a forex experiment

[loop101]

[FONT=Courier New, monospace]Since there are some people who are interested in trading Forex, I have been thinking about what advice I could give them. My only qualification for giving advice, is that I have probably lost more money trading than anyone else here. So, take whatever I say with a grain of salt. As I thought about what I would suggest, I started formulating a method I want to try. [/FONT]


[FONT=Courier New, monospace]In Forex, you trade currency pairs, which is the price of one nation's money in terms of another nation's money. You can't say how much a US dollar is worth, unless you can compare it to something, like a gallon of gas, or the Euro. When you trade a currency pair, you are betting on the strength of the currencies of two nations. When you bet the EUR/USD is going to go “upâ€, you are betting the Euro will rise in value, and/or the US dollar will drop in value. [/FONT]


[FONT=Courier New, monospace]If you want to know if the US dollar is “going upâ€, you need to track at least 3 currency pairs. For example, if I want to know how “strong†the US dollar is, I need to compare it to 2 other currencies, and also compare those other currencies to each other. In Forex, you could use these currencies:[/FONT]


[FONT=Courier New, monospace]EUR/USD = Euro vs US Dollar[/FONT]
[FONT=Courier New, monospace]EUR/GBP = Euro vs Great British Pound[/FONT]
[FONT=Courier New, monospace]GBP/USD = Great British Pound vs US Dollar[/FONT]


[FONT=Courier New, monospace]Lets say all 3 of the pairs are going “upâ€, and look at what that means:[/FONT]


[FONT=Courier New, monospace]If the EUR/USD is going “upâ€, then the Euro is rising and/or the USD is falling.[/FONT]


[FONT=Courier New, monospace]If the EUR/GBP is also going “upâ€, the Euro is beating both the USD (above) and the GBP. So the EUR is indeed strong.[/FONT]


[FONT=Courier New, monospace]If the GBP is going up, then that means it is also beating the USD, and the USD is weak.[/FONT]


[FONT=Courier New, monospace]So we know the EUR is strong, and the USD is weak. The best single trade would be to bet the EUR/USD is going to go “upâ€.[/FONT]




[FONT=Courier New, monospace]In the above example, if the GBP/USD was falling, you would have:[/FONT]
[FONT=Courier New, monospace]EUR > USD (rising EUR/USD)[/FONT]
[FONT=Courier New, monospace]EUR > GBP (rising EUR/GBP)[/FONT]
[FONT=Courier New, monospace]GBP < USD (falling GBP/USD)[/FONT]


[FONT=Courier New, monospace]It would mean:[/FONT]
[FONT=Courier New, monospace]The EUR is strong because it is beating both the USD and GBP.[/FONT]
[FONT=Courier New, monospace]The GBP is weak because it is losing to both the EUR and USD.[/FONT]
[FONT=Courier New, monospace]The best single trade would be betting the EUR/GBP will go “upâ€.[/FONT]


[FONT=Courier New, monospace]If you wanted to diversify, you could put 50% of your bet on the best trade, and 25% on each supporting trade. From the first example, you could bet:[/FONT]
[FONT=Courier New, monospace]EUR/USD = bet 50% it is going up, since EUR is strong and USD is weak[/FONT]
[FONT=Courier New, monospace]EUR/GBP = bet 25% it is going up, since EUR is strong[/FONT]
[FONT=Courier New, monospace]GBP/USD = bet 25% it is going up, since USD is weak[/FONT]


[FONT=Courier New, monospace]From the second example:[/FONT]
[FONT=Courier New, monospace]EUR/USD = bet 25% it is going up, since EUR is strong[/FONT]
[FONT=Courier New, monospace]EUR/GBP = bet 50% it is going up, since EUR is strong and GBP is weak[/FONT]
[FONT=Courier New, monospace]GBP/USD = bet 25% it is going down, since GBP is weak[/FONT]


[FONT=Courier New, monospace]In trading, you normally want to have a way to sit on the sidelines when you are confused, but with Forex you cannot really do that since you are trading money itself. If you “go to cashâ€, you are still betting on some nation's currency (probably the USD if you are American). You are taking a position by virtue of having money. Because of this, this method does not include a timeout mechanism.[/FONT]


[FONT=Courier New, monospace]Above, when I mentioned investing 100% of “your betâ€, this is assumed to be something like 2% of your account size, not 100% of your account size. Putting “50% of your bet in to the single best trade†would be putting 1% of your account in to it. A winning trade would be added to it, probably by an additional 1% per period.[/FONT]


