Reviewing Everything Forex

Time To Evolve... From FxReviews to MechanicalForex, a Milestone Achievement :o)

2010-09-13T18:19:00.000-07:00

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 : http://www.mechanicalforex.com. 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.

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.

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.

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.

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 Mechanical Forex, 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.

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.

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. 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. If you like this website make sure you share it with other people you know who might find it useful :o)

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) Please leave any opinions, comments or questions you might have about the new site ! (you can leave them here or in the new website)

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 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)

How to Treat Forex Like a Business : Ten Things You Need To Do When You Trade

2010-09-13T04:17:00.000-07:00

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.

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 !

1. Think in terms of goals and expenses. 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.

2. Determine your plan. 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.

3. Determine your goals based on your plan. 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 - through reliable simulations - 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.

4. Determine your expenses based on your plan. 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.

5. Determine your capital requirements. 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.

6. Draw best and worst case scenarios based on your simulations. 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.

7. Come up with a worst-case scenario. 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.

8. Do monthly, quarterly and yearly evaluations. 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.

9. Do not change your plan when it is working as planned. 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.

10. Do not increase your goals or your expenses. 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.

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.

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 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)

Revieweing Thrust VPS a New, Cheap and Reliable Option for EA Hosting

2010-09-12T04:47:00.000-07:00

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.

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).

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.
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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.

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.

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.

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 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)

Are You Backtesting Correctly ? : Six Common Technical Mistake That Will Make Your Simulations Useless

2010-09-11T04:48:00.000-07:00

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.

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 :

1. Using a 4 digit broker to run simulations. 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.

2. You are using the weekend spread. 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).

3. Your strategy trades below the 1 hour chart. 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.

4. Your Take Profit and Stop Loss values are within 10 times the spread of the instrument you are trading. 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.

5. You are not recalculating your data before each backtesting run. 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.

6. You are running a backtest over the last 1-3 months. 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.

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.

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 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)

September Video Reviews : New Commercial Automated Trading Systems

2010-09-10T05:15:00.001-07:00

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.

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.

If you are having problems watching the videos please remember that you need the free DivX codec or player available here.

Forex Bullet Proof, an unbiased review

Forex SAS, an unbiased review

Forex MeltDown, an unbiased review

Forex Morning Trade, an unbiased review

FX Wealth Machine, an unbiased review

Forex CounterAttack, an unbiased review

I hope you enjoy this week's videos. As always please remember that the burden of proof is on the seller's live accounts and NOT on your own. 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.

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 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)

Are You Up for a Challenge ? A Likely Daily Long Term Profitable System That Takes 5 Minutes a Day to Trade. Part Two -System Performance

2010-09-09T04:28:00.000-07:00

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.

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 Umaki 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.
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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%.
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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.
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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.

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.

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 !
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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 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)

Are You Up for a Challenge ? A Likely Daily Long Term Profitable System That Takes 5 Minutes a Day to Trade. Part One - System Rules

2010-09-08T01:00:00.001-07:00

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.

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.

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.

This trading system is a very simple trend following system designed to be used on the daily time frame only on the EUR/USD. 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 :

Long Trades :

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.

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.

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.
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Short Trades :

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.

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.

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.
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Lot Sizing

The lot size is defined by a very simple equation outlined below. This equation adjusts lot size against market volatility and account equity.

Lot size = 0.01*AccountBalance/(ATR*ContractSize)

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.

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.

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.

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)

Elegant Automated Trading Systems : A Key to Success in Mechanical Trading

2010-09-07T01:27:00.000-07:00

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.

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 (http://watukushayfe.blogspot.com) 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.

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.

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.

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.

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 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)

Confused by Your Charts ? How About Trying a Simple Line Chart for Trading ?

2010-09-06T04:38:00.000-07:00

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".

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.

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.

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.
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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.

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.
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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.

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 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)

Five Steps to Build a Forex Trading Plan : What Every Trader Should Now

2010-09-05T04:24:00.000-07:00

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.

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.

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.

Step 1. Figure out the type of market movement you want to capture. 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.

Step 2. Design your first entry logic. 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. If you are a manual trader you should consider getting Umaki to help you backtest your discretionary strategy over a long period of time.

Step 3. Make sure your systems is not static. 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).

Step 4. Design Exits and Lot sizing. 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.

Step 5. Understand the Risk and Profit characteristics of your plan. 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.

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 :

What is your expected maximum draw down ?
What is the average draw down period length ?
What is the distribution of monthly returns expected to be ?
What is the average compounded yearly profit ?
What is the probability to have a winning or a losing month ?

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.

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 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)

Being Close Minded and Being Cautious, Two Very Different Things

2010-09-04T05:23:00.000-07:00

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.

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.

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).

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.
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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.

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.

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.

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 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)

Why are Five Years Statistically Significant for the Evaluation of Trading Systems ?

2010-09-03T06:15:00.001-07:00

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.

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.

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.
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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.

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.

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 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)

New CFTC Rules : What They Mean and What They Try to Achieve

2010-09-02T01:00:00.000-07:00

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.

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.

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.

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.

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.

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.

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.

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)

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 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)

The September Effect : The Ghost Around the Corner ?

2010-09-01T04:45:00.001-07:00

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.

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.
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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.

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.

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.

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.

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.

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 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)

The Pain Index : A Measurement of How Hard it is to Trade a System from a Psychological Perspective

2010-08-31T03:15:00.000-07:00

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).

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.

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.

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 :

MD = maximum 10 year draw down as a percentage of account equity

MP = maximum 10 year draw down period length in years

pain index = 2*(Log( MD^2 * MP))

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).
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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). 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.

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 :

0 - system that never loses (does not exist)

2.59 - Watukushay No.2, Risk 1 EUR/USD

2.93 - Atinalla No.1 Portfolio (Risk 1 on all systems)

3.07 - Teyacanani, Risk 1 EUR/USD

3.60 - Watukushay No.5, Risk 1 USD/CHF

5.08 - Atinalla No.1 Portfolio (Risk 3 on all systems)

5.51 - Kutichiy EUR/USD Risk 1

5.79 - EUR/USD Turtle Trading System (original rules)

5.99 - GBP/USD Kutichiy Risk 1

6.71 - Kutichiy (EUR/USD, GBP/USD, USD/CHF, USD/JPY) (Risk 1 on all instances)

10 - system that loses everytime for ten years except on one trade that takes it to profitability

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.

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.

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 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)

Preserving Your Capital : Five Signals You are Taking Too Much Risk with Your Forex Trading

2010-08-30T06:05:00.001-07:00

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.

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 !

1. One loss has a significant emotional effect on you. 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.

2. Your system has a historical ten year maximum draw down higher than 50%. 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%.

3. Your system cannot face twice the maximum number of historical consecutive losses. 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.

4. You cannot sleep. 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.

5. You don't fully know your system or plan. 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.
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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.

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 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)

The Indicator Series : The Awesome Oscillator - A Tool to Measure Momentum

2010-08-29T04:37:00.000-07:00

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.

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 :

Awesome Oscillator = SMA(MEDIAN PRICE, 5)-SMA(MEDIAN PRICE, 34)

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.
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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.

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.
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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).
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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.

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 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)

It's Really Much More than Staring at the Screen : Become a Trader the Active Way

2010-08-28T05:54:00.000-07:00

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.

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.

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.

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 ?".

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.

Finally what I always advice new traders is to take a very active approach to trading 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.

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.

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 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)

Three Way (Triangular) Arbitrage in Forex : Does it Work ?

2010-08-27T03:45:00.000-07:00

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.

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 here, where the concept is also further explained).
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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 :

EUR/JPY = 107.86
EUR/USD = 1.2713
USD/JPY = 84.75

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.

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.

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.

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.

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.

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 Asirikuy.com, 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)

Finally Some Real Competition for Metatrader 4 : FXCM's Strategy Trader

2010-08-26T08:46:00.000-07:00

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.

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.

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.
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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.

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.

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.

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 Asirikuy.com, 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)

How To Get Umaki : The Trader Builder

2010-08-25T04:03:00.001-07:00

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 here. 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.

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.

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.
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This is when I remembered the "Treasures of Africa" foundation 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.

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.

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. The download link and instructions will be sent to you within 24 hours after I receive your email. 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. Also remember that the donations you make to this charity are entirely tax deductible (at least under US law).
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If you however would like to learn more about educating yourself to be successful in automated trading please consider joining Asirikuy.com, 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)

Getting Years of Manual Forex Trading Experience in Only Weeks : The Umaki Trader Builder EA

2010-08-24T01:00:00.000-07:00

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 ?

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.

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.

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.

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)
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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.

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.

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 ?

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 Asirikuy.com, 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)

Easy Profit in Automated Trading, Logical Proof of its Nonexistence

2010-08-23T04:17:00.000-07:00

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).

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).

Assuming this to be true :

n, m and k are integers (2n is the definition of an even number, 2k+1, the definition of an odd one)

2n+2m = 2k+1
2n+2m-2k = 1 subtract 2k from both sides
2(n+m-k) = 1 factor 2 out
2a = 1 since n, m and -k are integers their addition is another integer (a)

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. The hypothesis has been proved false because the assumptions that it is true leads to absurd results.

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.

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.

The conclusions of this thought experiment are therefore quite simple and straightforward. One of the following things must be true :

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.
If a successful mechanical system exists then there must be strong psychological barriers that make it extremely hard to trade for most market participants
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).

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.

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. In conclusion, there is simply no easy long term profit in automated trading.

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 !

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 Asirikuy.com, 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)

Yes, You ARE Looking for the Holy Grail : A Message for People New to Trading

2010-08-22T04:32:00.000-07:00

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.

What average yearly profit to max DD ratio do you consider realistically achievable ?

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.

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.

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.

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.

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 Asirikuy.com, 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)

Using Tick Volume in Forex : A Clear NVO Based Example

2010-08-21T04:34:00.000-07:00

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.

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.

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).

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 here. 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).
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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).
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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).
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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.

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.

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 Asirikuy.com, 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)

Six Steps to Become a Successful Forex Trader : A Short Guide for the Inexperienced Trader

2010-08-20T03:08:00.000-07:00

Perhaps only a few other businesses in this world have such a steep learning curve as forex trading. Thousands of traders begin their journey towards becoming profitable every year and only a handful ever make it to what seems to be a very exclusive club of successful people. In my mind the fact that profitable traders are not that common makes this journey a lot harder for new people, if finding someone whose example you can follow is so dramatically hard, then the journey has to be repeated for each traded who wants to become profitable. It's an odyssey every time, time and time again. Then you also have a problem dealing with the actual achievement of profitability since the strategies and methods used by one person who achieved this goal may simply not work for another either for time availability or psychological restrictions.

Through the past few months I have been thinking if there is a straight "A to B" way in which new traders can achieve profitability, a set of defined and clear steps that will allow people to become profitable traders even if there is a total absence of another profitable trader's personal experience and advice. To solve this conundrum I have come up with what I consider the 5 main steps that a new trader needs to carry out to become a successful trader. Reflecting upon my experience as well as that of other people I know who went from inexperienced to profitable I can tell you that - even though the advice may sound too general - it does constitute a genuine and clear route towards success in the forex market.

1. Learn and understand all the basic information. It is absolutely important in order to succeed for traders to understand what in the world they are doing and what everything in the world of forex means. I cannot tell you how many times I have come up with people who have been involved with forex for even a year without knowing what a contract size represents, what "trading a lot" means or how you can calculate the amount of money to risk for a given stop loss size. The firs thing you need to do to become successful is to learn and understand all the basic aspects of forex trading.

2. Learn to program and run reliable simulations. Even for people who like to trade manual systems it is absolutely necessary to be able to run accurate simulations of the strategies one intends to use in real, live trading. When the advice of an already successful trader is missing it would take you months to test every single strategy and then years to learn its true potential. In order to understand what you are doing it is VITAL that you learn how to simulate system under past market conditions in a RELIABLE way to understand their true potential.

3. Know the profit and risk targets of ALL the systems you are trading. Nothing draws more traders into losses than their ignorance about the characteristics of the system they are trading. For any given strategy you are using you should be able to answer what the average yearly profit and maximum draw down values are expected to be. You should also have a very good idea about things like the number of consecutive losing months, the risk to reward ratio, the maximum length of a draw down period, etc.

4. Don't trade anything you do NOT FULLY understand. This is one of the most important things people new to forex need to learn. Black boxes are absolutely dangerous for new traders since they put a strong psychological pressure and uncertainty on the trader. The best way to fail in trading is to use systems which you do not understand which use trading tactics you are not familiar with. When you don't understand the reason why you are getting into a position besides "the robot entered a position" or "the blue line turned red" you are running into SERIOUS trouble. There is not a single successful forex trader I know who doesn't absolutely FULLY understand all the ins and outs of the logic of the system they are trading.

5. Reduce risk to the lowest possible level. New traders are like new bait in a shark tank. There is absolutely no doubt that in the beginning a huge amount of mistakes will be made and these will make capital losses important. The most important decision you can make is to make capital preservation a MUST. Do not think of your success as your account percentage profitability but think of your success as your maximum draw down to average YEARLY profit ratio. In the first few years achieving long term profitability will be HARD so make sure this process is as cheap for you as possible. Trade with the absolutely MINIMUM risk.

6. Make a commitment to the systems and strategies you decide to trade. New traders like to hop from one strategy to another without ever giving them a chance to succeed. If you have followed the above mentioned steps you have a very good idea about the profit and draw down characteristics of the system you are trading. If you absolutely understand what you are trading then there is no need to change the system unless it shows that it has become too risky. However you have adequate risk and profit targets so it will be easy for you to evaluate your system as time moves on and know if it is or if it is not following the draw down analysis you performed before.

Even though following the above mentioned steps - except perhaps the first one - will be really hard for new traders it is what - in my experience - has to be done in order to become successful. It is obvious that many problems and probably some financial loss will come along the way but the above steps give you strong safeguards that will not guarantee but increase your chances of success to a great extent. Most inexperienced people face account wipe outs and long term losses in trading and the bast majority never follow any of the above steps. If you follow them I can tell you that you will feel much more prepared and ready to tackle the challenge, even if it takes a huge amount of effort.

If you would like to learn more about my journey in trading and especially with automated trading strategies and gain a true education regarding this type of systems please consider joining Asirikuy.com, 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)

New Review Methodology : Releasing my First Monthly EA Review Update ! :o)

2010-08-19T01:00:00.000-07:00

Certainly there have been a lot of new expert advisors being released every month and writing a post review for each one started to seem like a huge task that didn't make a lot of sense since many of the trading system's being released don't even have the slightest hint of reliable evidence of profitability. Due to the fact that I consider reviews very important but due to the fact that I also consider that my written posts can be devoted to more practical and educational matters I have decided to give my reviews a total turn around, changing the way in which they are done and shared. On today's post I will be sharing these changes with you as well as the first monthly update of expert advisor video reviews :o)

The problem was actually very simple. There are many new expert advisors coming up every month and writing reviews for each one of them would have taken a lot of time and typing hand-stress. However stopping my reviews never seemed like a very good option because I consider that one of the most important aspects of my mission here in fxreviews is to inform others about my opinion regarding new trading systems and their merit (or more commonly the lack of it) in forex trading. I believe that many new traders have taken a lot of benefit from my views and the ways in which I review systems and for this reason I have decided to continue doing reviews, albeit in an entirely different way.

How will reviews be presented now ? From now on I will publish a monthly post in which I will include links to video reviews of most of the trading systems released that month. Each video will include the same material as my previously written reviews although now people will be able to follow me around the evidence and hear my opinion about the trading systems. Before recording the reviews I still perform my in-depth analysis of the systems and their evidence and I share it with you by going through each system's website on each one of the videos.

I believe that this new review-sharing mechanism is not only far easier from a technical point of view (when a lot of reviews need to be done) but it also allows traders to get the information faster and too see the problems and specific failures of the different trading systems in a much more straightforward manner. This also allows me to easily pinpoint links or other sources where people might find evidence relevant to the different systems (such as the free systems a scam system might be based on). As always my reviews will attempt to offer an unbiased perspective with evidence as the main focus of their findings.

This month I have reviewed several different trading systems. The review video links are highlighted below (please download the free divx video player here if you cannot watch the videos).

- Pip brains unbiased review

- 4xhotbot unbiased review

- Forex legend unbiased review

- Forex Onslaught unbiased review

- Forex Supersonic unbiased review

- NonameBot unbiased review

- FAMDrone unbiased review

- Forex Euro System unbiased review

- Forex Supreme Complexity unbiased review

- Forex Hippo unbiased review

- Forex JackHammer unbiased review

- Forex Set and Forget unbiased review

- Forex Outbreak unbiased review

- Forex Shockwave unbiased review

I hope you enjoy the reviews and consider them as good - or perhaps even better - than my previously written contributions. I definitely enjoyed making them and I believe they will do a great job at informing people about the general quality and extent of the evidence and actual potential for long term profitability that these systems have. As always, remember that my approach is based on the fact that the burden of proof is on the authors of trading systems and NOT on our live accounts. Please follow this link to learn more about how I review systems and what you should know about my methods.

