This week I finally automated my scalping strategy. Yes it uses Bollinger bands. Yes it's a reversion to the mean idea. No I won't reveal the specifics, so please don't ask me. What I do want to talk about, however, is the idea of algo trading itself. For a purely discretionary trader like most of us, algorithmic trading is a brand new frontier and I wanted to share my initial thoughts on the subject. Those of you who have been trading automated strategies for a while, please write in offer your insights. I would love to hear from you.
Whether we like it or not algo trading is the future for both institutional and retail accounts. I don't think computers will ever replace human analysis completely, but just like in in every major field of life from aeronautics to medicine to agriculture to transportation they will become a crucial component of economic activity. So here is a list of things my algo taught me so far
1. Train Yourself
The first thing you will want to do with your algo is to override it. That's fine and totally natural. As discretionary screen based traders we simply don't realize how much "art" is involved in our day to day trading process. Even the most steely, disciplined traders will change their "ironclad" trading rules on the fly in reaction to whatever is happening on the screen.
So go ahead, screw around with the algo, take profits early, terminate trades arbitrarily, override your entry criteria. In short let emotion take over and get it out of your system. After a few days of second guessing yourself and losing money you will finally be ready to let go. Like an anxious parent watching his baby take a few steps on his own, you will finally start to trust the process.
2. Trade with Real Money
I know the standard advice is to trade your algo on a demo, but I disagree wholeheartedly. Trading a demo is like playing HALO 3 and thinking that you are ready for war. The moment you hear a shell explode near you in real life you'll pee your pants. Mistakes WILL happen on the algo (in the future I am going to devote a whole column to all the things that can go wrong) and you need to learn from those mistakes quickly. There is no better feedback loop than watching your account get sliced and diced by the computer. You will become battle hardened in no time.
3. Understand the Model
Ask yourself exactly what price behavior you are trying to model. Ask yourself why you think this behavior may have an edge in the market. Stop obsessing about the indicators. Indicators are simply tools that help you describe your psychological insight mathematically, so changing the parameters of your SMA from 20 to 25 will not help you at all in a rangebound market. Always take an eagle's eye view of your strategy and be merciless with your assumptions because I can assure you, if you are not - the market will show you no mercy.
4. Let Algo Be Algo
Once you are generally content with the logic of your strategy, let the thing trade. Just as we must learn as parents to bite our tongue and let our children discover for themselves the rules of life, so too with the algo we must let it trade for a while to discover the rules of price action. Besides, you need at least 200 data samples to even begin to draw any meaningful conclusions from your ideas so sit still and let it operate on its own. After all that's the goal isn't it?
source: BKForex Advisor
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Sunday, October 25, 2009
Monday, September 7, 2009
Forex Success, Top Ten Tips
Ever wondered how the elite group of successful Forex traders got to be that way - successful and highly profitable? Do you have what it takes to join the club? Can you survive the same Forex "apprenticeship"?
Most successful traders became profitable by first earning their Forex PhD. In this case, the letters stand for Phenomenally Huge Drawdown. It is often said that 95% of new traders will lose their shirts. What precisely, separates the winners from the losers? The success stories have a common theme - and it is not what you might expect.
Smart traders understand the risk inherent in this market and plan from the outset to be around for the long haul. So what are the keys to success? Do you have what it takes?
1. Respect for Risk.
Forex is like an ocean liner that runs on the edge of a razor blade. It can be both highly lucrative and highly damaging. Successful traders comprehend the risk inherent in a highly dynamic changeable market and adjust their perspective and trade plans accordingly. They have learned this the hard way, through incurring sometimes significant losses.
Successful traders have enormous respect for risk (since they have experienced first hand the damage this market can do when they get it wrong), they are highly flexible, not rigid; they are in tune with the changing tides of sentiment and have the capacity to shift their directional bias accordingly.
2. Advantage Plus.
Successful traders have two key advantages.
First, they have the best information. This consists of 5 key items -
* extensive TA knowledge that works in the forex market
* lengthy market experience
* independent/sound research capacity
* self-motivated attention to detail
* thorough and professional preparation.
