Trading Forex with a Strategy

Trading successfully is by no means a simple matter. It requires time, market knowledge and market understanding and a large amount of self restraint. ACM does not manage accounts, nor does it give market advice, that is the job of money managers and introducing brokers. As market professionals, we can however point the novice in the right direction and indicate what are correct trading tactics and considerations and what is total nonsense.

Anyone who says you can consistently make money in foreign exchange markets is being untruthful. Foreign exchange by nature, is a volatile market. The practice of trading it by way of margin increases that volatility exponentially. We are therefore talking about a very 'fast market' which is naturally inconsistent. Following that precept, it is logical to say that in order to make a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation. Timing a trade correctly is probably the most important variable in trading successfully but invariably there will be times where a traders' timing will be off. Don't expect to generate returns on every trade.

Let's enumerate what a trader needs to do in order to put the best chances for profitable trades on his side:

Trade with money you can afford to lose:

Trading fx markets is speculative and can result in loss, it is also exciting, exhilarating and can be addictive. The more you are 'involved with your money' the harder it is to make a clear-headed decision. Money you have earned is precious, but money you need to survive should never be traded.

Identify the state of the market:

What is the market doing? Is it trending upwards, downwards, is it in a trading range. Is the trend strong or weak, did it begin long ago or does it look like a new trend that's forming. Getting a clear picture of the market situation is laying the groundwork for a successful trade.

Determine what time frame you're trading on:

Many traders get in the market without thinking when they would like to get out, after all the goal is to make money. This is true but when trading, one must extrapolate in his mind's eye the movement that one expects to happen. Within this extrapolation, resides a price evolution during a certain period of time. Attached to this is the idea of exit price. The importance of this is to mentally put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you'll be 'scalping' (trying to get a few points off the market) trading intra-day, or going longer term. This will also determine what chart period you're looking at. If you trade many times a day, there's no point basing your technical analysis on a daily graph, you'll probably want to analyse 30 minute or hour graphs. Additionally it is important to know the different time periods when various financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.

Time your trade:

You can be right about a potential market movement but be too early or too late when you enter the trade. Timing considerations are twofold, an expected market figure like CPI, retail sales or a federal reserve decision can consolidate a movement that's already underway. Timing your move means knowing what's expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur. We will look at technical analysis in more detail later.

If in doubt, stay out:

If you're unsure about a trade and find you're hesitating, stay on the sidelines.

Trade logical transaction sizes:

Margin trading allows the fx trader a very large amount of leverage, trading at full margin capacity (in ACM's case 1% or 0.5%) can make for some very large profits or losses on an account. Scaling your trades so that you may re-enter the market or make transactions on other currencies is generally wiser. In short, don't trade amounts that can potentially wipe you out and don't put all your eggs in one basket. ACM offers the same rates regardless of transaction sizes so a customer has nothing to lose by starting small.

Gauge market sentiment:

Market sentiment is what most of the market is perceived to be feeling about the market and therefore what it is doing or will do. This is basically about trend. You may have heard the term 'the trend is your friend', this basically means that if you're in the right direction with a strong trend you will make successful trades. This of course is very simplistic, a trend is capable of reversal at any time. Technical and fundamental data can indicate however if the trend has begun long ago and if it is strong or weak.

Market expectation:

Market expection relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been 'discounted' by the market, alternatively if the adverse happens, markets will usually react violently.

Use what other traders use:

In a perfect world, every trader would be looking at a 14 day RSI and making trading decisions based on that. If that was the case, when RSI would go under the 30 level, everyone would buy and by consequence the price would rise. Needless to say, the world is not perfect and not all market participants follow the same technical indicators, draw the same trendlines and identify the same support & resistance levels. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The most common are 9 and 14 day RSI, obvious trendlines and support levels, fibonnacci retracement, MACD and 9, 20 & 40 day exponential moving averages. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa. Read More..

Trading Techniques

Automated trading gives most traders their best chance for success in forex, but it's not the only element of a successful trading record. Traders must know how to apply automated trading techniques and be willing to manually manipulate trades when possible. Combining these two methods – mechanization and discretion – is the path to profitable trading.

ANALYSIS

* Learn about different ways to use automated trading.
* Analyze systems to gauge their suitability for automated trading.

ACTION

* Build engines to see how they execute in an automated environment.
* Experiment with manual manipulation of trades with automated tools.
* Take your results live and succeed.