Of course feel free to live any comments with any opinions, comments, suggestions, observations, etc :o). If would also like to learn more about my journey in automated trading and how you can gain a true education in this field to design your OWN systems based on sound trading tactics please consider joining Asirikuy.com, 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)

The Destructive Focus on Money : The Greatest Enemy of New Traders

2010-08-18T06:36:00.000-07:00

In my career as a professional currency trader and through my whole experience with Asirikuy members I have been able to gain some great insights into how new and experienced traders think. There are several thought processes that seem to change from the time you start to trade to the time when you have your first profitable year and develop your first profitable system but I think none of them is so crucial as the evolution of your focus in trading. The way new people see trading and the way in which experienced profitable traders see it is absolutely and completely different. The main difference - if anyone asked me - is the focus in money. During the following few paragraphs I will attempt to explain a little bit how new experienced traders view their trading and how the view of professional traders is very different, focusing not on the money, but in the way in which this money is to be obtained.

Viewing things like a new trader is actually not very hard since we all have walked those steps. When you are beginning to trade the forex market you are hoping to "make it big", learn a lot, have small draw downs and huge gains. It is natural to think this way - perhaps due to all the hype - and most inexperienced traders enter the market with a sole focus : to make money. Although the objective of trading is to make money - for all traders - it is true that the main focus of new traders is the money and what happens to it, neglecting almost all other aspects of trading.

The difference here is that new traders don't know almost anything about trading in general. The bast majority don't have strong formations in economics, finances or statistics and they come from a wide variety of different backgrounds with the sole idea that they want to make money. The problem here comes when you see that there is a disconnection between the goal and the technique. New traders know they want to make money but they don't have the slightest idea of how this is made or how others who are successful actually achieve this. It is a world in which they are lost and where there doesn't seem to be any true guidance.

New traders also often come with pressures to gain money which may originate from different sources. They may be pressuring themselves to succeed, they may need the money to live from it, they may have a desperate financial situation, etc. In the end, new traders are simply people who don't have the slightest idea of what they are doing with the only idea that money is what they need to make.

Now the professional trader mindset is very different. Money is not actually the main objective but a consequence of succeeding at many other different aspects of trading. When you don't focus on the "money target goal" but on developing a statistically meaningful edges against the market, money comes to you as a consequence of your rational and sound based effort. Money comes as a consequence of succeeding at trading in general through analysis and understanding. Professional traders know that the most important thing is not to focus on making money but to focus on protecting capital and developing tools that guarantee long term statistical success under varied market conditions.
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The difference between both mindsets can be better explained through a simple example. Image there are two restaurant owners who just opened their businesses. One of them is an experienced restaurant owner while the other one is just on his/her first venture. The first restaurant owner knows that he/she must focus on developing a great menu, get some professionally trained staff and do some well planned advertising. The second restaurant owner rushes in with whatever menu he/she can get, employs half of his/her family and advertises everywhere he/she can. Five years after inauguration the first restaurant remains open while the second one filed for bankruptcy 4 years ago. The morale of the story, focus on the method and the objectives will take care of themselves.

In forex it is quite similar. Often I see Asirikuy members who are new traders focusing on using systems with higher risks and less understanding and evaluation while Asirikuy members who are professional traders focus a lot on the risk and develop an in-depth understanding of the strategies before even considering to use them. It is a matter of how things need to be done to get to a certain point, something which is sadly not known until you actually realize that making money in trading is a difficult goal to reach and it is only achieved in a consistent manner when the focus is on establishing the potential, reliability and robustness of methods and not by perusing an irrationally set money making goal.

If you would like to learn more about trading -especially automated trading - and gain a true education to achieve long term profitability please consider joining Asirikuy.com, 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)

Oh, My Bad Luck : The Perception of Luck and its Psychological Effect in Forex Trading

2010-08-17T04:36:00.000-07:00

It is funny when you see how new traders talk about their first experiences in trading and what they believe happens when they start using a given system. Time after time I have found out people in forums saying that whenever they start to run a system it goes south and that this is merely a consequence of their terrible, terrible bad luck. As a matter of fact there are many reasonable explanations to these phenomena and a clear argument that shows us why most people are bound to start trading systems within draw down periods. Today I want to talk about this "luck" aspect of trading, why people get this perception about their own trading experience and the psychological effect it tends to have in the end.

So why do most systems go into draw down right after you start using them ? The answer to this question is surprisingly simple and tells us a lot about both trading systems and trader psychology. To understand why this is the case we first need to take a look into the way in which inexperienced traders select their automatic or manual trading systems. Usually the only thing new people care about is the slope of the equity curve and the fact that it is making money consistently, constantly and in great or moderate amounts during a period superior to 1 or 2 months. When a new trader sees this type of system he or she immediately wants to use it and set it up. After all, the system has been showing excellent results and why should this be different in the future ?
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The problem to those experienced in trading should now become more evident. New traders fail to understand that systems trade in profit and draw down cycles and that the only way in which a system can remain profitable in the long term is if those profitable periods are greater in magnitude than the draw down periods. However, they fail to grasp the fact that a system can still have very profitable periods and then strong draw down periods that wipe accounts. A general lack of focus on the reliability of simulations and the need to have long term reliable back testing results ends up with inexperienced traders only paying attention to very short term live tests that are statistically meaningless and only portray very short term trading results.

Additionaly- despite the actual long term profitability of a system- the existance of long consistently profitable periods makes the entering into draw down periods more likely since the market is waiting to cash on the system's exposure. So the more attractive the equity curve seems to new traders, the more likely it is to show a venture into draw down territory. In the end inexperienced traders will systematically select systems that have a high like hood to enter draw down periods and this will lead - in the bast majority of cases - to the above mentioned result. Every time you get a system, it seems to start losing money. Oh my bad luck.

However the solution is not to do the opposite and get into systems that are losing money (new traders tend to simplify things this way), the solution is to know the extent of the draw downs a trading system will get into, to have reliable long term trading simulations that can show us precisely what we should expect from the system. As always it is lack of understanding what makes new traders so bad at picking systems and even worse at being able to live through extensive and deep draw down periods (something that is bound to happen with any system). If you look for a system that consistenly makes profits and "seldomly loses" you are getting yourself into this game of picking losing systems and even worse, you are most likely to use systems with very unsound trading tactics and risk to reward ratios.

In the end, the "luck effect" - as I like to call it - has an important effect in trader psychology , ending up with traders losing all their "faith" in automated trading. People who time after time use systems with very nice equity curves only to find strong draw down periods sometime after will most of the time say "automated trading doesn't work" and they will completely quit the quest to achieve profitable trading using this type of systems. However it is important here to understand that what generates this "luck effect" is merely the general lack of in-depth analysis and the desperate search for a holy grail of automated trading. When new traders acquire some experience and they begin to see that the analysis and understanding of a trading system is vital for success, the luck effect immediately starts to vanish since draw down periods become a part of the business and not an undesirable evil.

Of course if you would like to gain a true education in automated trading and learn to design and use systems you can understand and have confidence in please consider joining Asirikuy.com, 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)

To Trade or Not to Trade : A Little Bit About Friday Trading

2010-08-16T05:04:00.001-07:00

Can I disable Friday trading ? This is perhaps one of the most common questions I hear from people who try automated trading systems. Certainly the reason why most people are concerned with Friday trading can be easily understood but when you really look into the evidence people have to avoid trading this day of the week you will find that - for most systems - it is nothing more than a senseless superstition. What is so wrong and different about Fridays ? Should you avoid or not avoid Friday trading ? On today's post I will try to address these questions. I will first explore the reasons why traders avoid Friday trading and what the evidence actually says about trading the last day of the week, after that I will give you my conclusions about Friday trading and what you should do in order to know if you should or should not avoid trading Fridays.

What is the problem with Friday ? There are many reasons traders - especially new ones - give when you ask them why they are so reluctant to trade on Fridays. The first and most valid of these reasons is carrying positions over the weekend. Since traders know that getting a position through the weekend involves the risk of facing an unfavorable gap, they will attempt to avoid the carrying of positions in order to preserve their capital and avoid worse than stop loss trades. It is no mystery that if the market moves against you on a weekend and open up beyond your SL your broker will close your position at the next available price level which is - probably - much worse than your SL.
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Of course, the possibility of disaster changes depending on the trading strategy you are using. Systems that use 100-200 pip stops with a 1-2% risk will almost never lose a significantly large amount of money on a weekend gap (for systems like this the worst case I have found has been a 3-4% loss, just about two losing trades worth) while strategies that take huge risks on tight stops would run the risk of wiping the account on a large gap. For example, if you are trading a system with a 10 pip stop risking 10% (yes, there are systems that trade such an unsound money management) leaving a trade opened through the weekend is suicidal as a moderately large gap of 100 pips will wipe you out and an even larger gap of 200 pips can leave you owing money to your broker (yes, this is possible but I will discuss it on a later post).

The truth is that for all the systems I have tested that use sound trading tactics the largest loses due to weekend gaps have not surpassed a 3 consecutive loss count. It is also worth mentioning that the opposite effect (being on the right side of the gap) also happens with roughly the same frequency so in the end (over a long period of time) the effect of leaving trades over the weekend for these systems is almost the same as leaving trades open during any other day of the week.

Then we also have the fact that none of the systems I have ever tested and found reliable take any benefit from removing Friday trading. As a matter of fact- since Friday contains NFP releases and some other important news events- removing trading for this day of the week causes all the systems to lose a good part of their profitability, causing their net profits to go down and -even worse- damaging the average compounded yearly profit to maximum draw down ratio. Many important trending movements seem to begin on Fridays - with news as the catalyst- and for this reason removing Friday trading has never shown to bring positive consequences for any of the systems I trade.

In the end it seems that the removal of Friday from trading is more of an irrational fear caused by the psychological impact and "probable loss" from gaps than a good practice based on statistical evidence. When using systems that have sound trading tactics and modestly large SL and TP targets it has been evident that removing Friday trading has only detrimental effects on their long term performance. Of course if you would like to learn more about the development of sound trading systems and how you too can use, design and program your own systems based on realistic profit and risk expectations please consider joining Asirikuy.com, 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)

Trading the Noodle Soup : Discovering the Power of Guppy MA trading

2010-08-15T06:24:00.000-07:00

I have always believed that the best trading techniques are the simplest ones. I have realized time after time that complexity is not always the key to success in forex trading and system development and that the use of very simple trading techniques that tackle fundamental aspects of market behavior brings us better results and -more importantly- far more robustness than the more "fancy" and complex trading techniques. One such trading technique which I have always found simple and very good at giving us a general picture of overall market behavior was developed by Daryl Guppy, an Australian trader. Within this article I will talk a little bit about the idea behind the GMA technique (Guppy Moving Averages) as well as its application for the development of successful systems.

The Guppy Moving Average method - which is how I believe it should be called - is nothing more than a simple template that puts certain indicators on the chart in the hopes that they will make trending price action much more evident and easier to handle. This method tells us to use the 30, 35, 40, 45, 50 and 60 slow moving averages and the 3, 5, 8, 10, 12 and 15 fast moving averages. The Guppy method teaches that the first group corresponds to the "long term trader behavior" while the short group corresponds to the "short term trader behavior". Guppy seems to have understood these moving averages as the representations of the behavior of short term and long term traders within the currency market.

Obviously when you look at a chart - especially at strong trending periods - through the Guppy lens, things seem to align perfectly with what you would expect and trending price action seems to become crystal clear. Below you can see an example of such a period on the EUR/USD. You can notice perfectly how the fast moving average group "collapses" when we are within the retracement of a long term trend while the slow group remains showing us overall trend direction. Guppy Moving Average charts have always reminded me of noodle soups (because of all the lines and their interactions) reason why when I trade with Guppy's indicator setup I like to refer to it as trading the noodle soup.
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However after you spend sometime studying the GMA and its actual use to create a real trading system which succeeds in time you will notice that it is not very straightforward to do. Although many websites on the internet talk about the GMA method, how to setup the charts and the general information given by the interaction of the moving averages none of them describes a real system which allows us to mechanically apply the GMA to obtain long term profitable results. As always it seems that all we have is some pretty noodle soups and no idea of how to interpret this information to arrive at a system that is able to exploit the information shown on the screen to our advantage.

It is fairly obvious that the GMA method is not without its problems and obviously this makes its mechanical application difficult at first. However after analyzing a lot of the characteristics of the GMA and the way the two groups of moving averages interact I was able to come up with a simple yet powerful system that allows us to exploit long term trading behavior within the daily charts in a mechanical way with precise sets of rules on several different currency pairs (ten year backtest of the EUR/USD shown below). This is indeed a fairly simple moving average based system (with the moving averages used by Guppy) that achieves profits in the long term (note that these simulations on daily charts are bound to very live/back testing consistent).
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The specifics of this trading system's rules will however remain hidden for the moment as I believe this idea and its results will form part of a future Currency trader magazine article and they will be further polished to become a future Asirikuy trading system. If you would like to learn more about my automated trading systems and how you too can design and build your own reliable strategies with sound risk and profit targets please consider joining Asirikuy.com, 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)

Experience, Mathematics and Discretionary Trading : Why a Mentor is Vital When Doing Manual Trading

2010-08-14T06:58:00.001-07:00

I have always thought that one of the most important aspects for success in forex trading is to understand and completely know the expected profitability and especially the expected draw downs of the systems or techniques we are using. In automated or mechanical trading this seems pretty straight forward since simulations allow us to have a good idea of how our system behaved in the past (if the simulations are done in a reliable manner) while in manual trading it is quite a mistery how this is exactly achieved. If you are trading a discretionary technique in which there is no "mechanical set of rules" perse, then it becomes very hard to know the expected profit and draw down goals you should have in mind. On today's article I will share with you what I have found out when speaking to manual traders (those who failed and those who succeeded) and what they use to achieve this "determination of system characteristics" which is so necessary for long term success.

Although it seems that mechanical and discretionary techniques are too completely polar opposites it is clear that both of them seek exactly the same thing : to have a clear mathematical edge so that profits can be extracted in the long term. The problem with manual trading here is that measuring this "edge" is extremely difficult since the trading mechanics are blurry and there is no way to systematically apply them to the past. This is precisely one of the reasons why manual trading for most people is so difficult and only a handful eventually become profitable discretionary traders. The problem here is that you cannot know if what you are doing is "right or wrong" since evaluating, trading and coming to conclusions is a slow and seemingly masochistic process that ends with the realization of a mathematical edge and adequate profit and draw down expectations.

After talking to many manual traders during the past few months I have come to realize that those of them who succeeded quickly had something very simple in common : a successful mentor. When you are using discretionary trading the only way in which you can "cut the road" and gain an idea about the mathematical expectancy of the discretionary method and its intended profit and draw down targets is if someone who has already gone through the whole experience guides you through the process. New traders are taken under the wing of a successful manual trader have the advantage of counting with his/her experience which counts as a "trading record" that already shows evidence of what works and what doesn't and what has seemingly shown a mathematical edge in the past.

Manual traders who are not this fortunate seem to go through a very painful road that seems to have two main options. Either the trader becomes completely mechanical and decides to use systems which can be defined and simulated in computers to get the draw down and profit targets needed for success or the traders decides to take the discretionary road in which these targets will only become apparent after long periods of time (what seems to be an average of 5 years).
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It is however good to say here that this doesn't make automated trading or even the trading of mechanical systems in a manual way any easier than discretionary trading. Even though both roads eventually seem to lead to the realization of a positive edge and long term profitability in the market the truth is that both of them require huge amounts of work and a lot of effort. They both have similar psychological traps and both make the journey as hard. As a matter of fact achieving a certain level of average profitability in the long term with an algorithmic trading system is just as hard as doing it with discretionary trading although both roads are difficult in different ways. In both method people will fail incredibly in the beginning and success will only come when a deep understanding appears.

In both ways of trading your chief opponent is yourself and your ability to tackle the psychological issues related to trading will be vital. However it seems that when people are venturing into the world of forex trading through a discretionary path having a mentor seems to play a huge difference. Interestingly enough -from the number of discretionary traders I know- about 1 in every 20 has been profitable for at least 5 years and all of them had a mentor who taught them how to be profitable in trading. It is easy to note that this "passing of knowledge" makes new traders "take a leap" and gain many advantages that other traders who may attempt to become successful without a mentor do not have.

So my advice here is also pretty simple. If you want to become a successful manual discretionary forex trader, find someone who has already done this and get an education from him or her, it will save you a lot of money and it will give you an edge the bast majority of new traders do not have. If would rather become a mechanical trader using sound systems you completely understand with clear draw down and profit targets please consider joining Asirikuy.com, 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)

Watukushay No.5 and JPY crosses : First Encouraging Results

2010-08-13T05:22:00.001-07:00

When I coded Watukushay No.5 my idea was to build a universal breakout system that could be used to exploit a wide array of market inefficiencies in the foreign exchange market. After discovering 10 year profitable backtesting settings for 6 different currency pairs it seemed that this system was able to achieve this goal with similar profitability and good profit to draw down ratios on all of these different instruments. However it then became clear that the system was missing to conquer one formidable enemy which has eluded me since I first started my ventures in long term profitable trading : the JPY crosses. Within this article I will share with you some of my first profitable results on a JPY cross using Watukushay No.5.

The JPY crosses are definitely hard to trade and to exploit mechanically and the reasons why this is the case are many. Perhaps the most important reason is the general lack of liquidity of these instruments which causes wild swings and unpredictable behavior with some trading days having even 1000 pip rallies and some others having 1000 pip whipsaws. It becomes clear then that coming up with a trading technique using Watukushay No.5 to exploit their trading behavior would not be easy but since I always enjoy a good challenge I decided to give this a shot.