[FONT=Courier New, monospace]To decide trading frequency, I prefer to let that be dictated by the expected “run†of the trades. I don't usually use indicators, but in this test case I will probably use the Heikin-Ashi indicator on weekly Forex closing prices. The big gains are made on the trades that are allowed to trend, and weekly Forex data trends a lot better than daily data. Adding to a position each week would allow for pyramiding winning positions.[/FONT]


[FONT=Courier New, monospace]I have not worked out how to deal with the extreme leverage in Forex combined with the long multi-week hold periods, so I will have to just try it using minimal leverage and small bet sizes. I also ordered some back testing data which I will analyze to see if things still look promising.[/FONT]


[FONT=Courier New, monospace]I certainly don't suggest anyone try this approach until I see how I do, but I mention it because it is simple and contains a few important things:[/FONT]


[FONT=Courier New, monospace]1) It diversifies through time by investing 1-2% at a time[/FONT]
[FONT=Courier New, monospace]2) It diversifies through breadth by trading 3 pairs at a time[/FONT]
[FONT=Courier New, monospace]3) It uses a confirmation method (figuring out the strong and weak)[/FONT]
[FONT=Courier New, monospace]4) It does not over-trade because positions are adjusted weekly[/FONT]
[FONT=Courier New, monospace]5) It allows pyramiding (adding to) winning positions[/FONT]
[FONT=Courier New, monospace]6) It is always in the market, because it has to be[/FONT]
[FONT=Courier New, monospace]7) It is simple, it only uses the previous week's indicator[/FONT]

[FONT=Courier New, monospace]8) It is slow enough to not interest the day trading crowd

[/FONT]

 

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[Jonleehacker]

Good overview.

Here's a tool that I use which helps determine which currencies are strong and which ones are weak, like you have outlined above:

Forex Pairs Relative Strength on the right you can turn on more currencies to compare with.

I can't figure out what is going on behind the scenes with it, probably something just like you have described, but they have automated it.

 

[KarlR]

hmmm very interesting Loop101!!

Im just wondering on the time basis you go by?like..say your basing that the USD is up against the EUR,are you going by a days results,weeks etc?

Thanks!Interesting formula...

 

[Shuffle]

Hi Loop101

Comparing one currency's strength to others is definitely one part of the formula.

You have to be careful doing that though because for example the EUR and GBP are supposed to be closely relative to one another but as you can tell, EURGBP goes up and down too (Big jump up for EURGBP in the NY Close today by the way). Same goes for AUD/Gold and CADCHF.

You could definitely use that method as one of a few reasons to enter a trade. That link from Jonleehacker above is basically what you're after
Oh and remember to always keep it simple and clean!

 

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[Bailey]

Its really valuable article regarding forex trading ,I still googling all about forex trading.I just want to know forex and binary option are same or these are different terminology?

 

[loop101]

I can't figure out what is going on behind the scenes with it, probably something just like you have described, but they have automated it.

The old RSI (Relative Strength Index) is just a % comparison of an index to it's average. I assume this webpage is just the % comparison of the other currencies against the USD. For example, if JPY goes up 1% versus the USD, the RS on the webpage would go up 1%. I assume they have some scaling factor since the % moved on FX are so small (compared to stocks).

The graphs are the other currencies "relative" to the main one.

 

[loop101]

hmmm very interesting Loop101!!

Im just wondering on the time basis you go by?like..say your basing that the USD is up against the EUR,are you going by a days results,weeks etc?

Thanks!Interesting formula...

In Forex, longer periods work better for me. I find Forex very choppy, though some people prefer to live in the chop. I would rather trade infrequently and ride the longer term trends (if there are any).

Lately, I like the weekly Heiken-Ashi charts, because they appear to catch most of the longer term trends. This is on Oanda.

 

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[loop101]

Here is a derivation of my oringal idea, that I will try.

Instead of summing the performance of the national currencies based on their performance in pairs, I will just trade all the pairs. If there is something there, it should rise above the noise. The pairs I will trade are: EUR/USD, EUR/GBP, EUR/JPY, GBP/USD, GBP/JPY, and USD/JPY. These pairs represent all possible comparisons between the EUR, USD, GBP, and JPY.

I put $1k in to my Oanda account, set the leverage at the minimum of 10:1, and will trade 6% of my money across the 6 pairs (1% NAV each). I will use the weekly Heiken-Ashi (HA) to determine whether to go long or short. If the previous HA is long (green), I will go long. If the previous HA is short (red), I will go short. On Oanda, I have Weekend Data set to both Hide and Ignore from 17:00 (5pm). This hides all trading data that happens between 5pm Friday and 5pm Sunday. I will use Oanda's 1% NAV to allocate 1% of the account value whenever I take a position. All opening and closing of positions will be done 10pm-11pm on Sunday night (EST). 6% of my money will always be invested.

