maximum draw down start to become the "grail" targets.<br /><br />As traders start to accumulate more experience and they get to know the market and the inherent limitations of profitability and draw down they start to lower these figures. A trader with one year of experience is bound to give a 5% monthly profit with a 5% maximum draw down as a realistic expectation while it usually takes traders 5-7 years to realize that the before mentioned grail of a 5:1 ratio of average compounded yearly profit to maximum draw down ratio taken from real performance data is actually the real "extremely hard to achieve" target.<br /><br />So chances are that if you are a relatively new trader you are looking for a system which is quite unrealistic and your actual "holy grail" is way beyond the limits of what the market is willing to let you get. In the end, most traders are looking for holy grails, even if they believe they currently have "realistic" and sound expectations of draw down and profitability for their trading systems. If you would like to earn a true education in automated trading and learn how you too can design and build your own systems with realistic profit and draw down targets please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, 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)</div></div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com0tag:blogger.com,1999:blog-2847890102780597763.post-81817326592822470902010-08-21T04:34:00.000-07:002010-08-21T05:33:33.508-07:00Using Tick Volume in Forex : A Clear NVO Based Example<div style="text-align: justify;">A week or so ago I wrote a post about tick volume in forex and how I believed it could be used for the development of long term profitable strategies. Inspired by a currency trader magazine article, I decided to explore this issue even further to discover if I was capable of coming up with some 10 year volume-based profitable strategies. Of course - as I had mentioned before - the first problem comes when you realize that tick volume is different between each broker and that some sort of normalization must be carried out before even attempting to come up with something useful. Within this article I will talk to you about how I sorted this obstacle and how I came up with my very first volume-based system with 10 year profitable results.<br /></div><div style="text-align: justify;"><br />Evidently there is no such thing as true market volume in forex since the amount of money exchanged by all market participants cannot be accurately determined in an "of the counter" type of market. This lack of "true volume" information seems to doom forex traders to absolutely forget about using this information leaving them at a great disadvantage against stock and futures traders who do have access to centralized exchanges with very accurate live-updating volume information.<br /><br />However tick volume - which simply measures the volume of ticks during a certain amount of time - has been shown to be proportional to true volume in systems where this data is available for comparison. In forex we have tick volume and this allows us to think about the building of systems based on this information. However a big problem is that each broker has different liquidity providers and for this reason the number of ticks as an absolute value becomes useless as each system would need to be tailor made to the data feed of each broker and this is just impossible to do since forex brokers do not let you access their 10 year data (or they haven't even been on the market for this long).<br /><br />The best solution to the above problem is to use an NVO or normalized volume oscillator that portrays tick volume as a percentage of the tick volume values for the past X market periods. There are already several NVO indicators available for free for metatrader 4 and the one I like the most is available <a href="http://www.google.com.co/url?sa=t&source=web&cd=1&ved=0CBAQFjAA&url=http%3A%2F%2Fcodebase.mql4.com%2Fsource%2F9250&rct=j&q=volume%20oscillator%20mql4&ei=XrxvTOvQFMT58AbJ5pDjDA&usg=AFQjCNHuMPE_hw8F_Ppqm1gwCUJGvvf2Jw&cad=rja">here</a>. This indicators shows us volume in a -100 to 100 range where 0 represents the median volume value and -100 and 100 represent the lowest and highest volume values during the past X periods. Below you can see an image of the NVO together with the volume indicator (which just shows absolute tick volume values as a histogram).