When I first started to try Watukushay No.5 on the EUR/JPY, it seemed that the EA would be unsuccessful in trading this pair. Settings that gave 10 year profitable results on other pairs were marginally profitable and an analysis of the backtests revealed promptly that the inefficiencies I was trying to exploit were very weak, if even existent at all. By analyzing the initial simulation results and trades I then realized that perhaps I needed to give this problem a fresh perspective, maybe the problem could be solved by changing focus. This is when I realized that eventhough short term or long term breakouts as those traded by the USD/CHF and NZD/USD respectively were not going to work on the EUR/JPY, it seemed that the strong whipsaws and changes in direction in the longer time frames could in fact be traded to achieve profitable results.

So the answer Watukushay No.5 gave to the EUR/JPY was quite clear, it is not trading in the direction but fading long term breakouts what might work for this currency pair. I then started to use long periods of breakout-box definition (hundreds of hours) and I started to test the limit function of the EA which reverts the pending order positions and their intent with breakouts towards the upside triggering short trades and breakouts towards the downside triggering long trades. The results started to look much better and an inefficiency that could be exploited with modest results started to arise from the dark.
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The above image shows you how this technique actually works for this pair. Long term period breakouts tend to signal reversals since - on this pair at least - strong moves towards one side seem to signal reversals while they rarely signal true trending periods. This shows us how different the behavior of this currency pair is when compared with the other pairs traded by Watukushay No.5, on other instruments the EA exploits breakouts that lead to trades that follow overall trend direction while on this currency pair an inefficiency which is almost opposite in nature appears to take place.

The ten year backtests shown below (Jan 2000 to Jan 2010) show us that the EA indeed manages to achieve long term profitable results for this currency pair. However the fact is that the average compounded yearly profit to maximum draw down ratio is almost 1:3 (so there is still a lot of improvement needed before we can add this to our portfolio). The important thing here is that we were able to achieve our first 10 year profitable settings for this pair and now that we know the nature of the inefficiencies we can exploit it will become much easier to find more profitable results for this and other currency pairs.
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In the end it seems that Waukushay No.5 is indeed a very powerful and universal breakout trading system that can be used for the finding of breakout based inefficiencies on a wide array of different currency pairs. With the JPY crosses we will hopefully be able to add the EUR/JPY and GBP/JPY to our current instrument portfolio for this EA. If you would like to learn more about Watukushay No.5 and its trading tactics and results in live and back testing please consider joining Asirikuy.com, 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)

To Look or Not to Look ? : Setting and Forgetting in Automated Trading.

2010-08-12T01:00:00.000-07:00

We all fear that moment when we open up our trading terminals to find out that some portion of our profits or even worse, our initial investment capital, has been wiped out. Looking into a trading account continuously is one of the hardest things to do when getting involved in automated trading and certainly the emotions and reactions that take place when we do so lead to many of the devastating consequences that make profitable automated trading a very hard thing to achieve for most new and inexperienced traders. For many people new to automatic trading execution the answer to this problem - in which looking into losing trades makes them lose control - is a simple "I'd rather not look". On today's post I am going to discuss this issue a little bit and why you cannot expect to be successful just by "setting and forgetting" and "avoiding to look" when using algorithmic trading systems.

There is something very hard about looking into a losing account or an account with trades in open draw down that makes us want to forget about them or do something to make this stop. Definitely when people start to actively deal with their accounts they generally take very bad decisions that end up costing them far more capital. Inexperienced traders usually change systems upon draw downs, interfere with the trading of automated systems and get desperate and frustrated when things spend a lot of time going against them. However, given the knowledge that long term profitable systems are hard to trade because of this, many new traders simply decide to "forget" about the accounts and system to avoid intervening and dealing with the psychological aspects of trading.

This decision is absolutely logical and it is the easiest and most obvious answer to the above mentioned premise. If you're telling me that long term profitable systems are hard to trade because they have long and deep periods of draw down then I'll just trade the system and forget about it so that I do not interfere nor suffer from these draw down periods and their existence. Although this may sound good at first, this is a very dangerous road that often leads to as many losses as the first one.

In order to understand why this is the case we first need to see how people who are indeed successful with mechanical trading systems achieve this. Definitely it is not by not looking at the systems but my gathering knowledge, strength and confidence by doing the exact opposite. The difference between an experienced and an inexperienced trader is evident when you look at the ways in which they react to the exact same situation. While within a draw down an inexperienced trader would suffer from despair and fear (only avoidable by not looking at the account) the experienced trader can look into the account and see a temporary cycle which is just a pair of his or her regular business goals. If the account then goes onto a cycle which signals that it has become too risky to be traded the experienced trader will quickly realize this and eliminate the system from his or her portfolio while the other trader will trade the system to oblivion since he or she isn't even paying attention.

What I am trying to say here is therefore pretty simple : it is not about setting and forgetting and avoiding to look into your systems and accounts, it is about looking into them and understanding what they are doing and if what they are doing is part of what they are supposed to do. Certainly at first trading long term profitable systems will require a lot of self control and discipline from new traders but in the end this ability to look at the accounts, understand, expect and evaluate in a cold-headed manner is what distinguishes the few that do make it in this business from the big crowd of traders who fail at this endeavor.

My advice here is therefore quite straight, if you want to succeed at automated trading you should keep a close eye on all your live accounts and on their performance. When you feel emotions because of their profits/losses, turn them into understanding, learn all the ins and outs of your system's logic, its profit and draw down characteristics, what it is supposed to do and how it does it, only in this way will you be able to achieve success in this very hard business called automated forex trading.

If you would like to learn more about my experience with algorithmic trading strategies and how you too can receive a true education in automated trading please consider joining Asirikuy.com, 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)

Are you Ready to Make it in Automated Trading ? : Five Questions you Should Ask Yourself Before Expecting Success

2010-08-11T04:35:00.000-07:00

The truth is that we all want to get into forex automated trading systems and reap a profit from the market time after time after time without any concern for draw down periods, eventual loses of profitability or such other problems that may arise from the mere trading of any strategy. These understandable - yet extremely dangerous - attempts to avoid the "bad" parts of trading leads inexperienced people - sadly more often than not - to fall prey to systems that do not have enough evidence of profitability or which have evidence that is simply unreliable. The reasons why people tend to lean towards these systems are actually quite simple, they are not ready yet to achieve long term success in automated trading.

During the next few paragraphs I will share with you the five most important questions you should ask yourself to know if you are actually prepared right now to deal with and use long term profitable strategies. The questions attempt to measure your degree of preparation to the dangers and inherent pitfalls of trading and whether or not you are actually ready right now to face the challenges that will come with this decision. As a matter of fact, chances are that if you do not answer at least 4 of these 5 questions positively you will fail when attempting to use a long term profitable system to succeed in forex trading. (these questions are actually based on many interviews I have done with new and experienced traders)

1. Do you think you can make it in trading within 2 years ? Don't answer this question so quickly. Of course, trading is hard, but do you believe you can make it easily around this market or do you believe it will take you more than two years ? I have found that most new traders believe that it will only take them a year, two year tops, to reach the status of being profitable in trading while - as a matter of fact - it has taken at least 3 to 5 years for most profitable traders I know. If you have a mindset focused on the next 1 or 2 years then many long term profitable systems are bound to be a disappointment since you will be looking for monthly or weekly results that most of the time won't be there.

2. Do you suffer through open losses ? When you have a trade that is open in floating draw down, do you feel depressed ? do you feel like intervening ? A very important characteristic of people who are able to trade long term profitable systems successfully is their ability to withstand open losses without the slightest degree of emotion attached to their trades. Perhaps this is one of the hardest things to do for new traders but achieving this point is vital for long term success.

3. Would you trade a system with this equity curve (5 month results) ?
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Most new and inexperienced traders (the guinea pigs in my animal kingdom trader classification) would obviously say "never, ever" while more experienced traders would ask more questions about the system. It becomes obvious that a 5 month period is statistically irrelevant for a long term profitable system and knowing more about the long term trading characteristics of the system is vital. If you understand the concepts of "long term focus" then you are a step closer to being ready to trade a long term profitable system.

4. Do you change systems often ? Another very important characteristic of people ready to trade long term profitable systems is that they are capable of committing to a given trading system for larger amounts of time. Most new traders will quickly ditch and change systems when their short term results do not fall in line with their expectations (a reason why long term profitable systems are so hard to use). If you don't change systems often (you have stayed for at least a year with a single system), you can add one point to your scoreboard.

5. Is a 30% average compounded yearly profit bad ? Without a doubt, almost all new traders will say that this average yearly profit value is extremely bad since they have seen and used systems that have been able to make much more than that within weeks if not even days. The reality here however is that traders who have a little bit more experience and a true focus on the long term aspects of trading will definitely say - it is a good profit target. If you think that a 30% average compounded yearly profit is a good profit standard, then you have passed this test.

Perhaps if you are a new trader many of the above questions won't make a lot of sense to you and you may even consider me "close minded", "sore loser" or any of the other qualifications used by new traders to describe more experienced ones. However, with time you will find out that the above questions are very sound and that they do signal a turning point in a trader's thinking and profitability goals.

If the above questions make sense and you have answered positively to at least 4 of them then you are now - most likely- ready to start your journey in long term profitable trading using systems with realistic profits and draw down targets. Of course, if you want to learn more about my work on this field and how you too can start designing, programming and using your own systems please consider joining Asirikuy.com, 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)

Why People Do Not Take Advice : Five Reasons Why Learning From Others is SO Hard in Forex Trading

2010-08-10T05:29:00.000-07:00

You have just started trading forex and you feel that this is what you've been looking for your entire life. You then find about automated trading systems and you think - "this cannot get any better". What makes people believe that absurd profit targets are possible and that a hands-free system could turn a few dollars into millions within just a few months or years ? What makes people think they can get away with this when practical experience shows that this has never been the case ? On today's post I will explore the reasons why people - time after time - take bad trading decisions in the forex market and specifically why they neglect advice from more experienced traders who attempt to provide guidance. You will see why following advice in forex trading is so hard and why almost no one will be able to take short cuts through other people's experience.

My step father has always been a very intriguing person. A trained medical doctor with more than 30 years of experience in gastroenterology, he is what I would call a rational person who can understand and listen to arguments. However, he does buy one lottery ticket every week knowing that his odds of winning are roughly 1 in 8 million. Last year I told him that if what he wanted to do was indeed win the lottery, it was better to spend all the money he would have spend in lottery tickets for the year on one single event since this way the probability to win would be 52 times higher, roughly 1 in 15K. My advice with a sound and strong statistical background was simply laughed at and discarded.

Why do people tend to discard advice that would increase their probabilities of making money in the long term higher ? Why is it so hard to listen ? Why do new forex traders do not take advice from much more experienced traders ? In the following paragraphs I will share with you the 5 main reasons why I think this is the case, showing you why this happens and why it is likely to continue to happen as long as there are new traders.

1. The "I am special" problem. When you enter a market where the bast majority of people lose their first account and almost nobody seems to be living from automated trading people have to resort to some defense mechanism to be able to buy into something that is evidently not as good as portrayed. People then start to believe that "most people lose but I'll make it", "I'll find the system that works", etc. The truth my friend is that neither you or me are ANY especial and if something is not working for most then the largest probability is that it will not work for you or me either. However new traders often believe that there is something "special" about them and therefore they neglect to take advice because "they will do what that experience trader couldn't", etc. Even though this could be the case, the largest probability is that it will not.

2. The greed bug. Perhaps almost deserving a post on its own, the "greed bug" is the largest reason why traders neglect to listen to more experienced people. They want to achieve huge profit targets in small amounts of time and they will not listen to anyone that attempts to tell them this is not possible. The argument here is most of the time "the fact that he/she couldn't do it doesn't mean that I will not" but the reality here is not only that one experienced trader wasn't able to achieve it but simply that no one has been able to pull this off in a sustained manner. As the saying goes, there are old and bold traders but no old bold traders.

3. The problem of what seems possible. Even though there is no one I have ever seen who can show a track record of ten years with huge profits and small draw downs, the fact is that new traders see this as possible due to the fact that it seems this way. Many people are able to achieve 100-200% profit levels on some months (of course later on wipe-outs arrive) but inexperienced traders tend to believe that "if only they could reproduce that successful month" they would achieve their goal. They fail to listen to more experienced traders because they believe they have the "key" nobody else has and the fact that having a few months of high profitability is possible should "prove" that it is indeed possible and that experienced traders are just sore losers.

4. Small risk, huge potential. Another reason why new traders neglect to take the advice of more experienced people is the fact that the risk is often small but the potential seems huge. You are risking just 100 or 1000 USD to trade a system that you see in simulations can turn that into millions of dollars within 10 years. What is it there to lose ? 100 USD against 10 million ? who wouldn't take that chance ! However the reality is that the chance of the system working are 0 and this potential is just an illusion. Nonetheless, for as long as there is something that remotely suggests this is possible new traders will keep on saying, "small risk, huge potential", when in reality no one has ever cashed on this promise.

5. Keeping the dream alive. New traders are often charmed by the fact that forex may be their gate towards a hands-free income with unlimited potential and small temporary loses. When someone tells them that this is not possible and that very hard work, effort and understanding is needed to even achieve the most conservative long term profit targets they will feel depressed. It is far easier to ditch this advice as being "close minded and sore loser type" than to realize that there is simply no free lunch and that if it was so easy, possible and straightforward all your neighbors would have been doing it for years.

Of course, I was also a new trader sometime and I know what it is to ignore experienced trader advice and to think "I am special" and "this will work for me". Although I believe that for the above reasons it is almost impossible for new traders to listen to and take in advice I also know that traders who stay in this game long enough will realize through their own monetary loss that the things they were told in the beginning were nothing but the most transparent truths. Right now I know I would have been very wise to take the advice that was offered to me when I started trading but obviously every experienced trader will tell you this in hindsight.

Sadly it seems to be a characteristic of this game that it is extremely hard to cut corners and learn from other traders' experience. The above reasons will make new traders ignore experienced advice until they learn that advice to be true through their own experience. They will have to go through the "I will give it a shot" phase and then come back with some financial loss and knowledge behind their backs. For some this process will never end and they will take shots at the dream until they are drained and convinced that "profitable trading does not exist" while others will eventually make the change and start to get onto the road of long term profitability with realistic profit and draw down expectations.

If you would like to learn more about my journey in automated trading and how you too can start to build and design your own likely long term profitable systems please consider joining Asirikuy.com, 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)

Volume Based Forex Systems. Can it be Done ?

2010-08-09T05:31:00.000-07:00

When you analyze the forex market one of the first things that becomes clear is that the finding of true volume information is very hard if not actually impossible. Since the forex market has no central exchange it would require a person to track all of the largest banks in the worlds in order to know the real volume and magnitude of the transactions being done. Doing this in a real-time fashion to get volume data like that of stocks or futures would be a gigantic task that would most likely be frustrated by the complexity and "disorganized" nature of the foreign exchange market. So the question becomes, is there any way to measure volume ? is there any way to design a system based on volume information ? During this post I will share with you some of what I have learned about this problem and the best solutions that we have to tackle this issue.

Even though there is no such thing as a source of true volume information in forex trading, we could find a property that is correlated with trading volume which allows us to trade it in a way similar to how we would actually trade "true volume". The only property which has been studied extensively and which does show a strong correlation with true volume (at least we know this from other markets) is the tick number which corresponds to the number of times price is refreshed on your trading platform. This means that if during an hour there are 50 price quotes, then this hour is bound to have much less volume than an hour where there are 1000 price quotes.

Our problem here would be to use this tick volume information in a manner that is as less broker dependent as possible. Since different brokers have different feeds, filtering and liquidity providers it becomes impossible to actually use values of absolute volume as the starting point of any given trading strategy. A system that would attempt to use tick volume absolute values would certainly fail since these values are totally broker dependent and there is no way in which they can be related with actual market inefficiencies.

However the most interesting part comes when we realize that tick volume does go into predictable cycles and that we could build an indicator that normalizes this values so that we can have an "oscillator" that describes tick volume movement relative to the past X bars. This indicator would be similar to the stochastic oscillator used on price charts with the difference that it would use tick volume data. The oscillator would move to high regions when we are trading near the volume tick high of the past X periods and to low regions when we are trading near tick volume lows. By obtaining volume information that is relative and does not rely on the absolute tick volume values of the instrument we are trading we can make sure that broker dependency would be diminished and the design of profitable trading systems could start to happen.

Such an indicator could be used in several ways to find and exploit possible inefficiencies. For example, we could trade breakouts when volume drops below a certain oscillator threshold or we could attempt to trade continuations whenever there a price action movement with enough tick volume towards a given side. We could in fact also use volume information to find meaningful situations where patterns that would normally not be very interesting become relevant when they happen within the high regions of the tick volume oscillator.
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Certainly it is important to see that although there is no exact true volume information in forex the fact that we do have tick volume information and the fact that this tick volume is proportional to true market volume could allow us to develop successful systems since we have a totally new dimension of information which we don't have when we look exclusively at price charts. However it is very important here to realize that normalization of tick volume information is necessary in order to avoid broker dependency and such other problems that would make system development with absolute tick volume information a total nightmare.