If the system makes money, I will either increase the leverage (which goes up to 50:1), or the % NAV invested (which could go up to 15%). Attached is a screenshot my Oanda layout.

I will let you know if it works out. If it does, I will probably suggest MJ move this thread to the INSIDERS forum.

 

[loop101]

Opened this week's trades, I will close or continue them next Sunday night. If the previous week was flat, I treat it as a continuation of the preceding week.

 

[Bailey]

Here is a derivation of my oringal idea, that I will try.

Instead of summing the performance of the national currencies based on their performance in pairs, I will just trade all the pairs. If there is something there, it should rise above the noise. The pairs I will trade are: EUR/USD, EUR/GBP, EUR/JPY, GBP/USD, GBP/JPY, and USD/JPY. These pairs represent all possible comparisons between the EUR, USD, GBP, and JPY.

I put $1k in to my Oanda account, set the leverage at the minimum of 10:1, and will trade 6% of my money across the 6 pairs (1% NAV each). I will use the weekly Heiken-Ashi (HA) to determine whether to go long or short. If the previous HA is long (green), I will go long. If the previous HA is short (red), I will go short. On Oanda, I have Weekend Data set to both Hide and Ignore from 17:00 (5pm). This hides all trading data that happens between 5pm Friday and 5pm Sunday. I will use Oanda's 1% NAV to allocate 1% of the account value whenever I take a position. All opening and closing of positions will be done 10pm-11pm on Sunday night (EST). 6% of my money will always be invested.

If the system makes money, I will either increase the leverage (which goes up to 50:1), or the % NAV invested (which could go up to 15%). Attached is a screenshot my Oanda layout.

I will let you know if it works out. If it does, I will probably suggest MJ move this thread to the INSIDERS forum.

I think your idea is great to follow.

 

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[Swinny]

Could I ask how you will manage stops with this system?

 

[loop101]

Could I ask how you will manage stops with this system?

I'm not using stops. I'm minimizing risk by using small investments with minimal leverage, across several instruments. I can add CAD and AUX if I want to use even more instruments. If the Heiken-Ashi doesn't detect trends very well on the weekly data, I will lose money. It appears to do a pretty good job, which is why I am trying this experiment. I think the main risk here, is a death by a thousand cuts, as opposed to one big loss.

 

[Swinny]

Thanks Loop101 and appreciate you sharing this with us. I am very interested to see how it goes. If the system seems to work then I guess you can refine more to include trailing stops (maybe weekly chart) and take profit points. If the Heiken-Ashi changes colour I assume you would get out of the trade anyway although on a weekly chart that could be quite a few pips. Good luck!

 

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[loop101]

If the system seems to work then I guess you can refine more to include trailing stops (maybe weekly chart) and take profit points. If the Heiken-Ashi changes colour I assume you would get out of the trade anyway although on a weekly chart that could be quite a few pips. Good luck!

Whenever the weekly HA changes color, I will change my trade to match it's direction. It's not possible for me to be in a long-term losing trade, because by definition I would be in the long-term move. What can kill me, is if the weekly direction flip-flops and I get churned out of a lot of money. I am hoping that will only happen at the end of a long move. Since I am trading 6 pairs, I am hoping only 1-2 at a time will churn, and the other 4-5 will be in money-making trends.

The only way to make a ton of money quickly, is to bet a lot of money on one pair. That is also the way to lose a ton of money quickly. I might create a $500 "kamikaze" account, where I trade just the single best pair using the "strength" method described earlier. The kamikaze account would be throw-away money, because that is likely what would happen.

I might also create a 3rd account, where I trade 20 pairs using the same method I'm trading the 6 pairs. Basically, bet that all 20 pairs will go the direction their HA indicator predicts. Trading 20 pairs should provide a very smooth return, since no single pair would rock the boat. I ordered Bandy's book on Mean Revision trading, so my 3rd account may end of being used for that.

My goal with 6 pairs I am trading, is to get a 1% weekly return, which would be +64% annual return. My goal for the kamikaze account would be 2% weekly return, which would be a +170% annual return (assuming 50 trading weeks). It's unlikely I will get 1% per week using 6% of my money at 10:1 leverage, but I have to start small and see how things look. If I could consistently get .5% weekly, I would go to 20:1 leverage.