RELATED MATERIAL

Test-drive FX Engines for free online at www.fxengines.com to see the power of system building, system testing, and system automation.

ABOUT THIS REPORT

The Forex Report is a periodic publication that investigates advanced strategies for superior trading performance in the foreign exchange markets. These reports utilize advanced statistical and econometric modeling techniques to create new insight into the trading strategy of the average trader. This Data Brief, When to Trade, is intended for all audiences, including those new to the forex market.

To learn more about The Forex Report or to register for delivery of all future reports by email, including Case Studies & Data Briefs, please visit www.fxengines.com.
ANALYSIS

The Holy Grail of trading – does it exist? Yes, and its name is Hard Work! All of the debates surrounding the value of hard work vs. automation miss one main point – automation is hard work! Automated trading is not an end in itself, but a tool that immeasurably helps traders cope with the unique demands of the forex market. Once you've made the choice to pursue automated trading, you'll find a wealth of new trading techniques at your disposal.
THE MANY USES OF AUTOMATED TRADING

The first impression of most traders is that automated trading creates a system where a "robot" takes over and makes all of the trading decisions, then executes them. Another version has the trader crafting the strategy and leaving the actual execution – the part that requires the physical presence – to the automation platform. FX Engines is such a system.

Some trading systems are excellent candidates for complete automation. They have simple rules but may require off-hours trading, frequent trading, or some other element that is ideally suited for automation.

Beyond those systems are more advanced and discretion-driven systems. These kinds of systems require trader intervention at some point. Advanced automated systems like FX Engines allow for this kind of nuanced interaction, but some traders are simply more comfortable knowing their hands are on the wheel. These traders often believe that discretion, or the "art" of trading, is the key element, and since a machine cannot possibly employ the level of nuance a human can, they discount automated trading altogether. Yet there is something in automation for all traders, beginning with the basic trading techniques of automated platforms like FX Engines:
Entry Type Exit Type Best Use
Automated Automated Simple, mechanized systems
Automated Manual Mechanized entry with discretionary exit
Manual Automated Discretionary entry with mechanized exits
Manual Manual Discretionary entry and exit

With FX Engines, all of these options are available, with more on the way. A trader can manually enter an engine but walk away – knowing that the engine's exit signals will take over and direct the trade to its conclusion. The same is true for automated entry – perhaps while during the night – with manual exit at the point in time determined to be the best exit.
NOT ALL SYSTEMS ARE MADE FOR COMPLETE AUTOMATION

A skilled trader can make money using any toolkit, and in some cases systems will simply be outside the realm of complete automation. Some examples of these systems include:

* Event Driven Systems. Since events are spontaneous, manual entry is required for these systems. Still, an automated system can assist event traders by providing complete control after entry has occurred, all the way to the exit of the trade.
* Non-Quantitative Systems. Though technically driven systems have grown in prominence, many traders reply upon fundamental indicators that do not readily lend themselves to automation. In some cases these systems can employ automated entry or exit, and for some the advanced intra-trade tools like FX Engines' Contextual Exits allow for extremely fine, automated control of trades.
* Highly Discretionary Systems. Some traders work off pure feel of the markets, or use little-known chart patterns to dictate their trading choices. In these cases some form of automation will give these traders an edge they did not have access to previously.

What's the best way to know if a system is suitable for automation? Historical testing. Traders can create engines and test them historically, then let the results speak for themselves. Some engines will show dramatic results with no intervention. Other engines may show excellent results but be dominated by "giveback" – a hint that perhaps some manual tweaking is required. A quick look at the actual trades in the historical test report will allow the trader to determine what happened and how they could have possibly intervened to improve the results.

Once engines with a comfortable set of parameters are in place, live testing can begin. Remember, FX Engines' test trades are identical to its live trades, so demo trading with complete automation or with some manual manipulation will replicate live trading conditions. Once tests have successfully met targets, real trading puts the trader in a position to have automated trading techniques like these positively affect the bottom line.
ACTION

Using automation in combination with discretion as a complementary trading tool is a new idea. Explore it by building mechanized and discretionary engines that take advantage of different trading techniques and optimize the return on your trading efforts.
1- BUILD

Build your engines and test them. Take a close look at the results and see what they tell you. Is the engine best suited to total automation? If not, take a look at the results and see where you may have intervened, then factor those changes into your results.
2- EXPERIMENT

If you find systems that are a perfect fit for automation, great. Set them to test against our live feed and leave them alone. For the engines you suspect might need manual manipulation, set them to test and be sure to follow them when they enter the market. Use FORCE EXIT when you feel that the exit system in place in the engine will pull back too far below your optimal exit point.
3- BEGIN

Fund your account and get going! Once you've tested with FX Engines you'll have the confidence to trade in a real account. Start with a mini account if you need to, and prove to yourself that this is an automated platform that works. As your success increases, so will your trades, and your profits. Read More..