The article right after mine on the last issue of currency trader magazine explores the use of some tick volume information and indicators for the development of long term profitable strategies showing that this indeed can be done, leading to very interesting results. Now it is my turn to see if Metatrader 4 is up to the task :o)

If you would like to learn more about automated trading and how you too can develop your own likely long term profitable systems please consider joining Asirikuy.com, 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)

The Biggest Issue of Online Forex Trade Learning Sources : The IMO Problem

2010-08-08T05:19:00.000-07:00

Like most of you, when I first started to learn about forex trading and how to make it in this business my first source of information was the Internet. When I began to learn how to trade the Internet was already flooded with millions of pages with information about trading and dozens of forums with hundreds of posts telling me what I should be doing and how I should be doing it. However after a lot of years have passed I can tell you that this initial "online education" was more detrimental to me and my trading than what it was positive. If I hadn't had access to online learning sources I would have probably started being profitable much earlier. On today's post I will share with you the reasons why I think most online sources are destructive, why they turn out this way and what you can actually do to filter your online learning so that you keep the best and eliminate all of the things out there that are simply misguiding you and probably making your trading far worse.

I called this post the IMO (In My Opinion) problem precisely because one of the biggest problems in online learning is the fact that the credibility and reliability of the sources cannot be verified. For example, thousands of people post on forums and everything is done in an "IMO" manner. People give their opinions - usually without any form of support - leading you to believe something is true which probably is not. The problem here is not that people want to learn and share but the problem comes down to the fact that there are no hard facts behind what people are saying.
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I remember that when I was starting I was a fan of some of the most popular forex forums online (now at least, back then they were beginning) and people used to tell me different things all the time that would be confusing to me . For example, other users would tell me "use an ADX to filter ranging markets" but there was no hard evidence behind this. People never showed me any system that showed an improvement when this was done with statistically convincing evidence (like a simulation of some sort) or a real track record that showed that this was indeed the case. The reason behind all of these suggestions is usually the very limited experience of the users and the excuse behind it is usually given as "IMO".

New traders are very vulnerable to what they are told - since they have no experience of their own - and therefore they are prone to believe whatever people who might appear more experienced tell them. Anyone could start a forum post, a blog or a website saying that they know how to do things and that they have the experience but finally what helps you learn is not opinion but hard facts and evidence. When you are learning to trade, you have to bear in mind that "IMO" is not good enough and that everything someone tells you needs to be backed up by some form of tangible and measurable evidence.

This is the reason why most online learning sources were detrimental to my learning, I was exposed to a lot of "IMO" and I attempted to try everything since I couldn't actually know the real experience or profitability of the people behind the wheels and there was almost never evidence showing that there was some substance behind the suggestions and reasoning being made. For this reason I developed what I have heard people call a "scientific approach" to trading, which means that I take decisions and use systems and tactics based solely on evidence and not on anyone's opinion (not even my own). I finally found that this was the only approach that worked for me since results were tangible, measurable and verifiable by anyone else. At last I found a way in which I could learn how to trade that was not subjective.

My advice to you then is to put a LOT of focus into the actual evidence presented around what people say and to only follow advice - if there is any evidence presented - after you do your own analysis and make your own conclusions from what is being shown. If somebody tells you, do this or do that "IMO", you should just ignore it and focus on advice which is not based simply on mere opinion but on track records, analysis, understanding, etc. Having objective advice, based on actual evidence is invaluable and something which would have boosted my learning process incredibly. I am also not asking you to take this advice blindly (which would be contradictory) but I encourage you to give both approaches one month and see which one better improves your trading. For me, after years of spending time learning in a disorganized online environment a focused, objective and evidence-based approach finally worked.

If you would like to learn more about my journey in automated trading and how you too can learn to use and understand automated trading systems through an evidence-based method please consider joining Asirikuy.com, 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)

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

2010-08-07T04:40:00.000-07:00

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

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

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

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

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

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

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

If you would like to learn more about my work in automated trading and how you too can start to gain a true education to build and trade likely long term profitable systems please consider joining Asirikuy.com, 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)

Releasing My Free Ebook... An Introduction to Automated Trading

2010-08-06T04:25:00.000-07:00

After a lot of thinking and editing, today I am finally releasing the first version of my free ebook "An introduction to automated trading". This new ebook is a compilation of what I consider to be the best content of my blog to this date, the sum of a lot of basic knowledge about automated trading that should largely benefit traders who are new to this field. On this article you will be able to read more about my ebook, what it is about, what its objectives are and finally you will be able to download the pdf and enjoy the fruits of this effort to generate a high quality content guide for those people who are desperate in finding some truth in the world of forex trading.

When I see my website's keyword and search engine analysis it is a little bit disappointing to see how the posts that are visited are never those which I think portray the basic knowledge needed to start a profitable journey in automated trading. I spent a lot of time and effort in the writing of all this content and certainly it is pretty bad to see that it is almost never accessed. Of course, part of this problem is due to the fact that my blog's content management system is so primitive (more like blogger's content management system) but a larger part is due to the fact that updates are too frequent (daily) and therefore very good posts get lost after being only read by my very faithful audience (thanks again for visiting my blog !).

In order to solve this problem I decided that the best thing to do would be to create an ebook that would hold all the best content of my blog such that people could easily access my best posts and read them in an easy and convenient manner. My objective with this ebook is to increase the coverage of these very important posts by making them available within an easier to use format. All of this ebook's contents are already freely available within this blog but the ebook format makes them easy to read and easier to browse. There are literally hundreds of posts on this blog and finding those that I would want to be the most visited ones is very hard, a problem the ebook will solve.

Another important aspect is the fact that the ebook will increase the awareness about the myths and lies portrayed by EA sellers and people who want to push products in the automated trading industry, something that will certainly benefit newbies and generally people who are new to trading. I have the highest hopes that people will share the ebook online and make it a "must read" for those who want to venture in this field, however time will tell if this does become the case.

The ebook contains a lot of content which I consider basic knowledge that everyone who wants to try automated trading should have. The ebook has a section about "market truths", covering basic realities of the market (such as realistic profit targets) , a section dealing with trading system design, another one about automated trading psychology and losing periods and a large section containing posts about the understanding of indicators and how they can be used for the creation of automated trading systems (which is the indicator series of posts). The ebook has 95 pages of content, including more than 30 of my best posts (in my opinion at least). If you would like to suggest the addition of any posts, or you would just like to give your opinion or a suggestion feel free to leave a comment. I would be thrilled to know what you think about this new release !
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It is also worth mentioning that from later today my paid ebook will also become unavailable as a single purchase and it will only be available by joining Asirikuy, this ebook will also be updated later today to include new content :o). If you liked my free ebook and you would like to start a journey in automated trading based on truth, transparency, analysis and understanding please consider joining Asirikuy, my website about automated trading and the achievement of profitable trading using long term profitable systems.

Liquidity in Forex, Part No.2 : Analyzing the Liquidity of Different Pairs

2010-08-05T05:41:00.000-07:00

On yesterday's article - which was part No.1 of this post - we talked about the definition of liquidity and the implications of high and low liquidity levels on the forex market. Today we are going to give an in-depth look to liquidity in the forex market, particularly I will talk about recent literature in economics dealing with the evaluation of liquidity on several different currency pairs and what we can conclude and use from this analysis. After reading this article you will have an idea about which are the most liquid and illiquid currency pairs, something which should give you a good idea of what pairs you would want to focus on for the development of mechanical trading strategies.

First of all, it is important to understand that liquidity in forex in simply a pain to research. In order to investigate the liquidity levels of any given market instrument we need to have all transaction information including, type, volume and time. This means that we need access to the "books", the registry where all the transaction information of a given broker is kept. Since there is no central exchange in forex, we cannot get the real liquidity values but if we choose a broker that uses a large array of liquidity providers and we take a look at all their transaction we might be able to draw some general conclusions regarding overall pair liquidity values (at least relative to each other).

The Swiss National bank published a paper a few months ago dealing with the evaluation of liquidity on the FX market (you can access it here). Besides discussing previous literature findings regarding forex liquidity the authors investigated the liquidity levels of several different currency pairs using data from 2007 to 2008. The authors used a daily reversal measurement (explained within the paper) of liquidity in order to get a comparable to number to use between the different currency pairs.
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The study's first findings show us that the EUR/USD and USD/JPY were the most traded instruments during the testing periods while the AUD/USD and USD/CAD had the lowest trading volume. The authors also emphasize on the fact that even though the GBP/USD is an important pair it is very illiquid when compared to the EUR/USD, confirming the findings of previous studies and pointing to the reason why the development of GBP/USD based systems is far more difficult than for the EUR/USD since the lower liquidity makes inefficiencies harder to exploit in a mechanical fashion.

Another interesting conclusion is the high liquidity of the USD/CHF and EUR/CHF during this period which the authors attribute to the safe-heaven status of the frank and the economic crisis during 2007-2008. The study also shows us that liquidity is not constant but changes considerably over time with most currency pairs starting to lose liquidity around August 2007 (carry trade unwinding) rebounding slightly and then resuming the downtrend at the end of this year. This analysis shows that stressful periods in the market are characterized by important drops in liquidity having a very strong relationship with risk sentiment.

Perhaps the most important contribution of this article is the development of ways to measure liquidity and the finding of correlations of FX pairs' liquidity with other financial instruments or markets where liquidity is more easily measured. This in turn would allow investors to watch for drops of liquidity, something that could be especially important to those investors looking to shield themselves from crisis periods (investors involved in carry trades for example).

Of course, for us the most important findings are the relative levels of liquidity of the different pairs and their relative relationship. From the above mentioned study we can see that definitely system development should be focused on the EUR/USD and USD/JPY while longer term strategies aimed at "harder" to trade instruments should be used on pairs like the GBP/USD and the USD/CAD.

If you would like to learn more about system development and how you too can develop systems for these currency pairs with sound trading strategies please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Liquidity in Forex, Part No.1 : What it Means and Why it is Important

2010-08-04T04:50:00.000-07:00

The term "liquidity" is used a lot in trading and finances since it is a vital aspect of market behavior. However, people often use this term very liberally in forex trading often without understanding its exact meaning and the implications of high or low values of this particular property. On this article I want to explain to you what the term "liquidity" is, what it exactly means, its implications within a given instrument and why it is such an important characteristic of the market.

Imagine that we had 20 people standing on a circle with 19 of them holding empty glasses and one of them holding a glass full of water. Now we want to see how much time it will take for the person with the glass to pour it onto the next one and so on until the water reaches him/her again. What we find is that it takes a long time for the water to be exchanged along the full circle because only 2 players are able to participate (the one holding and the one receiving) while all the others have to stay on the sidelines, waiting for their glass of water. Now imagine that we give half of them a glass of water, the process is much faster since the number of active participants has now increased to include everyone, all the people are actually exchanging water all the time.
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Liquidity on the market is nothing else than the "water" in the above example, it is the amount of volume exchanged of a given instrument over a given amount of time. When there is high liquidity there is a lot of volume being exchanged and when there is low liquidity there is little volume being exchanged. When we have a lot of volume people can get in and out of the market easily (since there is always a buyer for every seller and vice versa) while when there is low liquidity the market gets "stuck" as people have to fight to get in or out of their positions. When there is low liquidity you also get harsher price movements since a person holding a position may be forced to drastically change the offering price to match what the other end - which is very scarce - wants. So while under high liquidity exchanges are easy and swift, under low liquidity prices move more erratically since the offered and accepted prices tend to have larger gaps between them. The consequences for the little trader are unpredictability and spread widening while for the large players the consequences are mainly not being able to get in or out of positions due to the lack of available exchange capacity.

Liquidity in the forex market is extremely difficult to read and study since the market has no central exchange but it is handled over a wide variety of banks worldwide in an over-the-counter manner. The volume of a given contract that has been exchanged during a certain period of time therefore becomes hard to read since it depends on the particular provider you are talking about. Even though the market is praised as being extremely liquid and huge, the fact is that this is only be true if you can access to all - or a lot - of liquidity providers (banks). If you limit yourself to just a few you will see that the liquidity you have access to is nowhere near the trillions of dollars people talk about.

When we are going to trade the foreign exchange market, knowing the liquidity levels of the instruments we want to trade is important since currency pairs with higher liquidity tend to be "easier to trade" since they show more inefficiencies characteristic of crowd behavior while instruments with low liquidity tend to show a more random walk much more characteristic of individual investor behavior. Therefore, instruments that are very liquid tend to be easier to exploit using mechanical trading systems while those that don't tend to be much harder to trade. However, as the time frames get bigger liquidity starts to become a less important factor and crowd-based inefficiencies still arise. This is the main reason why you should look for strategies based on larger time frames and longer period indicators when attempting to design systems for illiquid instruments.

On tomorrow's post I will discuss the inner aspects of liquidity in the forex market a little bit more, I will discuss some of the currently available literature about the subject in economics and the liquidity characteristics of different currency pairs. If you however would like to learn more about automated trading and how you too can start designing and programming your own systems based on realistic and sound strategies please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Watukushay No.5 : The Aussie and the Kiwi, More Encouraging Results

2010-08-03T04:34:00.000-07:00

During this weekend I released the first official version of Watukushay No.5 coupled with all its 10 year backtesting data showing profitable results on 6 different currency pairs in Asirikuy. From my last post about this EA you might remember that Watukushay No.5 had been tested on the EUR/USD, GBP/USD, USD/JPY and USD/CHF, however at that time I hadn't completed my analysis on two other currency pairs that also show us great results with this strategy despite their overall lack of liquidity, the AUD/USD and the NZD/USD. On today's post I want to share with you some of the results of the EA on these currency pairs and how the EA is able to use a completely different trading technique to profit from the different trading mechanics of these two instruments.

As you may already know, Watukushay No.5 attempts to exploit breakout inefficiencies on the different currency pairs. On the 4 majors this is done by exploiting periods of low volatility when the currency pairs form significant ranges, entering breakouts when important moves develop within the following trading sessions. However, these trading tactics do not work well on the AUD/USD and NZD/USD, not only because they tend not to form areas of compact trading but due to the fact that this areas do not lead to successful or unsuccessful breakouts with any statistical significance. In the end if you try the same tactics as with the majors you will obtain slightly profitable results which are definitely not worth using in live trading.

Upon my analysis of these two instruments it became clear that I needed to think the problem from another perspective if I was going to find any profitable results for this EA on these two pairs. This meant going back to a meticulous analysis of the currency pairs and the way in which the medium and long term trends develop within them. After spending a few days working on this I finally realized that the key was to rely on breakouts of more volatile sessions but aiming at much higher take profit and stop loss targets. The idea was that this large breakouts do allow us to predict long term trend direction with a good statistical edge in the long term.

Backtesting results were indeed very encouraging showing me that my analysis had been right. When you exploit this different and larger breakouts on the AUD/USD and the NZD/USD, you obtain some very profitable results which are achieved as the EA is able to follow long term trends through the periodical entering of this large session breakouts. The effect resembles the accumulation technique used by the turtle trading system, allowing us to follow a trend and greatly profit from its long term direction. Below you can see a picture of how this trading works on the NZD/USD, notice how the EA got a lot of profit from a developing trend.
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The 10 year backtesting results also give us great results for both of these currency pairs. We arrive at results which have average compounded yearly profit to maximum draw down targets better than Watukushay FE and the same as Teyacanani on the EUR/USD in the case of the NZD/USD. Surprisingly, the best trading results for this EA have been found on the NZD/USD, showing us the robustness of this strategy as a portfolio solution. The EA shows us its robustness and its ability to exploit two completely different market inefficiencies based on the same trading mechanics but aiming for entirely different things.
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Later today 3 live accounts with real money will be added to Asirikuy to start the testing of the system on the USD/CHF, NZD/USD and a full portfolio setup. Hopefully within the next year we will be able to gather some very useful information about its trading system, its tactics and its ability to tackle changing market conditions. The ability of this EA to adapt to each particular market situation and its very large set of adaptive parameters will probably lead it to succeed in this quest against market changes.

If you would like to learn more about automated trading and how you too can develop your own likely long term profitable systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Evaluating Trading Systems : Characteristics and Quality

2010-08-02T05:03:00.000-07:00

The evaluation of trading strategies is certainly one of the most necessary processes in the trading of mechanical manual or automated systems. The value of evaluation is great since it allows traders to loose their irrational fear and greed emotions and gain a true understanding about the characteristics of the trading system they intend to trade. Part of the evaluation of trading systems involves the judging of different quality parameters to distinguish what makes a system better and what makes it worse, a process which although seemingly intuitive is not so straightforward. Adequate knowledge about the information pertaining to each parameter of the test and what it conveys the user is necessary to know what its consequences actually are in real trading and what their power is from a comparative standpoint. On today's post I am going to talk about how to look at a system's characteristics and what you should be looking for to judge the quality of a given strategy.

New traders are often confused when it comes to the evaluation of trading strategies something which is not surprising if you take into account the whole amount of information which can be derived for a given system. People new to trading first seem to focus on the absolute values of the profit and maximum draw down percentages but judging the quality of a trading system merely by looking at these two values without prior experience is very hard. It is also true that judging a system just through one of these two values is misleading in the sense that it doesn't represent a good overall picture of the strategy's characteristics. For example, saying that a system makes 100% a year does not make any sense if the actual potential draw down is not known and even if it is, other characteristics need to be taken into account.

The most simple way to compare a trading system to another effectively is to use ratios of profit and draw down variables. The profit factor, which compares the gross profit against the gross losses of a strategy is an initial measure of system quality. However, although this type of ratios do give us some information about the past risk to reward long term expectation (especially when evaluated over 10 year periods) they do not talk a lot about the problems the strategy would run into with increases in future risk. For this reason I believe that although these ratios are useful to some extent to compare simulations they do not fully represent the inherent market exposure of the system in a way in which a true comparison is made.