Attached is a daily chart of my mid-week results. I am hoping to post Wednesday and Sunday updates. If that's too much, I will just do Sunday posts. I will only open/close trades on Sunday night.

 

[loop101]

Well, there is good news and bad news with my Forex experiment. The bad news is, the system of using weekly Heikin-Ashi indicators does not work over the long-term. The system gets whip-sawed too often, and "dies by a thousand cuts". In my case, 711 cuts. The good news is, I was able to determine this through analysis, and am now able to research other ideas. Ironically, I made my goal of a weekly 1%, which I have to attribute to sheer luck. Probably the first good luck I've ever had in trading.

I tried some minor adjustments to my Heiken-Ashi method, but there was no easy fix. The "strength" system I described at the beginning of this thread is still untested. I will try to figure out a way to code it using AmiBroker (the testing package I have).

After getting a bunch of historical market data, getting AmiBroker working, and re-reading Bandy's books, I plan to get back in to doing some research. I am going to close out my Heikin-Ashi trades Sunday night, and will not trade anymore, unless I can get a system working. Attached are some pictures of my trades, and the historical performance of this method (not pretty!).

For anyone interested, this is the AmiBroker AFL code I used to test the idea. The Heikin-Ashi had to manually calculated because it is not built-in.


TimeFrameSet( inWeekly );

NumberPositions = 6;
SetOption("MaxOpenPositions", NumberPositions);
PositionSize = -100 / NumberPositions;


HaClose[0] = (Open[0]+High[0]+Low[0]+Close[0]) / 4;
HaOpen[0] = (HaClose[0] + Open[0]) / 2;
HaHigh[0] = Max( High[0], Max( HaClose[0], HaOpen[0] ) );
HaLow[0] = Min( Low[0], Min( HaClose[0], HaOpen[0] ) );

for (i=1; i<BarCount; i++)
{
HaClose = (Open+High+Low+Close) / 4;
Haopen = (HaClose[i-1] + HaOpen[i-1]) / 2;
HaHigh = Max( High, Max( HaClose, HaOpen ) );
Halow = Min( Low, Min( HaClose, HaOpen ) );
}

HAlong = IIf((HaClose >= HaOpen),1,0);

Buy = (Ref(HAlong,-1)==1) AND (Ref(HAlong,-2)==0);
Sell = (Ref(HAlong,-1)==0) AND (Ref(HAlong,-2)==1);
Short = Sell;
Cover = Buy;

 

[loop101]

I'm going to describe a simple system I started using about a month ago, and have since been losing money with. I plan to continue trading it using a $500 account for the next two years. I don't suggest anyone follow this plan, but it might serve as useful information to others. I am using $500 because if the system works, it will not matter how much I started with, and I am willing to lose 100% of $500 to find out if it works. In my testing with 10:1 leverage, the maximum drawdown was about -80%.

The system is an "always in" EUR/USD method, where you switch from long to short, and vice-versa. The indicator is a 25-day moving average of the Open against a 25-day moving average of the Close. Here is the Amibroker code:

OptimizerSetEngine( "cmae" );
TimeFrameSet( inDaily );
MALength = Optimize ("MALength", 25, 2, 50, 1); //25 eurusd

SetOption( "Initialequity", 500 );
SetOption( "MaxOpenPositions", 1 );
SetTradeDelays( 0, 0, 0, 0 );

OpenMA = MA( Open, MALength);
CloseMA = MA(Close, MALength);

GoLong = CloseMA > OpenMA;
GoShort = CloseMA < OpenMA;

Buy = Ref(GoLong, -1);
Cover = Ref(GoLong, -1);

Short = Ref(GoShort, -1);
Sell = Ref(GoShort, -1);

Attached are pictures of the historical returns using 1:1 and 10:1 leverage.

1:1 leverage:


10:1 leverage:


10:1 returns porn:

 

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[dknise]

Attached are pictures of the historical returns using 1:1 and 10:1 leverage.

Why are the percentages different with margin? Assuming full market liquidity, the percentages should be the same, the fluctuations should just be 10x larger.

Also, it seems like you're searching for a holy grail in indicators. Have you thought much about the philosophy of markets and the "why's" to price movements?

 

[loop101]

I'm just looking for something that I think will make more money than it will lose.

 

[Guest3722A]

I'm just looking for something that I think will make more money than it will lose.

Have you looked into market profile and footprint?

 

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[dknise]

I'm just looking for something that I think will make more money than it will lose.

As long as you continue to believe it's magic, the approach you're taking says you do, you'll continue to lose. If you can understand the psychology of the why behind your strategies, you can build a more informed algorithm. Right now it's just guess work.