FX Trading The Martingale Way

Imagine a trading strategy that is practically 100% profitable - would you be interested? Most traders will probably reply with a resounding "Yes", especially since such a strategy does exist and dates all the way back to the eighteenth century. This strategy is based on probability theory and if your pockets are deep enough, it has a near 100% success rate. Known in the trading world as the martingale, this strategy was most commonly practiced in the gambling halls of Las Vegas casinos and is the main reason why casinos now have betting minimums and maximums and why the roulette wheel has two green markers (0 and 00) in addition to the odd or even bets. The problem with this strategy is that in order to achieve 100% profitability, you need to have very deep pockets - in some cases, they must be infinitely deep. Unfortunately, no one has infinite wealth, but with a theory that relies on mean reversion, one missed trade can bankrupt an entire account.Also, the amount risked on the trade is far greater than the potential gain. Despite these drawbacks, there are ways to improve the martingale strategy. In this article, we'll explore the ways you can improve your chances of succeeding at this very high risk and difficult strategy.

What is Martingale Strategy?
Popularized in the eighteenth century, the martingale was introduced by a French mathematician by the name of Paul Pierre Levy. The martingale was originally a type of betting style that was based on the premise of "doubling down". Interestingly enough, a lot of the work done on the martingale was by an American mathematician named Joseph Leo Doob, who sought to disprove the possibility of a 100% profitable betting strategy.

The mechanics of the system naturally involve an initial bet; however, each time the bet becomes a loser, the wager is doubled such that, given enough time, one winning trade will make up all of the previous losses. The introduction of the 0 and 00 on the roulette wheel was used to break the mechanics of the martingale by giving the game more than two possible outcomes other than the odd vs. even or red vs. black. This made the long-run profit expectancy of using the martingale in roulette negative and thus destroyed any incentive for using it.

To understand the basics behind the martingale strategy, let's take a look at a simple example. Suppose that we had a coin and engaged in a betting game of either head or tails with a starting wager of $1. There is an equal probability that the coin will land on a head or tails and each flip is independent, meaning that the previous flip does not impact the outcome of the next flip. As long as you stick with the same directional view each time, you would eventually, given an infinite amount of money, see the coin land on heads and regain all of your losses plus $1. The strategy is based on the premise that only one trade is needed to turn your account around.

Examples
Scenario No.1 (Head or Tails 50/50 Chance):

Your Bet Wager Flip Results Profit/Loss Account Equity
Heads $ 1 Heads $ 1 $11
Heads $ 1 Tails $ (1) $10
Heads $ 2 Tails $(2) $8
Heads $ 4 Heads $ 4 $12

Assume that you have a total of $10 to wager, starting with a first wager of $1. You bet on heads, the coin flips that way and you win $1, bringing your equity up to $11. Each time you are successful, you keep on betting the same $1 until you lose. The next flip is a loser and you bring your account equity back to $10. On the next bet, you wager $2 in the hope that if the coin lands on heads, you will recoup your previous losses and bring your net profit and loss to zero. Unfortunately, it lands on tails again and you lose another $2, bringing your total equity down to $8. So, according to martingale strategy, on the next bet you wager double the prior amount (or $4). Thankfully, you hit a winner and gain $4, bringing your total equity back up to $12. As you can see, all you needed was one winner to get back all of your previous losses.

However, let's consider what happens when you hit a losing streak like in scenario No.2:

Your Bet Wager Flip Results Profit/Loss Account Equity
Heads $1 Tails $ (1) $9
Heads $2 Tails $ (2) $7
Heads $4 Tails $ (4) $3
Heads $3 Tails $ (3) ZERO

Once again, you have $10 to wager with a starting bet of $1. In this scenario, you immediately lose on the first bet and bring your balance down $9. You double your bet on the next wager, lose again and end up with $7. On the third bet, your wager is up to $4, your losing streak continues and now you are down to $3. You do not have enough money to double down and the best you can do is bet it all. If you lose, you are down to zero and even if you win, you are still far from your initial $10 starting capital.