System quality - without a doubt - needs to include an analysis of increases in risk over the projected values achieved in simulations to know the true problems that the user may be running into if - for example - risk in the future increases or the estimation of profit and draw down targets is not accurate. For this reason it seems better to evaluate strategies based on projections of increased risk to know the true quality of the system and how dependent it may be on small glitches in simulations.

In this case our best shot at accurate quality comparisons seems to be the average compounded yearly profit to worst case scenario ratio in which the average yearly profit (over a 10 year period) is compared to twice the maximum draw down of the strategy (worst case ratio). To add more meaning to this increased risk comparison a careful user might also want to test the average compounded yearly profit to double consecutive loses after maximum draw down ratio (worst streak ratio). In this ratio, the average compounded yearly profit is compared to the maximum draw down percentage plus a string of loses equal to twice the number of maximum consecutive losing trades. The idea here is to get an idea about the robustness of the strategy and how bad things can turn before a bad scenario is bound to happen.

Systems that are very sensitive to small changes in the number of consecutive loses will give very unfavorable ratios in both cases while systems that have less dependency on individual trades will get better results. This way of evaluating strategies eliminates by default a lot of systems that use unsound trading tactics such as martingales and systems with very bad risk to reward ratios due to the fact that this ratio comparison makes them show their flaws if increases in risk are presented. One thing all traders should understand is that in the future the risk of any given strategy is bound to increase to some extent and having systems that are able to handle this risk increase is not only vital but necessary for successful long term trading.

The above evaluation criteria also allows you to use systems that don't need to wipe accounts to demonstrate that the market has become too risky for them. For example, a strategy with a worst case ratio of 1:2 targeting a 20% yearly profit may be stopped from trading at a 40% draw down while a system that has a 1:5 ratio in the same situation would end up killing the account before we realize it has become to risky. It is also important here to note that sound systems will have a "worst case ratio" better or only slightly worse than their "worst streak ratio" while systems that use unsound techniques -which will be sensitive to small increases in consecutive loses - will have a much worse "worst streak ratio".

In summary my advice is that you focus on the profit to draw down ratios when evaluating trading strategies but -most importantly - that you evaluate ratios in which the maximum draw down and maximum number of consecutive loses are increased so that you get a true idea about your system's robustness. If you would like to learn more about automated trading and how you too can start designing your own likely long term profitable systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Broker Conspiracy Theories : Are they True ?

2010-08-01T04:22:00.000-07:00

If people new to forex trading have anything in common it is the overwhelming belief in the broker conspiracy theories. Ask ten people on their road to become successful traders about what they think regarding forex brokers and they will tell you that the main reason (or one of the main reasons) why they cannot profit as much as they want is because their brokers "play with them" in such a way that trading profitably becomes impossible (or much harder at least). The reasons why there is such a widespread belief in the broker conspiracy are many but the real question to ask is, is this conspiracy real ? Do brokers willingly play with their customers and mess with their execution and accounts in such a way that profitability is removed ? On today's post I will talk about these issues, giving you my opinion about the broker conspiracy theory and the consequence this has on your trading.

You have just bought your first extremely profitable scalping system, simulations show great results (although they are unreliable for this type of systems), your demo account shows great results and you are ready to jump into a live account with your first forex broker. You open up the account, fund it, get your VPS and start to trade your EA only to notice that your demo and live accounts almost never agree and your demo account is taking almost twice as many positions as your live trading account. Upon checking your live account you see a lot of spread widening, re-quotes and slippage that makes you think : the rumors were true, my broker is messing up my execution.

To tell you the truth, I do not believe in broker conspiracy theories because it is not in the main interest of a broker to harm their customer's performance due to the fact that they make money from the spreads and this means that the longer it takes for a customer to lose their account, the more money they make. Generally what people perceive as their broker "messing with them" is nothing but the harsh reality of trading in the real market. Sometimes if the broker is a "market maker" this may become a little bit shady since the broker may make some decisions to protect itself from quick positioning or scalping, which they do not like due to the fact that they cannot properly hedge their exposure when such small and fast positions are opened. Such decisions may include spread widening, re-quotes, etc.

I have had my fair deal of experience with people in the broker industry (well known brokers at least) reason why I can tell you that most of the things you hear about are nothing but myths. Brokers are not "evil market makers" making money when you lose money, that to me seems like a childish way of putting things such as the brokers are "the bad guys" and you become the poor good guy/gal who could only make it if he or she wasn't screwed as much by the big guys. The first thing you need to do here is to take responsibility for your profits and your losses. Forex brokers are not responsible for your opening and closing of positions and therefore the fact that you attempt to use systems that simply don't work under real market conditions is not their fault.

However I always believe that you should always work with the worst possible case available such that your trading and decisions are as robust as possible. If there is a broker conspiracy and brokers will relentlessly prosecute and make certain systems (like scalpers) totally nonviable then you should focus on trading a system that is shielded from the power your broker has over your trading. Certainly it would not be very intelligent to trade a given system that you know depends greatly on execution variables your broker controls. If brokers do seek to make traders lose, then why in the world would you want to make it easier for them ?

In the end, if you profit or if you don't depends entirely on the decisions you make. If you trade systems that are very vulnerable to your brokers bidding then you will fall prey to the problems of real market execution and - if existent - to your broker's endless hunger for new trader's flesh. As I said before the key here is to take responsibility for your trading and find systems that will allow you to trade with the smallest degree of dependency on live execution variables. Systems that trade in the medium or long term which do not have small take profit and stop loss targets will make you "immune" to any conspiracy since your broker will not be able to control your trading through the manipulation of execution variables.

However it is interesting here to note that I have never heard a profitable trader complain about execution related problems as a "broker conspiracy" since experienced traders know that this is a characteristic of the real market and that being successful despite their existence is one of the jobs YOU have as a profitable trader. It is irrelevant if these problems are or aren't caused by your broker, if they are there and you want to be profitable then make your trading style such that these problems will have a small effect on your account balance. If you are suffering because of execution issues you should know that your trading style is what gives them the room to harm your wallet.

If you would like to know more about automated trading system development and how you too can design likely profitable trading systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Restructuring a Little Bit : New Ebook Update Coming Soon !! :o)

2010-07-31T06:56:00.000-07:00

A few weeks ago I talked to you about a pending ebook update I had from almost January and the fact that I wanted to have a new ebook version ready for release to cover some recent developments and ideas which are not covered within the previous versions of the ebook. I have given it a lot of thought and think I have finally figured out what I want from the ebook, the place it will have, what the update will include and when this update will be released. On today's post I want to share with you my views about the ebook and the update, especially about what this update will include and what I want to achieve with it.

Certainly the ebook has always been an important part of this website and Asirikuy since it features all the basic knowledge I believe someone who wants to be successful with automated trading systems should have. The ebook has covered important aspects of automated trading such as the psychology of using mechanical systems, realistic profit and draw down expectations and accurate analysis of trading systems. I believe that this is exactly what the ebook is about, taking the role of the first training part of anyone interested in automated trading solutions.

Thinking about the ebook this way - as an introductory tool - has meant that certain things I wanted to add do not make a lot of sense while others become very important. For example, the development of Kutichiy, Teyacanani and Watukushay No.5 - which is fully detailed in videos available in Asirikuy - is not worth adding within the ebook since the basics of development are well explained in-text for Watukushay No.1 and No.2. However other things such as an introduction to portfolios, draw down analysis and mathematical expectancy do become very important pieces of knowledge any person new to automated trading must have.

Since the ebook will only be offered through an Asirikuy membership I have decided to make it a very good introductory piece to the whole website and the contents available within it so the new sections will focus on introducing new members to important concepts such as the ones mentioned before. I will also make sure I add significant interactions between the ebook and the website such that new members can quickly find and watch videos that compliment or finish the explanation of certain ebook sections. For example, the section on the God's Gift ATR will include information about which videos to watch to understand the entry and exit logic mechanisms for this system.

Sections on new Watukushay systems will not be added, mainly because those experts' coding, logic and development are explained in detail within certain Asirikuy videos so adding text versions of those explanations would seem redundant taking into account all the content currently available within Asirikuy.

However a free ebook will also be released with this new ebook update. This free ebook will contain - as I have mentioned before - a compilation of many of my blogposts detailing some of the basic knowledge people who are very new to automated trading should have as well as a lot of content regarding tips and advice to achieve long term profitability using automated trading. I hope this ebook will become the chief "must read" for people interested in automated trading in the future.

I have set myself August 15th as a deadline for these new updates and contributions so you should expect the release of all this content on or before this date. I would also like to tell you that since a lot of new content, live accounts, etc, have been added to Asirikuy within the past 6 months, there will be a slight price increase (don't worry, only a few dollars :o)) so if you want to get the current price levels I advice you join before the update. Current customers don't have to worry since they will be able to keep their current subscription rates :o). Also previous ebook customers will be able to get the new ebook update although they won't be able to access the videos unless they join Asirikuy (which they will be able to join at the monthly subscription rate without the initial higher payment).

Do you have any opinions, suggestions, ideas, etc you would like to share with me before these updates are released ? Please leave a comment below !

If you would like to learn more about the current ebook and my website please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Watukushay No.5 : An Excellent System Ready for Release

2010-07-30T03:50:00.000-07:00

After a few months of testing and development I am glad to announce that the first release candidate for Watukushay No.5 is ready to be traded. Some days ago I talked about the first beta release and how I wanted to explore community based development before releasing the EA and after some limited success with this idea I have found enough profitable results for this system as to release the EA to all Asirikuy members. The release candidate of Watukushay No.5 will be ready for live trading featuring adequate error handling and functional decomposition with high-quality code that will allow us to have reliable and well-executed live trading results. During the next few paragraphs I want to share with you the importance of Watukushay No.5's achievements, a little bit about what I was able to achieve with this system and what it represents to the Asirikuy community.

As I mentioned on the previous post about this expert's beta, Watukushay No.5 is a universal daily breakout system that is able to enter the market on a wide variety of circumstances adapting itself to the inherent characteristics of each different daily breakout it enters. Watukushay No.5 therefore belong to the same family as the turtle trading system and Kutichiy, aiming to profit from directional movements by entering the market after a given price value is broken towards the same side. However, Watukushay No.5 also includes a "fade mechanism" which also allows it to trade against breakouts and increases its flexibility to be profitable on currency pairs where fading certain movements is more profitable than trading the breakouts.

When I released the beta I had found the first EUR/USD profitable settings and I had some preliminary results for other currency pairs. Right now I am proud to say that I have reached profitable settings for this EA on the EUR/USD, USD/CHF, USD/JPY and GBP/USD. This is important since we only have a few systems that are able to trade the 4 majors and Watukushay No.5 will be able to introduce a lot of diversification power through its results on different currency pairs. Adding to this is the fact that the most profitable results (achieving a higher than 2:1 average compounded yearly profit to maximum draw down ratio) belong to the USD/CHF currency pair and NOT to the EUR/USD, giving us the power to diversify greatly against other trading systems like Teyacanani and Watukushay No.2 which achieve excellent results on this currency pair.
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Perhaps one of the most important things about this EA is its ability to constitute a viable portfolio on its own. The above image shows you the equity curve with yearly balance restarts (meaning that the internal balance of each instance is reset to the general account balance every 12 months) for Watukushay No.5 when trading the 4 majors at the same time. during the past 10 years. The portfolio of this EA achieves an average compounded yearly profit of 44% coupled with a maximum draw down level of 16% an excellent result only achievable up until now with a few other portfolios.

Despite the fact that all instances trade the same system it seems that maximum draw down periods do not tend to overlap since the different currency pairs are able to exploit their particular breakout inefficiency only under select market conditions that rotate amongst them. This in turn allows the different instances to hedge their draw down periods and achieve the above mentioned results which show this to be the case. Below you can also see the monthly profit chart for the portfolio obtained with 10 year backtests and a 1 year balance restarting technique. The system shows a high population of profitable months with a good number of highly profitable months that ensure the portfolio's draw down remains under control. It is also worth mentioning that Watukushay No.5 was developed with all Watukushay Project principles in mind. The system was therefore developed with great care so that reliable simulations could be achieved.
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In summary, Watukushay No.5 is a great addition to Asirikuy featuring profitable results with similar draw down and profit targets on the 4 majors, a milestone achievement for Asirikuy portfolio system development. The system also showed excellent portfolio results, reason why its contributions to our long term profitability are bound to be important. Right now I have opened a poll within the Asirikuy community forum to choose a name for this EA and when the name is ready I will release the system's live trading version coupled with at least 2 account for live testing within Asirikuy.

If you would like to learn more about my journey in system development and how you too can develop your own likely long term profitable systems based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

The Dangerous Illusions of Short Term Profits in Forex Trading : An Obstacle Towards Long Term Success

2010-07-29T07:13:00.001-07:00

Perhaps one of the most important aspects of currency trading - in my opinion - is the focus in realistic and accurate long term profit and draw down objectives. Nonetheless, through the past several years I have observed that people almost never focus on long term investment and - more often than not - their decisions are based on short term and meaningless results that give them extremely little information about the real trading characteristics of the system they are using. On today's article I want to discuss with you why most people have short term focus, why it is so dangerous to have one and why this is one of the chief reasons why most people will never reach the goal of living from either manual or automated forex trading.

The truth is that in the beginning people want results and they want them as quickly as possible. Since people who are new to currency trading crave for fast results they often choose and run systems that have showed very high profitability during small periods of time. Part of this is the reason why Martingales and scalpers are so successful with new and less experienced forex traders, they show people fast evolving equity curves with little draw down that seem to answer the prayers of people looking forward to making a living from currency trading.

The main problem here is the focus on profits most new traders have while their focus on draw down is extremely limited. New traders often believe that a few months of profitable results mean that the system will be able to reproduce those results infinitely or at least for long enough as to get them a huge amount of profit to ease all their financial worries. When an experienced trader looks into most of these short term results he or she sees a system with a huge market exposure, unsound trading tactics and lack of proper long term analysis that shows the system's reactions under varied market conditions.

In the end what happens is that these new traders neglect to see that they are looking at a short term profitable cycle and that in the long term the risk level they are using will inevitably lead them to a total loss of their trading funds. It is - if you ask me - a matter of having vision and thinking about loses in the long term. The first question I ask myself when I intend to use a new trading system is : What are my loses (draw down periods) going to be in the LONG term (5-10 years) ? Almost all new traders fail to ask this question while they get overly excited about some short term live results which can range from a few months to a year of trading.

What I have seen after this - time after time - is that the EA goes into a draw down cycle and some traders get wipeouts while others freak out and stop trading the system. Traders then start to believe that "automated trading doesn't work" and that "all systems fail as the market changes" while in reality what happens is that they do not understand or know how to evaluate trading systems and how to focus on long term draw down and profitability to truly achieve long term success. What happens is simply that there are no short cuts in forex trading and completely understanding the automated trading systems you are using is vital to succeed with them in the long term.

My advice for you is therefore simple, do not focus on short term results and always understand the inherent characteristics of the trading system you are using. Always know the long term (5-10 year) draw down and profit targets and always understand the depths and lengths of the draw down periods you will encounter. Also have a strong focus on the reliability of the simulations since you can be greatly overestimating profitability and underestimating draw down if your system does not lend itself to accurate simulations. For this reason I always stick to systems that can be reliably simulated which give me accurate draw down and profit targets that allow me to know what I am trading, be confident and know exactly when my systems would have become too risky to be traded.

If you would like to learn about forex trading system design and how you too can start trading your OWN likely long term profitable systems with sound risk and profit targets please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Weird Arbitrage Opportunities in Currency Trading : The USD/COP Case

2010-07-28T05:46:00.001-07:00

Have you ever dreamed about making money with absolutely no risk of loss in the currency trading market ? Did you think that such opportunities did not exist ? Contrary to most people's belief in the fact that there are absolutely no arbitrage opportunities in currency trading I have personally observed the contrary for perhaps the past ten years in a very weird occurrence that seems to be absolutely particular to the USD/COP currency pair. The COP - or Colombian peso - is the main currency unit of the Colombian government and some extremely weird arbitrage opportunities are presented within Colombia to make substantial profit from USD or EUR exchanges. On today's post I will share with you this very strange case and why it leads to a rare inefficiency which doesn't seem to be present anywhere else.

The USD/COP is what many would call a "strange" currency pair. The pair's spread is usually around 0.1-0.2% of the pair's value and daily fluctuations can go from 2 to 10% of the exchange rate. This sometimes crazy volatility makes trading this pair hard (for anything but long term trading) but it also makes local Colombian currency exchange houses maintain some exchange rates away from the real interbank FX rate when very large fluctuations occur to avoid having strong monetary loses.

What happens here is that a great arbitrage opportunity is created that is actually quite strange. For example in early 2009 the USD/COP went from 1800 to nearly 2600 in a matter of a few months and the local exchange houses kept their exchange rate near 2000-2100 due to the fact that raising the rate to 2600 would cause them loses due to their previous peso reserves against the USD. Since most currency houses lack proper diversification and protection measures they need to eliminate their own loses by keeping exchange rates artificially low (although the time period this lasts is limited).

The opportunity arises since you can go to a currency house, exchange COP for USD at an exchange rate of 2100 then you need to physically take your money to the US (yes, you need to travel) then deposit it into a US bank and withdraw it through a wire transfer to Colombia at the FX rate of 2600. If you think this would have been impossible due to some reason, the fact is that I know several friends and traders who actually did the trip and managed to get 20% profits in a matter of days. I even had a friend who did the trip three times and made a 60% return over his initial "investment". Of course, the arbitrage opportunity is limited by the fact that you can only take 10K USD in cash out of the country legally per trip but it does give you the chance to get some risk-free profit from currency exchanges.