 

[loop101]

Right now it's just guess work.

Yep.

 

[Jonleehacker]

Those numbers and charts will look A LOT different when you add in spreads and slippage.

There is no easy way to make money trading, except by selling products to people who want to believe there is an easy way to make money trading

It is a performance career like being a professional athlete. I requires dedication and a lot of study and practice and desire to make it. The way you make money in a performance career is to be in the top .5% of all the people you are competing against.

Do you really think a simple moving average cross is going to give you that edge?

What's funny is that if you gave your system to a real professional trader, they would make money with it, that's the magic of trading - the system is irrelevant.

 

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[dknise]

Do you really think a simple moving average cross is going to give you that edge?

My point exactly. He's ignored the other tips I gave though. There's bulls, bears and...

 

[loop101]

dknise, I am just sharing what I am doing, and I am being specific. That in itself has value. Your tips were too vague for me to understand how they might be useful, perhaps giving an example of an "informed algorithm" would help.

Jonleehacker, I didn't get much from your post, but I looked at your website and was glad to see you know who Van Tharp is. His position sizing formula is used in a lot of systems. To answer your question, yes I think a simple SMA may give an edge that I find adequate. Different things work at different times and at different time scales, so no one can really say what works and what does not work. Dknise seemed offended when I simply agreed with him that I was guessing. I've never known a trader who wasn't.

 

[Jonleehacker]

Dknise seemed offended when I simply agreed with him that I was guessing. I've never known a trader who wasn't.

Trader's don't guess, they have statistically verified edges. Just like a casino doesn't guess that their games are profitable.

Anyways, if you're reading Van Tharp, you're on the right road. I just didn't want you thinking trading was a get rich quick thing.

Good fortune to you!

 

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[dknise]

Dknise seemed offended when I simply agreed with him that I was guessing. I've never known a trader who wasn't.

Nah you ignored my advice.

You are gong to continue to get slaughtered. Goodluck.

 

[InLikeFlint]

Nah you ignored my advice.

You are gong to continue to get slaughtered. Goodluck.

Speed+ great info given by someone who has actually made money with forex and the OP ignored. Very good post dknise, I enjoyed reading it and drew tears for a moment or two.

 

[loop101]

Trader's don't guess, they have statistically verified edges. Just like a casino doesn't guess that their games are profitable.

Anyways, if you're reading Van Tharp, you're on the right road. I just didn't want you thinking trading was a get rich quick thing.

Good fortune to you!

An interesting topic is what do we mean by "statistically verified edge". An important question is: how certain are you that your edge is statistically verified? It takes a certain number of unique samples to arrive at higher confidence levels. For example, if you only need to be sure that your system represents reality with a 70% probability, it may not take many samples. If you want to be 90% certain, it will take a lot more. And to be 99% sure, it will take many more. The ratio is inversely exponential. The big question is, do you have enough historical data to reach the confidence level you desire?

For example, if you use a SMA40/SMA250 crossover, you need at least 250 days of data per unique sample. You get one sample per year. Bretton Woods ended in 1971, so that gives you 42 unique samples in Forex if you are using an SMA250. The Euro has 18 years of data. Do you know what that means? It means if you use a yearly moving average, you can forget about having a "statistically verified edge".

You need to determine your minimum population size based on what confidence level you need, and then divide your amount of historical data by that. That calculation will give you the maximum amount of time that can be included in each sample. At that point, you may decide intraday trading gives you the number of samples you need to get to the confidence level you want.

Some traders realize the futility of having a "statistically verified edge", and proceed anyway. I am in that camp. Even with an edge, then you have to deal with BSE's. You may want to read about the dialogs between Neiderhoffer and Taleb, if you are unfamiliar with them.

If you understand where I am coming from, you will see there is zero point in me arguing with anyone here, or them arguing with me. All we can do, is show what we are doing. Most traders will never show what they are doing. It's a sad irony that anyone who does, is immediately attacked by people (like dknise). There was a guy on here posting his daily trading activity, and I believe he was chased away by similar activity. That was unfortunate.

 

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[loop101]

Nah you ignored my advice.

You are gong to continue to get slaughtered. Goodluck.

Would you be willing to make a thread where you detail your approach to trading?

 

[endsurfs]

Some traders realize the futility of having a "statistically verified edge", and proceed anyway. I am in that camp. Even with an edge, then you have to deal with BSE's. You may want to read about the dialogs between Neiderhoffer and Taleb, if you are unfamiliar with them.

Real world example: Long Term Capital Management