Second, they make the least number of mistakes. It isn't a question of making no mistakes (even the best get it wrong sometimes) but of keeping the error rate as low as possible.
Successful traders obtain, and maintain their success through accessing and using reliable high quality information and by keeping their error rate low.
3. Know the Rules and Exceptions.
Forex has 1001 different nuances that apply in different circumstances. Good traders know the rules. Great traders know the exceptions. Knowledge, experience and education matter. Longevity in the Forex market is important since it is only through this long term familiarity with “trial and error” that a good trader gains the detailed knowledge and discipline needed to be successful. Trading Forex is a little like training for neuro-surgery. Traders should avoid conducting major surgery on the patient until such time as they have sufficient knowledge, skills, training and clinical practice to be highly competent in their craft. The learning curve can be steep and costly if you venture into major operations too soon (e.g. mis-use of margin, too large position sizing, over-trading).
Successful traders have extensive experience under their belts; they have identified a trading system that works consistently well for them, they apply it rigorously; they also know the exceptions, that is, when and under what circumstances their normal approach cannot be relied upon.
4. Timing.
Timing is critical to successful trading. A core axiom in maximising success is to only trade when market is at its most liquid. This occurs at the beginning of the Europe session, during the overlap of Europe and US session and as the US session closes. The tides of momentum are at their peak with the greatest velocity. “Momentum is like a drawn crossbow, and timing is the trigger which will release the bolt with deadly accuracy”. (Sun Tzu, Art of War).
Successful traders maximise their chances of success by deliberately stacking the odds in their own favour.
5. Understanding Herd Behaviour.
Currencies are very drawn to major support and resistance levels. Herd behaviour is rampant in this market. If new traders do nothing else, it should be to only place a trade when currencies are at established support and resistance levels and/or when there is clear confirmation that a break-out move or trend reversal is occurring. Trading within the body of a move already in progress compounds risk in an already high risk instrument.
Successful traders monitor key support and resistance levels closely.
6. Logic and the Analytical Mind.
The Forex market can remain irrational longer than you can remain liquid. Highly analytical minds can find this lack of logical behaviour difficult to process. Logic and reason based on fundamentals do not always influence currency behaviour. Bias and impatience are the trader’s enemies. Some traders would rather be right, than be rich. Check your ego in at the door before entering, or this market will check it in for you.
Successful traders possess humility; they acquired this the hard way.
7. Price Action (PA).
Zig zag price action and retracements are very common. Most moves will retrace by 50% and many moves will re-test support and resistance levels several times before deciding on direction. Successful traders avoid getting on board too soon since market generally provides plenty of chances to recognise a move reversal - levels are (nearly always) tested more than once, usually multiple times. Learning to read the signs for safe entry accurately is a major part of the apprenticeship.
Successful traders recognise the most reliable trade signals; they know when to enter and when to exit, locking in profits.
8. Less is More.
Successful traders keep their finger off the trigger unless all their pre-determined entry signals are met. Over-trading is the Number One account killer. Choose your moment of entry carefully. Plan your trade. If in doubt, stay out. Less is more. This cannot be emphasized enough.
Successful traders plan their trades and exercise the discipline to wait for price to come to them.
9. Psychological Warfare.
Trading is psychological warfare, with yourself first and with market second. Trading is a catharsis, a rite of purification, a cleansing from the impurities of wrong information, lack of discipline, errors of judgement. Sometimes, when traders make the same mistakes over and over, our learning is merely being taken to a deeper level on each consecutive occasion until we eventually get the point. Constant repitition of mistakes occurs because our brains can unknowingly be programmed to prefer trading a particular directional bias (just like Pavlov's Dog, we are rewarded for trading a certain long or short bias, so the reward program is "set" to automatic). Re-programming the brain to be able to trade both the trend and counter trend is vitally important, but not an easy task. Allowing yourself to be shaped and "refined" in the Forex crucible requires two key personality elements - character and fortitude. It also requires a significant cache of reserve funds, without which, your Forex trading career may be short-lived. One of the worst mistakes new traders make is to transition from demo to live with all guns blazing.