The reasons why this bold inefficiency exists are many but probably both the above exposed lack of proper protection from strong currency moves and the general injection of money from the drug industry into currency exchange houses could make this arbitrage opportunity both a consequence of money laundering and inefficient handling. The fact that a very small percentage of the population has US or EU visas and bank accounts in the US and EU needed to finish the transaction could also explain why this is not exploited to the point where the market is made efficient.

Of course the fact that exploiting such an inefficiency could also be supporting the drug industry has made me refrain from ever taking part in this game but certainly there is an arbitrage opportunity that I know many have taken advantage of to get massive profits when these small windows of opportunity arise every 2-5 years. Definitely a weird occurrence that is worth noting and discussing. If you have any opinions please feel free to leave a comment below :o)

If you would like to learn more about my journey in automated trading and how you too can build your own automated trading systems based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

The Lindencourt Free Daily Forex System : an In-depth Look

2010-07-27T05:12:00.000-07:00

A fellow trader emailed me a few days ago asking me if I had ever used the Lindencourt daily trading system which he considered was a very good idea based on the daily time frame that could be used by those people interested in gaining profitability in the long run without dedicating too much time to forex trading. As the strategy was made freely available by the Lindencourt people, my friend was excited about it and asI like strategies that attempt to exploit long term trading opportunities I decided to give this system a shot and see if it was actually worth using in live trading. On today's post I will share with you my journey in the evaluation and use of this system and what conclusions I have drawn from this seemingly simple trading tactic.

First of all, my friend was very excited about the system but he had no answer to any of my questions about the system's fundamental characteristics. What is the system's average risk to reward ratio ? What is the average compounded yearly profit ? What is the maximum draw down ? My friend couldn't answer any of these questions something which made me believe that the analysis the people at Lindencourt did of this system was nothing but superficial and that the long term quality or viability of this system was yet to be proved. I find it amazing how people can trade systems which have trading characteristics they ignore, I could never trade any system without doing a very serious analysis beforehand to see if a) it is long term profitable and b) it has adequate risk and profit targets.

Since the system is absolutely mechanical and clear rules are defined to enter and exit positions I decided that I would code this system into an EA to easily evaluate its 10 year trading performance on a few instruments. I was especially careful to get ALL the logic right and to code everything EXACTLY as it was explained on their website. The first results (shown below, Jun 2000 to Jun 2010 on the EUR/USD) allow us to see that even though the system is indeed profitable during the past 10 years the average compounded yearly profit to maximum draw down ratio is abysmal, almost worse than 1:15. The system therefore will grant you profit in the long term on the EUR/USD but you will have to weather extreme draw down periods that will not be worth the profit you will be getting in the end.
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Then when we analyze other currency pairs things turn out to be even worse with most not being long term profitable at all and the few that are having very bad average compounded yearly profit to maximum draw down ratios. For example, the GBP/USD results shown below allow us to see how the system inevitably fails during most of the time only achieving new equity highs a few times during the past 10 years.
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It is however particularly interesting to note here that this system has some very profitable periods that may make people tend to think that the underlying logic is very good at capturing daily trending movements. Some profitable runs in almost every year show that the system does have very profitable moments which are sadly followed by draw down periods that almost wipe all the previously achieved success.

The problems with these system are several, a general lack of adaptability and the use of a 100 period EMA to determine trend direction are a few. In the daily time frame the daily 100 EMA is not a great trend direction indicator since price will tend to go towards it a lot of the time, periods in which the EA takes a lot of loses. Another problem of this system are the huge amount of crosses on the Stochastic Oscillator with an 8,3,3 configuration that often lead the system to repetitive whipsaws that cause large loses of equity when the system is trading over the EMA or under a strong consolidation period. Some of these problems are shown below on the GBP/USD ten year backtest.
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In the end I believe that the people at Lindencourt only did a very superficial analysis of this trading system that didn't cover a wide arrange of market conditions or a statistically meaningful period of time, if they had done so they would have noticed the poor trading characteristics of this system and the inherent problems with what it attempts to do. This shows - yet again - that having adequate long term profit and draw down targets is an absolute must for the successful trading of any given strategy or system. It is impossible for anyone to trade a system if they do not know its potential for long term profitability, its average compounded yearly profit and the length and depth of draw down periods. Trading a system just because a set of 10-20 trades is profitable or because the logic "looks good" is a big mistake that often contributes to people not achieving their long term profit targets.

The evidence clearly shows that the Lindencourt daily system has some serious flaws and that a strong development effort would be needed to improve the average compounded yearly profit to maximum draw down ratios. However the people of Lindencourt deserve some congratulations for sharing their daily system for free so that adequate analysis over its logic can be done :o).

If you would like to learn more about automated trading systems and how you too can build your own systems based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Why There is No Universal System : Differences Between Currency Pairs

2010-07-26T04:28:00.000-07:00

Can we build a system that trades successfully on all forex currency pairs ? This has often been a question of the automated trading system world that simply asks if there is a universal inefficiency, an inefficiency that is so common that it can be found an exploited on all different currency pairs. Up until now, the answer to this question has been a resounding and unequivocal NO. To the best of my knowledge no system has ever been developed to work on all currency pairs despite the claims of many system sellers who tell you that you can use their systems on all of them. But why has it been impossible to build such a system ? Why does trading all currency pairs seems like such a big challenge ? The answer lies within the very fabric of the market and the way in which the different currency pairs trade and react. Within the following paragraphs I will explain to you some of the basic aspects of these currency pair differences and why it makes the creation of any universal system extremely hard if not impossible.

You may have been told that inefficiencies in the market arise due to crowd behavior- which is a human characteristic- and that all currency pairs in forex show it to some degree. When you hear this it becomes easy to think that if a system "really works" then it is bound to work on absolutely all the instruments available in the currency market. After all, every instrument is bought and sold by humans and this would make them inherently inefficient.

Certainly if all instruments traded with the exact same number of people and with the exact same objectives we would be able to easily find a universal inefficiency but the matter of fact is that this is not the case. The first dramatic difference between instruments is the number of participants and the inherent liquidity of each currency pair. Some pairs like the EUR/USD are very liquid while others like the GBP/CHF don't have 1/10th of the liquidity of the former so their price action is dramatically different and the inefficiencies within it become dramatically different. The less people who trade a given pair, the more efficient it becomes since crowd behavior becomes less pronounced and individual decisions start to play important roles.

Then we have other differences that also make the movements of currency pairs different. For example if you are trading the USD/JPY and there is a negative trade balance against Japan then there will be a given fixed amount of money each month that will pull the USD against the JPY just merely because of business transactions that have nothing to do with speculation. The volume of these transactions is very significant and the time in which they are processed and their magnitude will have an impact on the way in which a pair moves.

Many other factors such as central bank intervention and even cultural differences play an important role in the way in which a pair moves when compared to another and all of these factors help to explain why the finding of universal inefficiencies is so hard. However when you look at higher time frames (daily and beyond) there seems to be some coherence and this is the reason why some systems that target month or year long trends manage to exploit the same inefficiency on several different currency pairs. However the success of these systems along the whole portfolio is never total and more often than not there are very strong differences between the profitability of different currency pairs and several pairs where the systems simply do not work.

So will we ever find a global and total inefficiency ? I would have to say that probably no, but if there is a chance it will take a lot more liquidity on all instruments and a lot more market participants to make this the case. Certainly in the future if the market volume on the illiquid currency pairs increases enough we might be able to have - even though not a truly universal system - at least systems that will have better success along different currency pairs.

If you would like to learn more about system development and how you too can build your own likely long term profitable systems based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Why Catastrophic Losses in Forex are Always Possible : A Look at the Forex Worst-Case Scenario

2010-07-25T04:54:00.000-07:00

It is very common for people new to forex trading to consider that forex trading can be traded with little or no risk when adequate precautions are taken into account. However these people often miss to understand that the forex market is a high-risk playground for many reasons beyond the thousands of rookies who wipe their accounts everyday. Trading in general is considered high risk because there is always the possibility to have a total account loss, regardless of the use of a stop loss or other mechanisms that may act as a way to protect you from the market. On today's post I will be talking to you about the worst-case forex scenario and why having an open position exposes you to an account wipe-out regardless of your protection mechanism and your money management. However you will see that such a scenario is - although possible - extremely unlikely.

The first thing we are told when we start our trading journey is that the stop loss is our way of protecting our equity from further loses. You start to think - Well, if price moves against me it won't matter because I will never lose more than the SL - and for the bast majority of cases you are in fact right, a stop loss will protect your account from further losses since when price reaches the SL your order will be automatically exit. However you also have to realize that the SL is NOT a fail-safe mechanism and that there are particular occurrences when the placement of an SL will not guarantee the accurate exit of your position.

Why wouldn't an SL work ? The fact is that a Stop Loss order merely tells your broker to exit at the first price that is equal to or worse than the value of the Stop Loss. This means that your broker is only able to execute the SL order on an existing price level which is generally not a problem since the forex market is for most purposes gap free. However if price decides to gap beyond your SL your broker will make you exit your position at the first available price worse than your SL which in some cases can be very far away.

The most common occurrence of this happening is when you leave trades opened through the weekend since this is where gaps are predicted to happen, however more often than not you will find that systems actually benefit from trading on Friday, even if you take into account "worse than expected" Stop Loss cases as additional loses (the seemingly "irrational fear" of over the week trading is something I will discuss later). However the absolute worst case is when gaps develop during the trading week due to very surprising news announcements. For example, an NFP release a few years ago made the GBP/USD gap a whole 200 pips during Friday. If you had been trading at the wrong side of the trade with an SL you could have probably experienced a slippage of 200-300 pips which could have caused a margin call if your risk management was actually very poor.

If you believe that you can avoid this by not trading important news then you are also wrong since black swan evens (rare unpredictable news or events like September 11 or a surprising rate hike during an emergency meeting) can also cause such gaps that will wipe your account. So the answer is clearly that whenever you have an open position, no matter what your SL is, there is always a certain gap that can develop that could potentially wipe you out.

The best way to protect yourself from this worst-case scenarios is to have several accounts and to use trading systems that aim to capture large movements. It would take a gap of more than 1000-2000 pips to wipe an account that risks 1% with a 100% ATR stop loss or a similar large value, such gaps have never happened and - even though possible - chances are that if they ever do they will signal an extreme and fast change in world wide conditions which - if adequate diversification is used - would allow you to exit with only a partial loss of your capital (just losing those accounts which have positions opened against the gap).

Many people would rather avoid the news and the weekends but in my experience and after careful evaluation this has had a negative effect on the performance of my trading systems almost all the time, even when taking into account "worse than expected" SL values. In the end news and over the week trading contributes some good signals in the long term that eventually lead to a loss of profitability when they are removed. So do not look at filters as answers, since this is the wrong way of approaching the situation but build systems that take into account these rare market occurrences so that in the long term their statistical meaning will not be very large.

If you would like to learn more about automated trading system design and how you too can make your own trading systems with sound risk and profit targets please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Trading a Martingale Based on Backtests : A VERY Dangerous Road

2010-07-24T07:01:00.000-07:00

During the past few months I have sadly seen a great increase in the number of Martingale systems flowing around on the internet and their use by new and inexperienced traders. I have also seen some people testing and using Martingale systems with great hope and some with what seem to be some very good results. Many of these people who use Martingales or systems with progressive money management seem to rely on backtesting results to test their theories and sometimes they claim that a 10 year backtest in which no wipeouts happen is "good enough" to consider a Martingale worth running on a live account since it is inherently "safe". Within the next few paragraphs you will see why this way of approaching Martingale trading is terribly dangerous and why people approaching trading in this manner are bound - sooner or later - to wipe out accounts and face the truth about progressive money management, in the end it never works.

The argument here seems to be pretty simple. You know that Martingale systems are dangerous but if you can get a 10 year backtests that shows no wipeouts it means that you are safe, right ? If during such a long trading period and such a varied array of market conditions your system survives then everything should be Okay. The truth is that there a few VERY large pitfalls to this approach.

The first problem with the backtesting of Martingale systems is that there is an inherent error in every backtesting result which can be explained in technical aspects of both the backtesting mechanism and the market itself. A 10 year backtest only gives you an approximation of the results during the past 10 years because - in reality - things like spread widening, requotes, broker differences and the absence of one minute interpolation would have made the results different to some extent.

In the case of Martingale and progressive money management systems the problem is that a very small error in the backtests can make the whole difference between wipeout and survival. Imagine that you have a Martingale system that wipes an account with 7 consecutive loses and the account achieves a maximum of 5 in a 10 year backtest. Now if the system only had 2 additional consecutive loses on any of those losing periods the account would have been wiped. While an addition of 2 consecutive loses to a given trading period for a trading system designed on sound principles is minimal, the effect on a Martingale or progressive money management system is bound to be devastating.

In the end the limitations of simulations make the "certainty of safeness" of any Martingale system a lie since the actual errors and limitations of the simulations are not only important but actually most likely determinant towards the evaluation of systems that are so sensitive to small increases in the number of consecutive loses. In reality, all trading systems are bound to be facing anything between one to three times the number of consecutive loses they have given in historical testing and this makes progressive money management systems always reach wipeouts in real trading.

To sum it up, using Martingales based on backtesting is a VERY dangerous thing to do due to the limitations of the simulations. In the end, ALL martingales are bound to wipe their accounts in the long term. This is a statistical certainty which does not change, no matter what short term results show or what simulations may appear to be telling you. It comes back to the old saying, there are bold and old traders but there are no old bold traders.

If you would like to learn more about the development of trading systems and how you too can design and trade your own systems based on sound money management techniques please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Five Automated Trading Myths : Clearing Up Some General Misconceptions

2010-07-23T01:00:00.000-07:00

In general I feel a little bit sad when I read every new expert advisor website because I know from experience that most of the things they say about automated trading are simply lies. I think that people believe these sellers due to their desire to find an easy and quick way to build riches but in the end when doing so they only achieve further frustration and financial loss. I feel that after having some years of experience with automated trading - particularly with the metatrader platform - I can now point out some of the "general myths" surrounding automated trading systems (both good and bad) and what I have found out to be the truth behind them and the actual reality behind all the hype or misinformation.

Within the next few paragraphs I will talk to you about what I consider to be the most prominent five myths that have surfaced in automated trading, what is true about them and what is totally false. I will do my best to be bluntly honest in the hopes that my efforts will help those of you who are looking for answers realize what the actual reality behind automated trading - from someone who works at it full time - actually is. So get ready and keep on reading to see what this five BIG automated trading myths actually are.

Myth One. You can be profitable with automated trading even if you don't know anything about forex trading. This is a very common thing EA sellers say and it is the main reason why most people approach automated trading. You feel you don't have enough time or knowledge and you want to trade like a pro so you simply load the EA and it will make you rich ? right ? The truth is that it won't because understanding what the system does is vital for your success. If you don't know the system how will you know if it has become too risky ? How will you know if it uses a sound trading strategy ? How will you know that it is likely to work for the next 10 years and not the next 10 days only ?

Myth Two. There is no emotion in automated trading. This is absolutely false since YOU are deciding if the trading system runs or gets stopped, as a matter of fact automated trading is FILLED with emotions because you are a human and you are making the decision of whether or not to run the strategy. When the strategy goes into draw down you will have emotions of fear and when it goes into profit you will experience greed. There IS A LOT of emotions and psychology in automated trading and ignoring that is a sure path towards failure. Learning to understand these emotions and dealing with draw down and profit periods rationally through analysis and understanding of systems is therefore VITAL for success.

Myth Three. Automated trading systems always stop working as the market changes. This is one of the most common myths amongst those people who have had some experience with automated trading systems and saw that they made some profit and then went into draw down. This myth is in fact a consequence of a general lack of understanding about trading systems and the cycles they go through. I have shown during the past few years (certain long term trading systems like the turtle trading system have shown through the past 3 decades) that a system can keep on working if it adapts to the markets as they change through some simple criteria. So in reality many system will in fact "stop working" as the market changes (they will become extremely risky) but others have shown that through the use of simple adaptive criteria they can survive a WIDE variety of market conditions.

Myth Four. Automated trading system do not work. Again, this is generally a myth that has been put up by those people who have failed to achieve success with algorithmic trading systems. Usually these are people who have gone out, bought commercial experts, expected holy grails and got a load of account-wiping and unsound trading systems that got them nowhere. Automated trading systems do work and the fact that I have been able to achieve a living from them proves this point. It is not that these systems do not work, it is that adequate analysis, expectations and knowledge are necessary to create them and use them properly to achieve long term success. The use of sound techniques, strong reliable evaluation and general long term outlook are vital to achieve success.

Myth Five. If automated trading worked, everybody would be doing it. This is generally one of the first things people who are unfamiliar with the whole world of automated trading ask me. If what you do is simply execute some code into a computer then why couldn't the whole world do this to achieve profitability ? The answer lies in the fact that automated trading systems that are likely to be long term profitable are EXTREMELY difficult to trade. You would think that this is not so bad but in reality only few people can have the confidence and understanding to deal with the draw down periods (which are often long and deep) inherent to the actual trading systems that do make an eventual profit. Donchian channel systems have been out there for 40+ years and have proven to succeed under extremely varied conditions, yet few people ever use them because of the above mentioned reasons.

