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

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)

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

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)

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

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 ?

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

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)

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

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)

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

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 ?

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)

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

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)

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

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)

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

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

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

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)

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

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)

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

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 ?

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)

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

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 !