Trading Application
You may think that the long string of losses such as in the above example would represent unusually bad luck, but when you trade currencies, they tend to trend and trends can last for a very long time if you are caught in the wrong direction. However, the key with martingale when applied to trading is that by "doubling down" you in essentially lower your average entry price. In the example below, at two lots, you need the EUR/USD to rally from 1.2630 to 1.2640 to break even. As the price moves lower and you add four lots, you only need it to rally to 1.2625 instead of 1.2640 to break even. The more lots you add, the lower your average entry price. Even though you may lose 100 pips on the first lot of the EUR/USD if the price hits 1.2550, you only need the currency pair to rally to 1.2569 to break even on your entire holdings. This is also a clear example of why deep pockets are needed. If you only have $5,000 to trade, you would be bankrupt before you were even able to see the EUR/USD reach 1.2550. The currency may eventually turn, but with the martingale strategy, there are many cases when you may not have enough money to keep you in the market long enough to see that end. (To learn more, see Common Questions About Currency Trading.)

EURUSD Lots Average or Breakeven Price Accumulated Loss Break-Even Move
1.2650 1 1.2650 $0 0 pips
1.2630 2 1.2640 -$200 +10 pips
1.2610 4 1.2625 -$600 +15 pips
1.2590 8 1.2605 -$1,400 +17 pips
1.2570 16 1.2588 -$3,000 +18 pips
1.2550 32 1.2569 -$6,200 +19 pips

Why Martingale Works Better With FX
One of the reasons why the martingale strategy is so popular in the currency market is because unlike stocks, currencies rarely go to zero. Although companies easily can go bankrupt, countries cannot. There will be times when a currency is devalued, but even in cases where there is a sharp slide, the currency's value never reaches zero. It's not impossible, but what it would take for this to happen is too scary to even consider.

The FX market also offers one unique advantage that makes it more attractive for traders who have the capital to follow the martingale strategy. The ability to earn interest allows traders to offset a portion of their losses with interest income. This means that an astute martingale trader may want to only trade the strategy on currency pairs in the direction of positive carry. This means that he or she would buy a currency with a high interest rate and earn that interest while, at the same time, selling a currency with a low interest rate.With a large amount of lots, interest income can be very substantial and could work to reduce your average entry price. (For related reading, see Trading The Odds With Arbitrage.)

Minding the Risk
As attractive as the martingale strategy may sound to some traders, we stress that grave caution is needed for those who attempt to practice this style of trading. The main problem with this strategy is that oftentimes, that sure-fire trade may blow up your account before you can turn a profit - or even recoup your losses. In the end, traders must question whether they are willing to lose most of their account equity on a single trade. Given that they must do this to average much smaller profits, many feel that the martingale trading strategy is entirely too risky for their tastes. Read More..

Forex Strategy: Trading with Stochastics

Stochastics are amongst the most popular technical indicators when it comes to Forex Trading. Unfortunately most traders use them incorrectly. In this article we will review the correct way to use this popular technical indicator.

George Lane developed this indicator in the late 1950s. Stochastics measure the current close relative to the range (high/low) over a set of periods.

Stochastics consist of two lines:

%K – Is the main line and is usually displayed as a solid line

%D – Is simply a moving average of the %K and is usually displayed as a dotted line

There are three types of Stochastics: Full, fast and slow stochastics. Slow stochastics are simply a smother version of the fast stochastics, and full stochastics are even a smother version of the slow stochastics.

Interpretation:

Buy when %K falls below the oversold level (below 20) and rises back above the same level.

Sell when %K rises above de overbought level (above 80) and falls back below the same level.

The interpretation above is how most traders and investors use them; however, it only works when the market is trendless or ranging. When the market is trending, a reading above the overbought territory isn't necessary a bearish signal, while a reading below de oversold territory isn't necessary bullish signal.

Trending market

When the market is trending is necessary to adapt the oscillator to the same conditions: When the market is trending up, then the signals with the higher probability of success are those in direction of the trend “Buy signals”, on the other hand when the market is trending down, selling signals offer the lowest risk opportunities.

Thus when the market is trending up, we will only look for oversold conditions (when the stochastics fall below the oversold level [below 20] and rises back above the same level) to get ready to trade, and in the same way, when the market is trending down we will only look for overbought conditions (when the stochastics rise above de overbought level [above 80] and falls back below the same level. Read More..