In the end automated trading is no different than manual trading. It is not a shortcut and it is not an easy way to do things, nonetheless it is also not an impossible thing to do to be profitable. Automated trading - as manual trading - is psychologically demanding, requires extensive knowledge about what you are doing and allows you to achieve realistic profit targets when you do things the right way. Sadly succeeding in automated trading is not something most people can do and the reasons are mainly within the above five myths. Most people simply tackle this as an effortless way to get rich and they do not want to do the actual effort to get a profit and a "down to earth" perspective about what can and cannot be done in trading.

Hopefully some traders in the end realize that it is not easy but that it is doable and they are willing to do the effort and go through the learning process necessary to get there. If you would like to learn more about educating yourself around automated trading and how you too can build systems around sound trading techniques that are likely to be long term profitable please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

The Greatest Advantage of Automated Trading, at Least for Me !

2010-07-22T01:00:00.000-07:00

It is true that my posts regarding automated trading are generally focused towards the negative aspects of this way of trading and explaining why it is bound to be harder to achieve than simple manual profitable trading. However, there are a few advantages inherent to automated trading that have made it my operational way of choice and the generator of the majority of my current income level. Within the next few paragraphs I will be explaining to you one of the main reasons why I decided to use automated instead of manual trading systems to succeed in forex trading, especially why this is so beneficial for my trading style and personality. I will also tell you why this quality is also a double edged sword and why it does NOT mean that you can just "set and forget" trading systems.

Yes, we have all heard the many "benefits" inherent to automated trading. Most EA sellers just tell you that you can make money while you sleep, trade like a professional without knowing anything and simply enjoy the profits using the forex market like some sort of ATM machine. The truth is VERY far away from this and automated trading is simply not what they tell you it is. In reality automated trading is harder to achieve than manual profitable trading and it is as challenging and demanding from a psychological point of view.

What is the difference then ? What are the TRUE advantages of automated trading ? In reality automated trading has a lot of pitfalls but it also has some great advantages that made me decide to go with it instead of regular full time manual trading when starting to build my forex trading career.

Truth be told, the fact that you are able to watch the markets 24/7 and "not miss any trades" or do a "ton of analysis in a millisecond" were not the things that made me choose this way of trading over manual execution. Even though you may think that this is actually better the fact is that you can use manual trading systems that require only a few minutes every day to achieve the same profitability levels as a regular long term profitable automated trading system. I know traders who trade daily charts and don't spend much time "working" and achieve the same profit targets as me so the fact that you can just have an ever-watchful eye is not a true reason to choose automated over manual trading since being on a constant lookout for trading opportunities is not necessary nor does it warranty more success in trading.

The most important reason that drove me to use automated instead of manual trading systems was simply that - from a psychological point of view - I am better able to control my short term emotions when I do not have to take the actual trades of the systems I am using. I am very good at dealing with draw down periods since I always have a strong analysis and long term perspective but having to take trades from a strategy that has been losing for a given period of time manually is just psychologically hard for me to do. As a trader, I quickly noticed that draw down periods when trading manually made me change my strategy and this led to long term loses and deviations from my projected profit and draw down targets.

Automated trading is a blessing in the sense that it offers me the ability to have a long term plan and stick to its guidelines even if I am not actually personally executing each position the system goes into. Of course this does NOT mean that automated trading is emotionless and those of you who assume this to be the case will be making a BIG mistake. Automated trading attacks your psychology a LOT but from a different perspective. If you don't understand the system you are using you will not be successful because you will not know if you should or shouldn't stop using a given trading system when a draw down period happens, you will constantly wonder if it has stopped working and you will NOT be able to achieve long term profitability.

Even though automated trading is very demanding emotionally, it is demanding in a way which I am more comfortable with. I am very meticulous about the analysis and understanding of my trading systems and I have built what I think is a very good capacity to draw plans around automated trading systems and stick to them. Manual trading is demanding for me in a way that I cannot handle very well, reason why automated trading became the perfect answer for my question about success in forex trading.

So for me not having to personally suffer through each trade of my systems is great since I am better able to handle the great psychological pressure that is exerted by automated trading systems in other ways. However what you have to realize here is that whatever you choose -manual or automated trading -, it will be challenging and believing that automated trading will be a "breeze" simply because you don't have to watch and take every trade is going to be a FATAL mistake. In the end it comes down to having a well laid out plan, a GREAT understanding of your trading strategy and the will to execute your plan exactly as you have laid it out.

If you would like to learn more about the psychology of automated trading, the building of systems and how you can trade with confidence with a likely long term profitable system YOU build based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

The Animal Kingdom of Traders : Where are you in the Food Chain ?

2010-07-21T01:00:00.000-07:00

Last week while I was playing with a little hamster it came to my mind that there are several different levels of experience and development in forex trading that are much alike the positions of animals within the food chain. I gave this a little bit more thought and I came up with a small classification system that uses several animal figures to point out the main characteristics of the different phases a person goes through when starting a long term journey in forex trading. I realized that each different stage has its strengths and weaknesses and that evolving towards the next one is merely a matter of overcoming the problems that arise due to the nature of each particular phase. On today's post I want to share with you my "animal kingdom" classification system in which I attempted to give a "scale" of evolution within forex trading. Where are you on this "animal kingdom"? Keep reading to find out !

I have never seen any "trader evolution" classification system that shows you what traders generally go through and what the general process looks like, for this reason I believe my "animal kingdom" system has value as it will allow you to see where you are within the "food chain" and it may also give you hints on what you should do to evolve towards the next level. It is also worth mentioning that I considered both traders far less and far more experienced than me in building this scheme and even though I consider I have advanced significantly, I still have a lot of way to go to reach the top. I will now tell you how I classified the different stages of trader development and what makes up each one.

Level 1, the rabbit. I thought I would start my classification level with rabbits since they are near the bottom of the real food chain. People who are in the rabbit stage of trading have just heard of trading or they have very limited trading experience. If you have never had a live account, you don't understand how to calculate risk and you don't know what a contract size is you are probably in the "rabbit stage" of trader development.
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Level 2, the hamster. These furry and cute little animals are extremely curious and eager to explore although this sometimes may put them in harms way. People within the hamster stage of trader development have little knowledge and they believe very unsound profit targets (like a sustained 100% average yearly return or higher) are possible with very low risk. Hamsters already have their first live account but they don't have any trading system or methodology, they are playing the field and looking for a system or strategy to use.
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Level 3, the guinea pig. If you have had a live account for a few weeks and you have traded demo for quite a bit you are probably within the guinea pig phase. I called it this way because traders in this stage get into strategies that are absolutely unsound and bound to wipe their accounts. Guinea pig traders start to get scalpers, martingales, grid systems, etc in the search for a system that achieves the unrealistic returns they hope for. Traders within this phase generally end up wiping accounts or they switch continuously from system to system hoping that "the right one" will eventually come.
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Level 4, the ferret. If a trader survives the above stage in which unsound trading strategies are the norm, he or she may realize that the real profit lies around the application of sound trading principles with strong money management over the long term. Even though a trader within the ferret phase may still not be profitable, the inherent realization that there is now a path to follow makes this stage very important. If you have started a live account to trade a strategy with sound trading principles with a long term trade perspective then you probably belong here. (if you still think those "wild 10000%" profits are possible then you are still on level 3) :o).
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Level 5, the dog. Traders who have done a year of live trading who have got some profitable results with controlled risks and sound trading tactics have now started their journey into profitable territory, they are now predators in the food chain. A trader in the dog phase now understands that draw downs are a part of profitable trading but there still may have some issues dealing with the psychological aspects of trading.
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Level 6, the lion. If a trader has been able to achieve more than a year of profitable trading with any system and also more than a year of profitable trading with a system of his or her own personal design then he or she enters the lion stage. Within this period not only does the trader know what realistic profit and draw down targets are but he or she knows enough about how the market works and the exploitation of inefficiencies to make up his or her own systems based on this knowledge.
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Level 6, the tiger. After three years of profitable live trading tiger traders now have a very good grasp about the market and how to systematically exploit inefficiencies in the long term. Tiger traders no longer concern themselves with unrealistic expectations of any sort but they now have long term risk and profit projection based on their own trading. Traders within the tiger phase have a domain over draw down periods and they can trade with almost no emotional ties. Getting to be a tiger is extremely difficult and a position reserved only for the very small percentage that can actually get through the first 4 levels.
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Level 7, the elephant. After ten years of profitable trading an elephant trader is now what could be considered a full mentor or "guru" in the field of trading. Traders who have reached this point have a very good grasp of market action, they can effectively build and design trading systems and they have trading systems that have been in place for years achieving profits through the systematical exploitation of inefficiencies. Elephant traders have seen the good and the bad times and it is very likely that they will be able to trade their systems through a large variety of circumstances.

Of course, my classification system is not absolutely dogmatic and I just considered it a fun exercise to better gauge where we are relative to the progress scale in forex trading and what things we may want to do to evolve towards the most desirable "elephant position". Evidently you may agree or disagree with the classification given but this are in general the stages I consider people go through when dealing with trading. Sadly few people will ever become "ferrets" and even fewer will ever be "elephants", however if you are a "rabbit", "hamster" or "guinea pig" you can always work, learn and do the effort to move up in the food chain and stop being the meal for the "higher predators" in the forex market :o).
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Where do you think you are in the above scale ? are you already a predator ? do you think another level should be added ? Feel free to leave a comment to discuss my "animal kingdom" classification system :o) If you would like to learn more about my journey in trading and how you can get a true education about the development of likely long term profitable systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Becoming Successful in Forex When There is NO Time : Tips for the Family Guy with a Full Time Job - Part No.2

2010-07-20T01:00:00.000-07:00

On yesterday's post we talked about the disadvantages people have when they attempt to become full time forex traders or even simply successful traders when they have full time jobs and families that take up substantial amounts of their time. Near the end of the post I pointed out that patience and a long term look are bound to be absolutely important to the success of a person in this situation and I also said that exploiting strengths and reducing weaknesses was also an important part of this journey. On today's post I will elaborate on the more practical aspects of this advice and I will lay out a plan that you - as a person with a full time job and family - can follow to become successful in forex trading in the long term.

Many of you may be asking how I came up with such a plan if I don't have a full time job nor a few kids to make my life a lot more complicated. The truth is that even though this is not the case my advantage is that I know what has to be done to become a successful trader even if I did not do it from the above mentioned situation. This has allowed me to extrapolate what I learned to device a plan for people in such a situation. Of course, I would not bother to tell you this plan if I had not put it into practice before, something I have been doing for a while with a friend who has a wife, two kids and a full time job. For the past year this friend has been executing my plan to the letter and his results have been very good - a positive evolution towards a long term profitable trading outcome. Certainly he is not even close to quitting his day job but he made profit this year and did not wipe his account (a true achievement for having such a small amount of time !).

What was the plan he followed ? When he asked me to help him become a successful trader I told him about all the disadvantages I talked about in yesterday's post and I said to him that he had to approach trading in a very particular way to achieve success. Since I knew he had no clue about what he needed to do I laid out a plan for him so that he could go towards long term success in trading with under 5 hours of work each week. This is what I advised him to do :

Forget about short term trading, to trade one hour charts you need to stay at least 5-8 hours a day in front of your computer, to trade even smaller time frames you need even more time. If you attempt to trade short term charts when you get home tired at night you will definitely only get frustrated and lose.

Learning is the top priority, understanding what you are doing is the most important part of trading success. I told him to dedicate 2 hours each week to go through learning material and through its application. I encourage him to read classical book in currency trading and technical analysis and to actually PUT that knowledge in practice over visual backtests of at least 5 years of data. Often people read a lot but they fail to apply the concepts and knowledge they acquire.

Daily trading systems, perhaps one of the most important things I told him to do was to start trading daily systems and STICK with them. I encourage him to do evaluations of several different daily systems and to stick to those that had profitable long term results. He ended up trading a very simple MA cross based system on the EUR/USD. One pair, one decision each day, efficient, trend following trading.

Keep a journal. I told him that keeping a detailed journal of his trades was VITAL. Since the system traded once every few weeks it was actually quite easy to do this and visual backtesting analysis of his systems became CLEAR.

Learn to program. I said that evaluation is a significant part of success and that coding was an important thing to speed up evaluation. I insisted that he spent one "learning session" every month to learn how to code on mql4. The result was that after a few months he was able to start coding and backtesting his simple daily trading strategies.

Profits, for now, do not matter. When you start trading everything seems to be about the profits. I told him that profits are the reward for learning and that the first thing you wanted to do was learn and then profits would come. I advised him to just trade the systems he designed and evaluated without concerning himself with "last trade was a winner or a loser" or "I have lost all the trades".

So to sum it up, what you need to do is to approach trading in a way that exploits your strengths (your willingness to become a successful trader) and diminishes your weaknesses (lack of time). Putting a very strong emphasis on education and focusing on the evaluation and trading of daily strategies seems to be the best way for people who have "very busy lives" to start to become successful traders. Certainly it will take a few years to get there but the road is much easier, much clearer and much more rewarding than attempting to trade at a play field where you will most likely lose. By using systems that require little baby sitting and just a few quick minutes of analysis my friend was able to go from not trading at all to becoming at least a person in a clear path towards long term profitability in forex trading.

I hope that the above article has been helpful to all of you who are facing this situation of wanting to become successful trades with little time to do so :o) If you would like to learn more about automated trading systems and how they can be used to achieve profits in trading through understanding and sound design please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Becoming Successful in Forex When There is NO Time : Tips for the Family Guy with a Full Time Job - Part No.1

2010-07-19T01:00:00.000-07:00

From my perspective it has been absolutely clear for the past several years that being successful in forex trading is a matter of effort, dedication, patience and endurance, it has been hard for me but I have been able to achieve most of my goals in this aggressive and unforgiving market. However one of the things I often do not consider is that most people who want to become successful traders make this decision at a point in their lives where they have almost no time at all to trade. Sure, it wasn't as hard for me to do this since I took this decision when I had a lot of time and I was able to make the change from university graduate to full time forex trader with almost no break. However many of the people who want to become successful traders already have families and full time jobs. On today and tomorrow's posts I will talk about the problems of having no time, why this probably will lead to failure and how you can implement some ideas and tips to "change the balance" and achieve success when time is a very scarce commodity.

Okay, so you are a full time worker with a family, a few kids and a ton of responsibilities that are -obviously - more important than forex trading. For you trading is probably a hobby and something you do on your free time because you like it but certainly you would like to become a full time trader or have a retirement fund sometime in the future. To tell you the truth, you are at an absolutely horrible disadvantage when compared with almost all other market players since you probably trade late at nights when you are tired and you have your mind worried with another million things, you are probably trading out of emotion most of the time and - truth be told - you are paving your way towards a few account wipe outs and disappointment as you are not tackling the problem in the right way.

Sure, you are thinking automated trading systems are the answer since a robot can trade while you work or do other things with your family. However the simple truth is that you are as likely to fail with automated trading systems as you are with manual systems if you do not dedicate time to educate yourself and to truly understand how they work. I have highlighted on several previous posts why people are generally not capable of trading long term profitable systems and you will certainly fail to do this if you just want to use them in a "set and forget" fashion.

The truth is that you are in one of the worst possible positions and succeeding in forex trading either through automated or manual systems will be a lot harder for you than what it is for others out there. For example, you are competing with a lot of people who do this for a living and with people who have a ton more time to devote to trading (retired people for example) on top of this you have the problem of having the pressure to be efficient with your money and probably your partner will question your investments in this "doubtful endeavor" instead of some more traditional investments or some other expenses.

What you need to do right now is to shift the balance in your favor so that you can decrease your weakness and increase your strengths. It will be extremely important for you to be patient and for you to realize that success will NOT come from night to day but it will probably take years before you are able to achieve good results. For a person in your position it is very important to understand that approaching trading in a different fashion than the one shown by most commercial EA or system sellers out there is not only important but crucial to your long term success.

Now that we have learned what puts people in these situation in such a disadvantage we can start to look at how this can be fixed and how it is actually possible for full time workers with families to become successful forex traders. On tomorrow's post I will talk to you about a well laid out plan and some tips you can use so that you can start to get your act together and evolve towards a path of long term success in forex automated trading.

If you would like to learn more about my personal journey in automated trading and how you too can educate yourself around automated trading systems and how to succeed with them please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Leaving For the Caribbean my First Forex Trading Paid Vacation :o)

2010-07-18T01:00:00.000-07:00

This is a very special day for me since later today I will be leaving for my first fully forex-paid vacation (tomorrow is my birthday so I will be spending it there, yey !!). This is a very important achievement for me in the sense that it is a sign that my goal of "trading for a living" has become a sustainable reality and after a long time of constant effort I can now spend a few days to relax and enjoy with my girlfriend along a wonderful Caribbean island beach. Today I wanted to take some time to tell you about what will happen while I am gone with Asirikuy and this website as well as sharing with you some of the details of my journey and where I will be heading.

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I will be leaving from today till July the 23rd so those of you who are Asirikuy members should not worry about videos or newsletters since this week's material has already been uploaded and next week's will be when I come back (since I will come back on Friday I'll be able to get everything done by Sunday). However while I am gone I will be absolutely disconnected from the modern world so I won't be checking my email or even getting near a computer during that time so any questions, inquiries, etc will have to be delayed until I come back. However feel free to email me and I'll reply when I return. Of course this will also mean that all purchase links will be deactivated until I come back so if you were planning on signing up to Asirikuy or getting the ebook please wait till the 23rd to do so :o)

Regarding VPS, trading accounts, etc I have left everything in charge of a fellow trader I fully trust and hopefully there will be no problems whatsoever. However if there are any he will fix them as promptly as I would. It is probable that some Asirikuy live accounts will also stop updating through the week as the publisher sometimes gets stuck but I'll make sure I reset things when I come back on Friday so that we can have accurate values in myfxbook for next week's expert advisor analysis.