Successful traders have visited their own fallibility, they have survived the crucible and allowed it to shape them. Successful traders can trade both trend and counter-trend moves with equal confidence.
10. Longevity.
Plan from the outset to be around for the long haul. Trading Forex successfully requires high levels of self discipline and emotional maturity – trading real money (unlike demo trading) carries significant pressure which can very easily lead to doing the wrong thing in the heat of the moment. Learning to manage emotions, to remain patient and disciplined is perhaps the hardest of all apprenticeship hurdles. Being unable to gain mastery of this is the main cause of losses and blown accounts.
Successful traders are disciplined, smart, and market savvy because they have been around long enough to have visited the raw truth regarding the causes of their failures; they have diligently applied themselves to the task of overcoming their short-comings and succeeded (where others either give up or cling relentlessly to bad habits or unrealistic objectives, and fail).
Summary
Start small. Trade a live micro-account to begin with. If or when you have the runs on the board, consistent profits in a micro account, that is the time to move to a larger account and larger position sizing.
Make plenty of allowance for the steep learning curve and be well prepared - understand from the outset this is a journey you are embarking on, a journey into how this market operates and also a journey into how you as a trader operate. It may take a few months or it may take years to acquire proficiency, it all depends on you, the trader. Acquiring the necessary knowledge and skill is a process, sometimes a brutal and lengthy process.
Be fully prepared. Be smart, be realistic, trade safely while you learn the craft of trading Forex successfully.
(from: forexdistrict)
Most successful traders became profitable by first earning their Forex PhD. In this case, the letters stand for Phenomenally Huge Drawdown. It is often said that 95% of new traders will lose their shirts. What precisely, separates the winners from the losers? The success stories have a common theme - and it is not what you might expect.
Smart traders understand the risk inherent in this market and plan from the outset to be around for the long haul. So what are the keys to success? Do you have what it takes?
1. Respect for Risk.
Forex is like an ocean liner that runs on the edge of a razor blade. It can be both highly lucrative and highly damaging. Successful traders comprehend the risk inherent in a highly dynamic changeable market and adjust their perspective and trade plans accordingly. They have learned this the hard way, through incurring sometimes significant losses.
Successful traders have enormous respect for risk (since they have experienced first hand the damage this market can do when they get it wrong), they are highly flexible, not rigid; they are in tune with the changing tides of sentiment and have the capacity to shift their directional bias accordingly.
2. Advantage Plus.
Successful traders have two key advantages.
First, they have the best information. This consists of 5 key items -
* extensive TA knowledge that works in the forex market
* lengthy market experience
* independent/sound research capacity
* self-motivated attention to detail
* thorough and professional preparation.
Second, they make the least number of mistakes. It isn't a question of making no mistakes (even the best get it wrong sometimes) but of keeping the error rate as low as possible.
Successful traders obtain, and maintain their success through accessing and using reliable high quality information and by keeping their error rate low.
3. Know the Rules and Exceptions.
Forex has 1001 different nuances that apply in different circumstances. Good traders know the rules. Great traders know the exceptions. Knowledge, experience and education matter. Longevity in the Forex market is important since it is only through this long term familiarity with “trial and error” that a good trader gains the detailed knowledge and discipline needed to be successful. Trading Forex is a little like training for neuro-surgery. Traders should avoid conducting major surgery on the patient until such time as they have sufficient knowledge, skills, training and clinical practice to be highly competent in their craft. The learning curve can be steep and costly if you venture into major operations too soon (e.g. mis-use of margin, too large position sizing, over-trading).
Successful traders have extensive experience under their belts; they have identified a trading system that works consistently well for them, they apply it rigorously; they also know the exceptions, that is, when and under what circumstances their normal approach cannot be relied upon.
4. Timing.
Timing is critical to successful trading. A core axiom in maximising success is to only trade when market is at its most liquid. This occurs at the beginning of the Europe session, during the overlap of Europe and US session and as the US session closes. The tides of momentum are at their peak with the greatest velocity. “Momentum is like a drawn crossbow, and timing is the trigger which will release the bolt with deadly accuracy”. (Sun Tzu, Art of War).
Successful traders maximise their chances of success by deliberately stacking the odds in their own favour.
5. Understanding Herd Behaviour.
Currencies are very drawn to major support and resistance levels. Herd behaviour is rampant in this market. If new traders do nothing else, it should be to only place a trade when currencies are at established support and resistance levels and/or when there is clear confirmation that a break-out move or trend reversal is occurring. Trading within the body of a move already in progress compounds risk in an already high risk instrument.
Successful traders monitor key support and resistance levels closely.
6. Logic and the Analytical Mind.
The Forex market can remain irrational longer than you can remain liquid. Highly analytical minds can find this lack of logical behaviour difficult to process. Logic and reason based on fundamentals do not always influence currency behaviour. Bias and impatience are the trader’s enemies. Some traders would rather be right, than be rich. Check your ego in at the door before entering, or this market will check it in for you.
Successful traders possess humility; they acquired this the hard way.
7. Price Action (PA).
Zig zag price action and retracements are very common. Most moves will retrace by 50% and many moves will re-test support and resistance levels several times before deciding on direction. Successful traders avoid getting on board too soon since market generally provides plenty of chances to recognise a move reversal - levels are (nearly always) tested more than once, usually multiple times. Learning to read the signs for safe entry accurately is a major part of the apprenticeship.
Successful traders recognise the most reliable trade signals; they know when to enter and when to exit, locking in profits.
8. Less is More.
Successful traders keep their finger off the trigger unless all their pre-determined entry signals are met. Over-trading is the Number One account killer. Choose your moment of entry carefully. Plan your trade. If in doubt, stay out. Less is more. This cannot be emphasized enough.
Successful traders plan their trades and exercise the discipline to wait for price to come to them.
9. Psychological Warfare.
Trading is psychological warfare, with yourself first and with market second. Trading is a catharsis, a rite of purification, a cleansing from the impurities of wrong information, lack of discipline, errors of judgement. Sometimes, when traders make the same mistakes over and over, our learning is merely being taken to a deeper level on each consecutive occasion until we eventually get the point. Constant repitition of mistakes occurs because our brains can unknowingly be programmed to prefer trading a particular directional bias (just like Pavlov's Dog, we are rewarded for trading a certain long or short bias, so the reward program is "set" to automatic). Re-programming the brain to be able to trade both the trend and counter trend is vitally important, but not an easy task. Allowing yourself to be shaped and "refined" in the Forex crucible requires two key personality elements - character and fortitude. It also requires a significant cache of reserve funds, without which, your Forex trading career may be short-lived. One of the worst mistakes new traders make is to transition from demo to live with all guns blazing.
Successful traders have visited their own fallibility, they have survived the crucible and allowed it to shape them. Successful traders can trade both trend and counter-trend moves with equal confidence.
10. Longevity.
Plan from the outset to be around for the long haul. Trading Forex successfully requires high levels of self discipline and emotional maturity – trading real money (unlike demo trading) carries significant pressure which can very easily lead to doing the wrong thing in the heat of the moment. Learning to manage emotions, to remain patient and disciplined is perhaps the hardest of all apprenticeship hurdles. Being unable to gain mastery of this is the main cause of losses and blown accounts.
Successful traders are disciplined, smart, and market savvy because they have been around long enough to have visited the raw truth regarding the causes of their failures; they have diligently applied themselves to the task of overcoming their short-comings and succeeded (where others either give up or cling relentlessly to bad habits or unrealistic objectives, and fail).
Summary
Start small. Trade a live micro-account to begin with. If or when you have the runs on the board, consistent profits in a micro account, that is the time to move to a larger account and larger position sizing.
Make plenty of allowance for the steep learning curve and be well prepared - understand from the outset this is a journey you are embarking on, a journey into how this market operates and also a journey into how you as a trader operate. It may take a few months or it may take years to acquire proficiency, it all depends on you, the trader. Acquiring the necessary knowledge and skill is a process, sometimes a brutal and lengthy process.
Be fully prepared. Be smart, be realistic, trade safely while you learn the craft of trading Forex successfully.
(from: forexdistrict)
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