<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_523vgIqxXgW4-bu0Cj-He9RizDnoa6FBQjHRqWh6RHs5AEg38G9RuKo73CH4v8jvMWI2SlhHednfwzNn7somDH6dWZAdRYTkRPKv_3n-nZZ-LKdZgm2V47PY6I6DjATCNcONbJHXm8EJ/s1600/nvo.gif"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 300px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_523vgIqxXgW4-bu0Cj-He9RizDnoa6FBQjHRqWh6RHs5AEg38G9RuKo73CH4v8jvMWI2SlhHednfwzNn7somDH6dWZAdRYTkRPKv_3n-nZZ-LKdZgm2V47PY6I6DjATCNcONbJHXm8EJ/s400/nvo.gif" alt="" id="BLOGGER_PHOTO_ID_5507833316742944706" border="0" /></a>-<br />After we have this information it now becomes quite simple to design a strategy based on this NVO indicator. But how do we use volume ? The traditional way to use volume is to distinguish between different "reasons" for different "events" to happen in trading. Usually price action patterns, indicator signals, etc, can happen due to reasons that are not related to actual changes in market behavior. For example, you can have a shooting star candlestick pattern develop because of lack of liquidity and not because of an imminent reversal. What volume allows you to do is to eliminate all these "false" signals, since you are only entering positions after a signal that is meaningful happens. Meaningful in this case, means that it happens on high market volume (which we assume to be proportional to tick volume which is what we actually have).<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7djp11p6K_grP-6WTFonDB_I-fwC3oU33kLfJ1s-EgKqARgCHiaH-PN7PPjV7M0j0vDT-WbJ5DNPJ2GGE0LumZBqnnkh36DWU0Dd8nl719xm0KJjQPRqpqEMkWdqBpYYlyfrXGlMDZV4y/s1600/twobars.gif"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 98px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7djp11p6K_grP-6WTFonDB_I-fwC3oU33kLfJ1s-EgKqARgCHiaH-PN7PPjV7M0j0vDT-WbJ5DNPJ2GGE0LumZBqnnkh36DWU0Dd8nl719xm0KJjQPRqpqEMkWdqBpYYlyfrXGlMDZV4y/s400/twobars.gif" alt="" id="BLOGGER_PHOTO_ID_5507838812216086290" border="0" /></a>-<br />I designed a very simple system using a very simple candlestick pattern and the above mentioned NVO indicator. The results in simulations (Jan 2000 - Jan 2010, EUR/USD) were quite good with a system with an average yearly profit to maximum draw down ratio of 0.5:1 without any optimization or additional exit logic besides a simple SL and TP. What this strategy shows is simply that entries with very good mathematical expectancy values can be designed when using an NVO as a way to measure the meaningfulness of certain market signals (of course a strategy has to be designed with the use of volume in mind from the beginning, strategies like the ones used by Watukushay No.2 or Teyacanani don't actually benefit from an additional NVO based filter).<br />-<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLPoCyAwzpQehP35H6yUi7SDqvzMvsivF4m3pC9lfZvfLx8S2QDf8mHPOhjQerfK4sDz3cBICSSxB6_bcC9uF3keflbckYgrgxGxOR25Dmj4S3epQe2wMTKIHcg5ZJtTiQrmep-Xv9Nt6T/s1600/nvo1.gif"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 300px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLPoCyAwzpQehP35H6yUi7SDqvzMvsivF4m3pC9lfZvfLx8S2QDf8mHPOhjQerfK4sDz3cBICSSxB6_bcC9uF3keflbckYgrgxGxOR25Dmj4S3epQe2wMTKIHcg5ZJtTiQrmep-Xv9Nt6T/s400/nvo1.gif" alt="" id="BLOGGER_PHOTO_ID_5507833394112368994" border="0" /></a>-<br />Bear in mind that this does not mean that you should add an NVO filter to "every system" to attempt to improve its entries. This will most likely not work since anNVO is only useful as a way to aid in entry selection when the price pattern we are looking for benefits from this type of criteria. When a pattern is valid regardless of volume, the NVO becomes a problem and NOT a solution. Also most indicator signals do not get any improvements from the use of an NVO since their signals represent the conjunction of complex calculations done over price through significant periods of time. In the end if you want to design a system using an NVO you should plan this from the beginning, adding such a filter as an after thought is NOT going to work in the large majority of cases.<br /><br />After a few weeks of hard work and development using normalized volume oscillators I can say that I have developed at least a couple of strategies that show long term profitable results on a basket of currency pairs. However we will see in time if such strategies are in fact able to avoid broker dependency due to the NVO implementation and therefore succeed in the long term. Tomorrow I will be releasing a few videos in Asirikuy dealing with volume as well as the actual logic and coding implementation of the above mentioned NVO strategy.<br /><br />As always if you would like to learn more about automated trading and gain a true education in the development and understanding of these trading systems please consider joining <a href="http://www.asirikuy.com/join.htm">Asirikuy.com</a>, 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)</div>Danielhttp://www.blogger.com/profile/00940108413648645894noreply@blogger.com2