I have also written five posts in advance for the blog so those of you who visit daily will be able to benefit from 5 hopefully interesting articles during this week. Of course since I moderate comments personally to avoid spam you will have to wait until I come back for any of them to show up but feel free to comment anyway and I'll make sure I answer your questions and remarks upon my return.
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Regarding where I am going, it is an island called San Andres, near the country of Nicaragua (images shown above). It has some of those white sand Caribbean beaches coupled with the warmth and hospitality that has always characterized people who live around this beautiful sea. I am definitely looking forward to some long sun bathing and some marathon eating sessions that will probably have me weighting a few pounds more when I come back. My girlfriend was a professional swimmer so certainly we will have some fun scuba diving and she will definitely have a blast humiliating me in swimming races :o)

Anyway, I'll be leaving and when I come back there will be a ton of things happening in Asirikuy and on this website. Before August 15th I will be releasing the next ebook update (which is almost a full remake) and the free ebook containing many of this blog's posts. So many exciting things will happen and hopefully I'll count on you - my faithful blog reader - to enjoy this journey with me :o)

Getting the Right Mind Set : Distinguishing Between Expenses and Failures

2010-07-17T04:46:00.000-07:00

Certainly when people start to get into forex trading every little trade that doesn't go their way seems like a gigantic failure. Definitely the reasons why this is the case are many but perhaps the most important one is that new traders do not have an approach to trading that lets them make the distinction between what is a failure and what is a normal trade that simply went wrong when everything was done "by the book". On today's post I will be talking about the distinction between trades that fail and trades that lose, I will define each one and I will attempt to give you some guidelines so that you can change your mindset and start approaching trading from a more business like perspective. Hopefully after reading this post you will apply this to your trading and you will find out that most of your so called "failures" are just business expenses while many of your profitable trades, are just failures.

Cataloging trades that go "wrong" and end up in losing territory as failures is easy because when we lose money we tend to feel like losers. It is therefore very normal to consider losing trades failures in the beginning. However after you have been trading for a while it becomes obvious that losing is an inherent part of long term profitable trading and that learning to catalogue losing trades differently is important to approach trading with the right mindset. In reality, when every trade is placed there is a natural probability that it may turn out to be a loser (the trade's market exposure) and therefore when you execute everything as planned and you lose, it is just a temporary consequence of your strategy.

When you approach trading like a business, this becomes a business expense and the trade become a triumph since you planned you trade and traded your plan. This in turn makes it easier to deal with losing trades since you approach them in a very non-emotional way, simply as some temporary events that will lead to some future profitability. Therefore losing trades that are a consequence of a well laid out plan with accurate long term profit and draw down targets are not failures, they are just part of your business model.
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Failures - on the other hand - are all the trades you take that deviate from your business plan. When you intervene with your plan and make emotional changes to your trading methodology or system you are indeed failing at trading because you are moving away from your "business model". If you made a trade in which you took a decision that generated a lot of profit but that decision led to a road where the long term probability of success was unknown then you have failed because what you obtained was some profit out of some luck. Long term survival in forex trading is about having a plan and executing the plan to get to where you want to be, any deviations from the plan are failures since they lead you a road of unpredictability and uncertainty that will end up with failure.

In order to trade forex successfully I focus on trading as a business and on the trades taken by my systems as a business plan. Any losing trades that happen are merely "business expenses" and all of them are triumphs in the sense that they represent my confidence in the strategy and the business plan. I now understand that any action I take that may intervene with my strategies will deviate me from my long term profitability objective and this for me has become unacceptable since these changes constitute failures of what I want to achieve.

So in the end, loses are a natural part of trading and they will always be there. Dealing with loses is something which is naturally hard to do but you should be able to make the distinction and take loses that are part of a well laid out plan as business expenses while those trades that get you to uncharted territory should be regarded as failures. This mindset will get you on a track of long term thinking and understanding that will ultimately lead to long term profitable trading.

If you would like to learn more about automated trading systems and how you too could use them to succeed in forex trading by building your own systems with reliable trading tactics and accurate risk and profit targets please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Does Hedging (on the same currency pair) Really Exist ? A Look at Position Holding in Forex Trading

2010-07-16T05:15:00.001-07:00

One of the things I consider the funniest about forex traders is that they seem to have a strong opposition against the removal of "hedging" from their trading capacity. However few of them do realize that the traditional hedging we have seen where you buy and sell a given currency pair at the same time is merely and illusion and that in reality it doesn't exist or -for that matter- make any real sense. On today's post I want to talk about the concept of hedging, why it simply doesn't exist in reality and why any strategy that uses this concept can be implemented without its use. After reading this post you will understand better that hedging a currency pair by having open long and short positions at the same time is not possible in the real market and you 'll see how you can actually understand what you are doing when you have this on your account and how it can be implemented within your strategy to have the exact same results without ever having more than one position opened per currency pair.

What is hedging after all ? In general it refers to the taking of opposite positions with a certain degree of correlation that offers some protection against side movements in the market. So for example going short EUR/USD and short USD/CHF is bound to guarantee some protection against variations in either currency pair since they are heavily and negatively correlated. However since the correlation is not 1 the actual effectiveness of this hedge depends on market conditions and - when correlation is temporarily lost - such hedges become extremely dangerous.

However, when people in the MT4 community refer to "hedging" they generally talk about having a long and short position opened at the same time on a currency pair. For example they open up a long on the EUR/USD at X price and then a short afterwards to cover up their loses or to "fix" some of the profit level they have achieved. Many traders who are not familiar with how the market works consider hedging absolutely vital for their success and the removal of this feature seems to be extremely unacceptable.

When we look close having a short and a long trade opened on the same pair is merely an illusion. What you are doing is buying and selling the same contract so if you were actually carrying out currency exchanges (of physical currency) you would have done the same exchange twice and ended up with what you started with (your ending net positioning is 0). It doesn't actually make sense if you think about it and the way it has been implemented in MT4 is practical in some ways but very misleading in others.

As a matter of fact, any hedging strategy can be implemented EXACTLY in the same way without ever having two positions opened in the market. For example if you bought USD/JPY at 85.54 then you want to enter a short position at 84.54 then exit the short and the long at 86.54 the same effect would be realized if you closed the long at 85.54 because closing the long is indeed what you would be doing in reality if you entered a short. The later point where you exit both the long and short is irrelevant since your net positioning from the open of the short is 0.

Case 1 ( Buy 85.54, Sell 84.54, Close both 86.54)

Long Result = 86.54-85.54 = 100 pip profit
Short Result = 84.54-86.54 = 200 pip loss

Net Result = 100 pip loss

Case 2 (Buy 85.54, Close 84.54)

Long Result = 85.54-84.54 = 100 pip loss

Net Result = 100 pip loss

So in summary it is now evident that the current "short and long hedging ability" in metatrader 4 is simply an illusion and that any strategy can be implemented which currently relies on this feature simply by taking into account the net positioning of the account. When shorts are entered they close longs and when longs are entered they close shorts. In the end this leads to the exact same effect as we would have had if we had simply opened all the short and long positions simultaneously since what matters is merely our net positioning in the market. This is the approach that really makes sense and falls in line with what would happen in a physicial currency exchange.

To sum it up, if you currently have a portfolio trading on the same instrument or if you are trading a system that opens longs and shorts on the same currency pair, don't worry about hedging as you can always implement your strategy using a net positioning approach, something we will all have to do once we move entirely towarsd metatrader 5.

If you would like to learn more about my journey in automated trading and how you too can code likely long term profitable systems using reliable trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

The Daily Time Frame : Five Reason to Love This Time Chart

2010-07-15T04:10:00.001-07:00

I believe there is some sort of obsession right now in the forex trading community with the lower time frames. Perhaps it seems more profitable or glamorous to trade within the minutes and to get very small profitable trades with high lot sizes but the actual reality of the matter is that lower time frame systems with higher frequency trading often achieve the same degree of success that higher time frame strategies with much more effort and time requirements (plus a LOT more commission paid up in spread). I for one believe that the use of the higher time frames is unequivocally one of the best tools people have to become successful forex traders with low stress levels, I personally absolutely love the daily time frame for my long term trading strategies and it is in fact the lowest time frame I ever use when personally handling an account.

What is so great about the daily time frame ? What makes it such a great tool for anyone who wants to become a successful trader (using either manual or automated techniques) ? Within this article I will give you the five main reason why I absolutely love the daily time frame and why I believe that system development and use within it is an extremely educational and profitable endeavor most traders should - at least - try for a year or two.

Just a few minutes each day. One of the great things about daily charts is that - as the name implies - they only have one new bar each day. This allows you to easily execute any trading strategy with very little time since it only requires a few minutes to check the new bar and input the signals. You know the exact time when the bar is closed so it is a chart that allows you to execute strategies when you don't have or you don't want to spend a lot of time in front of charts.

As successful as the lower time frames. Systems on the daily charts can be as profitable as systems traded on much lower time frames and - as a matter of fact - many times the trading costs are much smaller due to the reduced trading time. It is a myth that shorter time frames are inherently more profitable, there are daily strategies and short time strategies that work great but strategies in the daily time frames usually aim for very high gains over long periods of time reason why they may take more time to show their true profitability levels.

Broker dependency is VERY small. After using a script to remove Sunday candles (if present) daily candles show very little variation between different brokers. This means that the results of your system will be similar between brokers and the broker will be able to do very little to alter the results of your strategy since any slippage, re-quotes, etc are bound to represent only an extremely small percentage of your average profitable trade.

Always trade with the trend. Daily time frames offer you the ability to always trade with the developing trend while smaller time frames may sometimes get to into trades that temporarily go against long term trend direction. This allows you to have more peace of mind since you know that the market is moving with you. It is also true that most successful traders and market movers also use the daily time frame to do their trading so since you are using and looking at what professionals are actually looking at your chances of success are increased.

Stress-free trading. Maybe not entirely but the daily time frames allow you to trade a system and not worry about how it is doing every second. When entering trades on higher time frames small movements are not very significant and therefore you can just set your trade and leave it with confidence that the possibility of something bad ruining it is small. Weekend gaps will most of the time not be a problem since your trading targets will always be very large and the small indecisive days and "blurry" short term charts will not be something you will need to concern yourself with.

Of course there are a few reasons why almost no new traders use daily charts particularly because of their desire to stay within the market a lot and their impatience to get profitable results. Certainly long term trading systems on daily charts are not so glamorous or fancy but they offer easy-to-evaluate trading setups and easy to understand logic that can be applied with confidence when adequate evaluation with profit and worst case scenario targets is achieved. With daily time frame systems this is especially important to do since these systems can usually have long and deep draw down periods that can last several years (alike some short term trading systems) but overall their profitability levels end up being similar to those of short term trading systems.

So in summary I believe that every trader should do at least a few years of trading with a daily time frame based systems at least in parallel with his regular trading activities (if they don't involve this already), just a few minutes everyday, sound robust trading techniques and long term results are some of the great reasons why the use of this time frame has paved the way towards the success of many new forex traders. Certainly you can be the next one :o).

If you would like to learn more about evaluating strategies by programming them into the MQL4 language to get accurate profit and draw down targets please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Getting the Most out of Trading : Using a Forex Spread Rebate Service

2010-07-14T03:48:00.001-07:00

When you want to get profit in a market where trading is hard and competition is extremely aggressive you need to take advantage of every tool you can use to reduce your trading costs. There is little you can do in forex trading but one of the most practical things almost anyone can do is to find a forex rebate service to reduce the cost of their trading a little bit. Even though this cost reduction does not make a system "more profitable" in any way it does allow us to reduce our trading costs to a significant degree something that may decrease the loses we get simply because of our net trading volume (spread costs). On today's post I will talk a little bit about this rebate services, why they exist, how they work and why you should definitely join one if you are expecting to trade the forex market for an extensive period of time.

When you are using a forex system to trade the market you will inevitable get in and out of the market with a certain frequency. Some systems will have a lower trading cost since they will trade only 20-40 times each year while others will have larger trading costs since they will trade frequently. Each one of these trades will have the spread (the difference between the price at which you buy and the price at which you sell) as their fixed trading cost plus any additional commissions if you are using an ECN broker.

The cost of trading in forex is indeed quite small and for most systems (except scalpers of course) the spread cost is not determinant to their profitability in the sense that it often constitutes less than 5% of their aimed profit or loss. For some systems the cost is even negligible as it is less than 0.5% of their exit target values. However anything we could do to reduce this cost should be done as having lower spreads will definitely contribute to decrease our costs and therefore it will make us "lose less money" to get into trades.

How do we do this ? In forex trading there has been a figure for some time (in the form of introductory brokers) which allows us to get some "cash back" as a "benefit" from joining through a given broker partner. The truth behind this is that the introductory broker gets some commission from the broker's spread (for example 0.5 pips) however there is no incentive for you to join through them instead of the original broker and for this reason they give you part of their earnings as a way to encourage you to join through them. In the end everybody wins, you get some part of the spread back and your introductory broker also gets a piece of the cake. There are several well known companies that provide this service but perhaps cashbackforex.com is the most reputable and well known rebate provider (I personally use them on several different brokers).
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Usually what happens is that you are given a certain amount of each trade's spread back and this money is paid either directly to your trading account every month or more conveniently to your PayPal account. Having this money sent to your PayPal or alert-pay accounts is actually very good since it allows you to withdraw some money without paying any transfer fees from your broker. So in the end you are saving money in the form of trading costs and you are also saving withdrawal fees since you are getting some money directly into your PayPal account. Recently an Asirikuy member told me that this cash back deposits onto his account were perfect since they allowed him to pay for VPS costs every month without having to actually withdraw funds from the trading account, this is a perfect solution to pay for small additional trading costs (like a VPS) through the offset of spread expenses.

So as you see, even though this cash back services will not increase the profitability of your system in anyway they will allow you to offset the trading costs of a long term profitable system and obtain some money without any withdrawal fees directly onto your PayPal account. This money can then be used for other trading costs such as a VPS or it can be saved and added back yearly to your trading account. In the end, it is always a good idea to use a cash back service since any reduction in trading expenses is always welcome. Do you know any other good and reliable cash-back introductory brokers ? Feel free to leave a comment :o) !

If you would like to learn more about long term profitable systems and how you too can start building systems with a high like hood of long term success please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

The Desirability of a Position : Why Long Term Profitable Automated Trading is Naturally Incredibly Hard

2010-07-13T04:27:00.000-07:00

I have dedicated a few posts in the past to explain why most people fail to succeed with automated trading systems and why the promises of "living from trading" and "earning money while you sleep" made by EA sellers are not true and derived from a fantasy that has absolutely no relationship with the actual reality of making a living from automated trading. Certainly there are many technical reasons why living from trading is extremely difficult (which I have highlighted before) but there are also some anthropological reasons why getting a profit in the long term from trading is extremely hard. On the next few paragraphs I will explain to you - from a different point of view - why automated trading is - just by its nature - incredibly hard to achieve and why few people ever get the privilege of arriving at this status.

What is the problem with profitable trading from automated trading systems ? To get to the answer to this question I first need to explain to you a concept called "position desirability". This concept raises from the sociological construct and tells us that the most desirable positions in a society are the most difficult ones to achieve because society in itself, gives them their desirability in part because of the difficulty or the rarity of their occurrence.

What does this mean ? Well, this simply means that the better positioned you want to be in society, the harder it will be for you to get there. By harder, I mean that it will require an effort which has to be superior to the effort made by all other people fighting for the "additional spots" for that position. For example, if you want to be a Nobel laureate - a highly desired social position - you will need to do better than all others who are fighting for the chance to get the prize each year. If you want to be the owner of a multimillion dollar corporation you will need to do better than all others attempting to do this. It is just a matter of how many of these positions are available and how many people are actually "fighting" to get to them. A desirable position has few spots and a LOT of competition.

Making a living from automated trading is an extremely desirable position. If you think about it this is one of the best lines of work in the sense that you will be able to make money in the forex market without having to take positions or do market analysis manually, you will be able to effectively mechanically exploit market inefficiencies with success in the long term. This is a position that MANY people want (the reason why so many commercial automated trading systems are sold) but few are able to get. The consequence is simply that the actual number of people who are able to achieve this status is VERY LOW and the effort required is extremely large.
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You should ask yourself, what are you doing that other thousands of people are NOT doing to arrive to this position ? What do you know that others do not ? The truth is that you need to build yourself a huge amount of merit if you want to reach the goal of living from profitable trading. If you are just "following the herd" and attempting to find the one commercial EA that "just works" you are truly NEVER going to realize your dream of becoming a long term profitable trader.

For me, the answer came in the form of hundreds of hours of work and the continuous development and understanding of everything that I do in the field. I decided that knowledge was the answer and I dedicated years of my life to do tons of analysis and programming. For me, the key was -and continues to be- to maintain a permanent effort to understand everything I do and to be extremely meticulous about system development and trading. In the end doing a lot of things that separate you from all others fighting to get to the "ideal position" will be what gets you there. Remember that the position is extremely desirable and that you are competing with thousands (if not hundreds of thousands) to get there. Are you willing to make the effort ?

If you want to learn more about my journey in automated trading and how you can start to gain an understanding and education about automated trading and long term profitability please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !