Time Dimension of the Market

.

Several short term trading systems we have been developing for the FX market relays heavily on the distinctively unique and consistent nature of volatility behavior between market’s sessions.

We even haven’t found any ways to substitute our time-constraint filters with something purely derived from price-only data. It’s like we actually have a different kind of market for each session that is divided by a rigid time mark, not by some hints those can be found in price action.

This has been bringing some serious thought for us, because we thought that we have to stick to our philosophy to relay our systems purely on price action. But then we realize that the market has the dimension of time along with the dimension of price.

And to our surprise, I found this interesting observation by Mr. Steenbarger, Ph.D. In one of his post today in his blog, he stated a similar conclusion as ours:

What we can see is that these seem to be different markets. Indeed, the daily correlations among the three range from .12 to .18, suggesting that what the market does during one time period is only very weakly related to what it will do in the next one.

Although his research is about the stock market, particularly the S&P, this has put us into believing that time dimension is very truly exists, as we also been observing the same phenomenon in the FX market.

This confirmation from Mr. Steenbarger’s research has put a new item to our research agenda, that we will need to check market’s average range for each session. This would probably be useful for developing a better opening range breakout model, by having a better measurement of the opening range width. And for our range trading model, we might get a better basis for the entry and exit strategy. The keyword would be determining the historical and average range of sessions.

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Risk analysis tool for Metatrader-built trading algorithm

http://www.mt4tools.com

An essential tool in trading algorithm development. A good trader should never use any trading systems into their live trading before doing all things that can be done using this tool.

This tool gives a more complete capability to analyze MetaTrader reports, e.g. for doing risk analysis on a portfolio of multiple currency pairs, something that can not be done by using the Metatrader alone.

Its RiskSIM simulator, with the capability of doing Monte Carlo test is an important tool to further understand the risk profile of a trading system being tested.

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Volatility is back! :-)

Dear valued partners of Risenberg,
after a contraction in intraday volatility since the begining of 2007 on all major pairs, we are now observing a convincingly increasing volatility.
Using a 15 bars Average True Rrange (ATR) on 15minute chart, then putting a 100 bars Simple Moving Average off the ATR readings, we can observe a significant increase in intraday volatility.
This phenomenon is seen across all forex pairs, including pairs we are now trading using the RiVER system: the Brit Pound, Euro, Canadian, and the Swissie.

Volatility was very low during November 2006 – July 2007.

And this is the reading we have been having for several weeks now.

A very good news for us.
This should be a favorable condition for the business.
Wish us luck!

(*)

About Daylight Saving Time – History, rationale, laws & dates

http://webexhibits.org/daylightsaving/index.html

Doing works and projects on the global currency market, make me hit several times on the confusion of the DST rules.
Seems like this website is a good place to rationalize the idea in my head. LOL.

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The next platform for the robots

http://www.ninjatrader.com

NinjaTrader seems to be a good platform for developing robot.
It is based on C++ language, so it will be powerful enough to handle various features of the robots.

Although we are now satisfy with the Metatrader platform, but the lack of choice for well-known brokerage firms to execute the trades has been some obstacle for accepting big clients. Big clients prefer to put their money with well-known brokers, such as the Man Financials, or at least the Interactive Broker.
The largest brokerage firm that accept MT4-generated trades are the FXLQ, which we are now using. Their NAC now is some 36 million USD, while the Man’s is some 500 million USD

List of NT-supporting brokerage firms:
- Mirus Futures
- AMP Futures
- Spike Trading
- cCAP Futures
- Gain Capital
- Alaron
- Interactivebrokers
- MB Trading
- Velocity Futures
- Advantage Futures
- Man Financial
- Fox
- Daniel Trading
- King
- Infinity
- Zaner
- Rosenthal Collins
- Dorman Trading

Man Financial is the real big one. Having the robot playing at this big playground of the trading world will put us to the next level of the competition.

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DerivativesStrategy.com

http://www.derivativesstrategy.com

Have just found this link in my bookmark.

Derivatives Strategy (1992-2001) was a widely-praised publication that focused on the global derivatives market from a US perspective. It was written in easy-to-follow language for people who actually use derivatives products — not the quants who designed them.

It has some interesting comic archive too.

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Fwd: Preventing over-leveraging (Was: IBFX problems)

———- Forwarded message ———-
From: Darma
Date: Jun 14, 2007 8:26 AM
Subject: Preventing over-leveraging (Was: IBFX problems)
To: MetaTrader_Experts_and_Indicators@yahoogroups.com
Cc: indotraders@yahoogroups.com

Regarding preventing over leveraging the account, i have these lines on my EAs :

// Money Management
if (prm_mm_enabled) {
volume = NormalizeDouble((AccountBalance()*prm_gearing_ratio)
/(prm_pair_diversify*MarketInfo(Symbol(),MODE_LOTSIZE)),
prm_lot_resolution);
} else {
volume = prm_mm_fixed_volume;
}
if (volume > MarketInfo(Symbol(), MODE_MAXLOT)) {
volume = MarketInfo(Symbol(), MODE_MAXLOT);
} else if (volume < MarketInfo(Symbol(), MODE_MINLOT)) {
volume = MarketInfo(Symbol(), MODE_MINLOT);
}

i use prm_gearing_ratio = 5 to 6. 10 is the most agressive number for me.
prm_pair_diversify needs to be input externally by me since i havent found a way for the EA to detect by itself how many pairs it is trading in a single account at a particular moment.
Does anyone has any idea on this?

Rgrds,
Darma

On 6/13/07, accrete <yahoogrp01@accrete.com > wrote:

I agree on not overleveraging the account. I know that (as mentioned and hoped for by another member) the idea Bluto stated he would incorporate in a future version is that of telling the EA just how much of the account it was allowed to trade. This would add a measure of safety also.

: ) Thom

—– Original Message —–
From: Sam

One thing to avoid is overleverage. I believe it’s best to leverage only around 10-20% of the account. Usually when we overleverage we want to be stringing on SL thereby prone to SL hunting as well as margin call danger. Forex is full of suprises. The goal is to be able to survive long term.

__._,_.___

For archives of Experts and Indicators from the MetaTrader Experts and Indicators Group
See http://www.forexmt4.com/ or http://www.lightpatch.com/forex

(*)

Fwd: historical economic calendar?

———- Forwarded message ———-
From: Darma
Date: Jun 6, 2007 3:00 PM
Subject: historical economic calendar?
To: MetaTrader_Experts_and_Indicators@yahoogroups.com
Cc: indotraders@yahoogroups.com,
Berjangka_Derivatives@yahoogroups.com, milis-aati@yahoogroups.com

Dear friends,

Does anyone know where can be found an HISTORICAL economic calendar
for the US, or Japan or Europe or just any of them?
for example, i wud like to know what was the economic data schedule
for the date of May 17th 2000, a certain day some several years ago ?
e.g. : was it a holiday? or was it a CPI day? or was it an Interest
Rate decision day?

Much appreciate.

Fwd: Penurunan volatilitas short term: penyebab dan aplikasi praktisnya

.
———- Forwarded message ———-

From: Darma
Date: May 10, 2007 10:05 PM
Subject: Penurunan volatilitas short term: penyebab dan aplikasi praktisnya
To: indotraders@yahoogroups.com
Dear traders,

Kalau kita pasang indicator ATR (Average True Range), di timeframe 15 menit, dengan periode 15 bar, lalu dipasang moving average nya dengan periode 100 bar, maka kita mendapatkan suatu gambaran seberapa banyak gerakan rata2 per satu bar di 15 menit.
Nah, ternyata ada fenomena menarik.

Kalau di tahun-tahun dulu, misalnya di tahun 2005, rata-rata gerakan per 15 menit di EUR/USD adalah 13 pips (lihat gambar chart di bawah). Sedangkan di tahun-tahun sekarang ini, semenjak tahun 2006 november, gerakan market menjadi lebih tipis. Rata2 hanya 6 pips per 15 menit.

Hal yg sama terjadi di GBP/USD, USD/JPY, USD/CHF dan lainnya.
Penyebabnya adalah: meningkatnya likuiditas market. Yang tadinya rata2 volume transaksi harian di forex adalah $ 1-2 trilliun per hari, semenjak pertengahan 2006, menjadi $ 3 trilliun per hari. Ini menurut report dari BIS (Bank for International Settlement).

Aplikasi praktis dari hal ini adalah:
Untuk trading di short term, intraday, tidak lagi realistis untuk mengharapkan takeprofit seperti di tahun-tahun sebelum 2006. Yang tadinya di GBP/USD mengharapkan bisa take profit 15-20 point dalam waktu 30-60 menit, kini hal itu agak sulit. Mesti di jam2 tertentu saja yang memang volatilitas meningkat seperti saat ada news. Kalau di jam-jam normal, dalam waktu 30-60 menit lebih mudah untuk bias ambil 10-12 pips saja. Itu contoh angka untuk di GBP/USD. Sedangkan untuk di EUR/USD, mesti dilihat masing2. Pasang saja indicator ATR dan moving average seprti gambar di bawah ini.
Ini tentu sejalan dengan menurunnya spread di retail spot di hampir semua broker di dunia. Yang misalnya saja tadinya spread 5 pips di FXCM dan marketmaker lainnya, sekarang rata2 udah pada turun. Spread 2-3 pips sudah lumrah sekali. Bahkan belakangan ini kita lihat spread aneh 1 pips no commission di marketmaker nekat seperti crown dan fxclearing. Kalau di bntuk2 ecn sih biasa, memang 1-2 pips dari sejak mereka hadir untuk retail sejak tahun lalu.

Segitu dulu. Selamat mengeksplorasi lebih jauh lagi. Kalo ada pendapat atau ide lain, silahkan disampaikan.

Rgrds,
Darma

F is for Final

After the sharing session, I do this small change to the algorithm, where it does the money management part of it.

volume = NormalizeDouble(
(AccountBalance()*prm_gearing_ratio)/
(prm_pair_diversify*MarketInfo(Symbol(),MODE_LOTSIZE)),
prm_lot_resolution);

This will automate the process in determining the position size based on a fixed number of gearing ratio.
I have a 5.33 gearing ratio, this will be the value of prm_gearing_ratio.
prm_pair_diversify will be 2, since the system will be run on two pair: EUR/USD and GBP/USD.
When trading on a mini acct, the MarketInfo(Symbol(),MODE_LOTSIZE) will automatically return a value of 10,000 or 100k when trading a standard account.
With this piece of code, i dont have to calculate some basic arithmetic on waste papers anymore. LOL.
This version is tagged as vy5f. So the version is StealthTrader_vy5f now. I hope F is for Final. he he he..
Good luck to us !!!

Another reason to share

Ron is an inspiring fellow trader/researcher at the MT_E_I community.
Here is an excerpt of emails exchange between me and him about sharing our knowledge and research achievement.

From: Ron Thompson
Date: Apr 30, 2007 12:35 PM
Subject: Re: a personal question about sharing
To: Darma

Darma,
Sorry this reply took so long. Let me try to answer the questions for you.

At 12:06 AM 3/15/2007, Darma wrote:

Dear Ron,
I am thankful for your sharing the bolltrader ideas and expert advisors and also your tons of contribution in the community, where I learn so much from.

You’re very welcome.

Ron, I always have this question in my head, how do you so confidently share your ideas and works to the open public ? dont you ever worried that the market will anticipate your system or trading ideas, thus making it not profitable anymore in the future ?
Thank you for your time answering my silly question.

Not silly at all!
I do in fact have some nagging suspicions that, not necessarily the market, but my broker, or rather their MT4 server actually does something like that.
I have seen just at the moment the price reaches the trigger point for BollTrade, the spreads widen by 2-3 pips. Now I don’t track support/resistance, so the spread could have gone up because of that, or even because of something that IBFX saw from the ECN that they “smoothed”.
But I just think in the long run, that there are too many people and too many trades to track a minilot and worry about it.
The other thing I count on is people. When the 1st bad trades happen, they’ll abandon the EA. If they’re using martingale, and have to use 11 lots to recover a few minilots, then they’ll abandon it. noone will stick to any one trading EA for more than a few weeks.
I, on the other hand, will stick to it. I know there is a learning curve where you have to try a lot of stuff. I’ve done that. I’ve lost a fair bit of money during the process. But as my wife says, it’s the cost of education.
I’m now funded well enough to be able to let the EA run mostly on it’s own, which many people won’t be.
The other thing that I see is that no two brokers give the same results. That puts people off too,
So as you see, I’m not too worried about a “disaster of success” because I don’t think it will happen.
One thing I just do not know is how many people are actually running BollTrade. For all I know there could be 10,000 people running it across the globe optimized to their broker making tons of money. If so, it hasn’t affected my trading at all.
Hope that explains a little

Ron

So, another reason to share.. There could be 10,000 people running our strategy across the globe, making tons of money. It won’t affect our trading at all.
Let’s share !!!!

Risenberg Research Sharing Session

Dear Researchers/Traders @ Indotraders,

I will be in Jakarta during this week.
I’m leaving Bali today, and planning to be back to the island by Saturday.
I am inviting my fellow researchers in a sharing session. I will be presenting Risenberg’s latest research on systematical trading. A volatility-exploiting trading system will be discused and disclosed to a limited number of active researchers. This is a culture we had a long time ago when the Indotraders group was founded, and I am trying to bring this back. I’m so tired of witnessing the always-want-the-easy-way newbies slamming their words in the group, attacking other members while hiding behind the anonimity of their funny email addresses. So chicken of them :p

This will be a sharing session. We will discuss the research, I will ask for feedbacks and ask for suggestions from other researchers.
This will not be a promotion / marketing event since there will be nothing to be sold or offered. My old fellows here know that I’m not that kind of a person.

Please contact me on my phone number: 081XXXXXXXX if you are interested to join the session. No want-to-be-rich-quickly type of people please !! Only fellow researchers and traders. Humble people only please. No negative-minded people who always trying to find the bad side of things like we’ve been seeing more often lately in this group. :p

The venue will be at my office at Fatmawati, probably on Friday evening, after offfice hour. Please bring your own food/drink, bring your own notebooks, pens, because I will not provide any of them, nor asking any payment for anything like they always do in seminars.

The meeting room will fit for only 5-10 people. If there are more people confirming to join, I will try finding different places otherwise I will be limiting the number of people.

This is for free. Not “shovel selling” kind of seminars, so please: no shovel seekers !!!

Rgrds,
Darma

p.s.
just in case some idiot cynical person in this group will speak, I wud like to say sorry for using English. I recently prefer to write in my blog rather then in shovel-seekers groups, and many readers of my blog dont speak bahasa.

BIS report on volatility

Continuing my recent research on market volatility, i found this report from Bank for International Settlement (www.bis.org). The report can be downloaded from this link (pdf).

My observation on this change in market bahavior is confirmed in the report:

The evidence presented in this Report shows that over the period from mid-2004 to March 2006 the volatility of short-term and long-term interest rates, stocks, exchange rates and corporate spreads has been generally low relative to the previous five to 10 years in both industrial countries and emerging market economies (EMEs). However, if the sample period is extended back to the last two to three decades, for which daily data are available, other periods in which volatility reached similar low levels can be observed. The exception is represented by the volatility of short-term interest rates, which has reached its lowest level for 20 years in all the main currency areas.

Regarding the possible causes of this are:

The sharp decline of financial volatility witnessed over the last few years may have benefited from increased liquidity of financial markets. Since this concept is not easy to operationalise, it is useful to look at several indicators.
Throughout the sample the turnover of stock markets has increased considerably, and now stands almost everywhere around the highest levels since 1990. In the foreign exchange markets volumes were virtually flat over the period 2000-02, but since 2003 an upward trend has emerged.
In recent years financial innovation and the rise of new classes of financial institutions, combined with a change in the trading behaviour of traditional institutional investors, have contributed to increasing market liquidity.

And something more interesting is this part:

A key issue is whether the current low level of volatility is a permanent new feature of financial markets or only a temporary phenomenon. The results suggest that important drivers of the volatility reduction seem to be structural, and may therefore have a permanent effect on volatility.

So ? Less volatility. Smoother charts ? My quick guess is this: trend following strategy may perform better on lower timeframe.
Another good material was posted in my friend’s blog here, tittled “Market Effects of Hedge Funds”.

A dead ended discussion

A dead-ended discussion about volatility on this Elitetrader forum.
There were only me, Truestory and ElectricSavant who added to the conversation.
Hundreds of hits on that thread, but nobody replied.
Nobody really understand about the market.
LOLLLL !!!!

Me:
pardon me,
im a newbie in this forum.
does anyone notice a much smaller volatility in forex’ intraday behavior ?
when i place a 300 or 500 bar average true range on 15minute charts of eurusd, gbpusd, usdchf, usdjpy, they are declining a lot since november 2006.
what may cause this ?
is it a more stable global economy ?
more liquidity in the spot market ?
less liquidity ?
please advice.
thank you.

TrueStory:
It’s natural. Volatility goes up and down in cycles. Since November, you’re right, it has come down some, especially in certain pairs. But it will rise again as we move to new congestion levels as economies and interest rates change…

Me:
TrueStory, thank you for your relieving answer.
I run a volatility-dependent system, and I have less-frequent trades these days. I start to worry about the market, will it move more in the future, more volatility like the past time..
I’m not quite understand the correlation between market’s liquidity and volatility. There must be some correlation, but is it negatively or positively correlated ?
Thank you..

TrueStory:
I believe the relationship between liquidity and volatility is too dependent on other factors to be easily defined. It also depends on whether you’re looking at short-term or longer-term volatility.

Me:
Ive been exploiting short term volatility for mechanical system design, but has never been learning what fundamental factors do determine volatility.
Could anyone please point me where to look at this, any books or other resources ? Thank you so much.

ElectricSavant:
yeah…it’s like this…what picture am I being presented? right?

More robust but less trades

Streamlining the codes to detect low volatility pairs as I mentioned in my previous post.
The codes now is as follows:

((!prm_volatility_filter) || (val_far_atr >= prm_tp_pips*Point)) &&

The system is now more robust. Less drawdown.
But i must admit, we may expecting less frequent trades as we are now able to isolate lower probability trades and avoid trading them.
Let’s see how it’ll do this week.
Good luck to us.

Alasan fundamental

Apa sih penyebab turunnya volatilitas di market semenjak november 2006 ?
Masih inget dengan temen gue yg namanya Asrul kan ? Yup, asrul, yg gue tulis di blog post sebelumnya yg berjudul a funny friend of mine. Seperti yg gue pernah sebut sebelumnya, dia itu market master. Perilaku market udah mendarah daging bagi dia dah, ha ha ha. Pokoknya doi tuh oke banget deh.
Berikut ini diskusi gue dengan dia soal faktor fundamental yg menyebabkan menurunnya volatilitas market :

darmasdt: ini ada penurunan volatilitas di semua pairs
darmasdt: gue udah kasih filter, tapi jadinya jumlah transaksi berkurang
darmasdt: semenjak oktober november 2006
darmasdt: ada apa ya secara fundamental ?
darmasdt: kok volatilitas menurun
darmasdt: panjang bar memendek, gitu lho
darmasdt: yg tadinya dalam 1 bar 15 menit itu panjangnya 15-20 pips, sekarang ini hanya 7-8 pips
darmasdt: kenapa gitu ya as
darmasdt: ?
asrul_daf: thn 2004 kan US kena double deficit
asrul_daf: policy naikin rate sampe 14 kali…disatu sisi bagus
asrul_daf: tapi sisi satunya malah inflasinya bengkak
darmasdt: ini kelihatan perubahan signifikan, menurunnya volatilitas itu sejak november 2006
asrul_daf: 2004-05, volatiliti bagus, karena US lg jelek,,,plus minyak juga naik
darmasdt: ic
darmasdt: trus
darmasdt: akhir 2006 apa yg terjadi ?
darmasdt: ekonomi dunia stabil ?
asrul_daf: 2006 setelah greenspan turun, diharapkan tdk ada lg kenaikan rate US.
darmasdt: ic
asrul_daf: kenyataanya mau potong rate juga bernanke msh belum yakin, karena takut inflasi malah naik trs
asrul_daf: trs ekonomi duni lagi mengarah ke asia, terutama Cina
darmasdt: oke
darmasdt: thanks as
darmasdt: siip banget lu
darmasdt:
darmasdt: top abisss
asrul_daf: namanya juga gosip news
asrul_daf: gw pikir udh jln live nya dar
darmasdt: belum as
asrul_daf: kyk yg lu bilang…STS emang bgs kalo pasar US yg leading ya, kmrn pagi Asia udh gerak , byk kena SL ya STS dar.
darmasdt: filter volatility nya barus selesai tadi subuh, gue gak berani live pakai yg cuek kayak kemarin gitu, terlalu pasrah ke market
darmasdt: iya. itu dulunya belum sempurna, terlalu mengandalkan siklus itu
asrul_daf: kalo ada market yg libur, mending systemnya ga dijalanin dulu kali ya dar
darmasdt: setelah kejadian drawdown seminggu kemarin, gue baru inget, ternyata memang ada handle yg belum gue kerjain. baru selesai tadi subuh
asrul_daf: kmrn kan pasca libur pasar Eropa, paskah

Emoticon nggak tampil di copy-paste ini jadi kesannya kaku gitu. Padahal banyak icon2 ketawa, nyengir dan sebagainya, diskusi yg santai tapi oke banget deh dengan master asrul.

Penurunan volatilitas

Gue pernah tulis di blog ini tentang turunnya volatilitas di market forex majors.
Nah ternyata hal itu lah penyebab drawdown dari STS seminggu ini, dan kurang cantiknya perilaku STS di pair USDCHF dan USDJPY semenjak november 2006.
Setelah mikir-mikir dan utak-atik statistik, akhirnya gue tambahin code ini di bagian pre-trade filternya:

// these lines are to avoid trades on low volatility pairs :
((!prm_atr_far_filter) ||
(val_far_atr >= prm_tp_pips*Point+
(prm_min_vol_spare*MarketInfo(Symbol(),MODE_SPREAD)*Point)
)
) &&
// end of code to avoid trades on low volatility pairs

Dengan penambahan filter seperti ini, ternyata STS mampu menghindari banyak sekali losing trades pada saat2 volatilitas menurun. Biasanya terjadi karena gerakan market tidak cukup volatile utk meng-hit TP, keburu lari lagi jauh2 dan malah hit SL.
Hasil modifikasi ini menjadikan STS sampai pada versi vy_6, menggantikan vy_5b yg masih terlalu mengandalkan siklus historical, tapi kurang peka dengan penurunan volatilitas.
Di versi vy_6 ini, performance STS meningkat tajam, profit factor menjadi 2.0 +/- 20% di beberapa tested pair.
Hasil nggak tidur selama 3 hari ini ternyata sebanding dengan hasil yg didapat. He he he..
Capek tapi hepi. Dan seperti biasanya: Good luck to us.

Found another bug

I’m so happy when last night I found this bug (line 255):

cond_exit = COND_EXIT_BUY;
close_order(OP_BUY, MAGIC_NUMBER_SELL);

Using this MAGIC_NUMBER_SELL on the last line, has made the system unable to close the appropriate BUY trades.
Now it has been fixed to be like this:

cond_exit = COND_EXIT_BUY;
close_order(OP_BUY, MAGIC_NUMBER_BUY);

and for documentation purpose, i’ve put these additional lines:

// vy5 – fixing prm_use_calc_tp wasnt working well in vy4
// – possibility to turn off all logging
// – fixing hedge filter for sell
// vy5b- fixing prm_exit_when_opposit on buy trades was wrong, now fixed
// – putting optimized values on external parameters

These things happen often because of the the copy n paste practice on the initial development stage. It is now named as vy_5b.
I’m replacing the previous vy5 version to the trading server now.
The change will take effect from tonight.
Good luck to us.

Trade only the price

This article in Covel’s website once again shows how profitable traders/fund managers do their trading.

Despite

I met with an old pro trader yesterday in his NYC office. He runs one of the largest clearing firms on the NYMEX. He has his unique way of doing things and clearly is not a trend follower. That said, his concern about knowing how to take losses properly echoed the wisdom of Wall Street’s great trend traders. His most interesting comment was about the word “despite”. He loved to see the word. For example, if you see the talking heads saying, “Despite bad news Apple stock went higher”, he would view that as an opportunity to go long even more. Conversely, if he saw “despite good news, Apple went lower”, he would go short. He wasn’t trying to preach fundamentals or “news” reading, but just wanted to pass along his insights from the last 20 years. Sure, it was short and simple wisdom, but then again most good Wall Street wisdom is that way, the hard part as he reminded me is the execution.

A quick note: DESPITE of whatever the news and fundamentals say, they trade the price. But this doesn’t mean they use technical analysis mumbo jumbo. Not analysis. Not prediction.

Trading workshop

Thamrin (Jakarta), February 2007.
This suit was bought in Frankfurt, Germany. :p :p

Class dismissed :)

It has been since January, a basic-to-advance training session, delivered for the TGF’s people.
I hope they will be more than ready for the next step, running some of our mechanical trading systems.

(*)

Less Volatility

I’ve witnessed a decreasing volatility in all forex pairs. This was observed when I put a long term ATR indicator into several forex pairs on all time frames. During the last 7 years, the volatility have been declining by more than 40%. I thought that was only me who observe such a shift in market behavior. But then I found this article on FXCM’s website:

Why the Forex Market Changed

Through the 1980s and 1990s, and even into the new century, the distinctive characteristic of the foreign exchange market was its volatility—a volatility that was a reflection of major imbalances between national economies.
When a country over-spent or over-borrowed, or when its external trade went wildly out of balance, its interest rates were forced up and its economic growth slowed down. In the forex market, the country’s currency also paid the price—usually by sudden and sometimes drastic devaluation. In short, economic imbalance generated currency volatility.

Increasing globalization has changed all that. In today’s world of tightening economic interdependency, it is in every country’s interest to maintain economic and financial stability—even if it costs. And trade surplus countries (in particular China) now effectively underwrite trade deficit countries (in particular the US) in the name of stability and an orderly market. As one result, interest rate differences are compressed. As another, currency volatility is minimized.

The New Range-Bound Forex Market

The forex market has undergone a profound change. In past years, a trade imbalance or an interest rate shift could suddenly move a currency price hundreds of pips. For that reason, success in the forex market followed a traditional formula: Cut your losses short, but let your profits run. Traders took small losses quickly, but rode big trends for big wins. A volatile forex market rewarded breakout traders.

Using that formula, professional traders were disciplined enough (or their black boxes were disciplined enough) to absorb several small losing trades, because their one, very large win more than made up for them. Using a breakout trading system, only 30% of the trades had to be winners, because the payoff on a breakout trade could be six times the total of the losses. The risk/reward ratio and the mathematical probabilities were in their favor.

Myth in FX

This is my post to the Indotraders mailing list.

Utk temen2, liat deh itu video presentasi yg diposting Eugene, menurut gue bagus. BANGET.
Yang bicara di situ ada 3 orang trader:
Pembicara utamanya: 10 years trade fx + er2
2 lainnya:
15 years trade emini, fx daytrading, stock
10 years trade fx, er2

Coba liatin teknik trading mereka dan persepsi mereka terhadap market FX.

Beberapa hal yg menarik antara lain:

Beberapa mitos ttg FX:

1. Mitos bhw anda trading di interbank market. Kenyataan anda trading dalam suatu house, shg mrk tidak pernah pakai tight SL. Hanya cat-SL, sdangkan exitnya pakai mental-SL. (tolong koreksi kalo gue salah soal yg ini)
2. Mitos bahwa FX = low cost. Kenyataan: biaya spread yg 2-3pips itu sangat tinggi. Bandingkan dengan trading futures atau stock, comission di bawah 1 pips per r/t. Apalagi dibanding ER2 yg volatilitasnya bisa 20 tick sehari.
3. Mitos soal Leverage yg dijadikan daya tarik. Kenyataan: ini adalah senjata paling ampuh bagi house utk marketing, sekaligus menjadi penyebab utama kehancuran rekening customer (para trader pemula)
4. Mitos bhwa di FX anda bisa trading selama 24 Hour. Kenyataan: para professional trader seperti para pembicara di video trsebut hanya trading di jam-jam tertentu saja. Mrk lihat calendar utk lihat kapan ada action di market. Bahkan menurut mereka: trader yg mencoba trading intraday dan mentradingkan semua signal buy/sell dari sistem nya, pasti trader2 itu rekeningnya masih losing. itu menurut pengamatan mereka melihat trader2 lainnya. Ini menarik sekali.
5. Mitos soal fasilitas Free software, free data utk FX. Kenyataannya: free sfotware dan data itu gak baik. Ini menurut mereka. Mrk pakai tradestation. Mungkin bener juga kata mereka, tapi mungkin juga salah ya. I don;t know. Coba temen2 ada yg bisa kasi tanggapan ?
6. Mitos soal indikator2: sell di overbought, buy di oversold. Buy/sell di corssover dll. Kenyataannya: teknik trading seperti itu sengaja disebarkan oleh pihak2 yg berkepentingan. Wah wah.
7. Mitos bhwa cukup demo 1-2 bulan, lalu go Live. Kenyataan: menurut mereka: “don’t expect to go live within 6 months, 1 year or even 18 months”.
8. Mitos bhwa FX & Futures lebih rumit drpada stock. Kenyataan: menurut mrk: stock lebih repot.

Hal menarik lain: Soal teknik trading.

Mereka pakai satu setting (mrk pakai 1 indikator) di 3 timeframe.
Mereka jelas2 bilang penggunaan banyak indikator di satu timeframe itu salah satu ciri2 trader yg masih merugi. Mereka justru lakukan yg sebaliknya sebaliknya: mrk pakai satu indikator atau tanpa indikator, di multiple timeframe. Utk intraday mrk pakai chart 15 min, 10min, 3 min. Utk posisi swing yg lebih panjang mrk pakai tf yg lebih panjang, tp tetap multiple timeframe.

Yah begitu lah point2 yg gue dapat tangkap dari video tersebut. Mungkin gue ada salah tangkap atau ada yg terlewat. Utk lebih jelasnya, silakan liat ndiri deh yak..
Ini gue posting lagi link nya, siapa tau ada yg kelewat postingnya Eugene:

http://www.netpicks.com/UTM/MythBustingE1.html

http://www.netpicks.com/UTM/MythBustingE2.htm

Thanks to Eugene for the link.

Rgrds,
Darma

p.s.
Video di link itu bisa disave gak sih ? Ada yg bisa bantu ?

The Secret to Making Profits from the Big Moves

Nice reading. Post this here to find them easier, just in case the original page is removed.

================================
The Secret to Making Profits from the Big Moves

In FOREX trading, it’s a fact that many traders simply can’t let their profits run – they enter trades correctly, but only ever, bank marginal profits.

“Let your profits run” is accepted market wisdom – but how do you do it in practice? How do you maximize your profits?

Many FOREX traders get in on a good opportunity, and take a marginal profit, or are stopped out – they then watch in frustration as the trade piles up $20,000, $50,000, or more – and they’re not in the market! This happens all the time, so lets look at how you can let your FOREX trading profits run.

Statistical Significance

When FOREX Trading, letting your profits run, is the only way you can cover the cost of your losses – and most traders don’t understand its significance.

What constitutes a large winner in FOREX trading? – You need to make ten times or more than your average losing trade. If you lose $500, you need to make $5000 – but how do you do this?

The only way to make money in FOREX trading is by letting your profits run – and this isn’t as easy as it sounds. You need to let your profits run with a NO profit objective. Of course, this is hard to do – and most traders don’t do it (and that’s why they lose).

There are two reasons why traders lose money in the FOREX market – one’s mental, and the other’s physical:

A Mental Dilemma

Why is it so hard to hold on to winning trades?

The emotion of fear comes into play here – the bigger the profit becomes, the more a trader wants to take it – before they lose it.

Watching a trade you are making money in, dip back is hard. Most traders simply say, any profit is better than no profit – so they take a small profit and feel happy. However, the profit isn’t big enough – and their losing trades wipe them out sooner or later.

Traders want to snatch ANY profit – in case it gets away – but this is totally wrong.

Physical Reality

The large trends simply do not come around that often.

By using an open profit objective, and a lagging exit, most of your FOREX trades will lose you money.

Trying to avoid losses by snatching profits, or running stops to close, will see you lose money in the long run, when you trade the FOREX markets.

The huge trends don’t come that often – so you need to catch them.

If you want to catch the big winners, then you need to see the majority of the trades that you enter, that are in profit, reverse – and stop you out at a loss

Because FOREX Trading offers traders fantastic long-term trends – that go on for months, or years – if you can get in on them, and hold them – you’re all set for huge profits.

Use Lagging Exits

A lagging exit is where you wait for confirmation of a trend change – before banking your profit.

Many traders try to anticipate a trend change – only to take profits early, and miss the major move – don’t fall into this trap!

Here are two exit strategies that will keep you in the trend for as long possible:

1. To exit a trade, use the 40-day moving average. If positioned long in an up trend – wait for a close below this level – and exit the position. In a downtrend, exit a short on a close above this level.

2. If long from a new 20 day high – hold position until prices make a new 10-day price low. If short from a 4 week low – hold short until prices make a new 10-day high.

These two lagging exit strategies will ensure that you are in the big trending moves, for as long as possible. In FOREX Trading, if you want to run the big winners, then you must use a lagging exit. If you do this, then you will stay with the big moves – and pile up huge gains – rather that get stopped out early.

Research on Squircle

I’ve found an interesting idea for a new approach on trading. It involves a mathematical formula for a family of shapes called “squircle”.
This family of shapes was given the name SQUIRCLE by Peter Panholzer. They are shapes that are intermediate between squares and circles.
To simulate the squircle please go to this page. According to that page, a squircle is described by the equation:
|X|^N + |Y|^N = Radius^N.
Peter Panholzer is a currency manager. He has been trading for more than 30 years. He trades mechanically.

This new idea will be built into an EA soon after our software engineers complete his current task on building systems for several clients. Yes, we accept programming jobs from people who wish to build their system into an automated one. For more info on this service, please contact us at info[at]risenberg[dot]com.

Measuring Market Noise

Properly measuring market noise, could be the way to determine which kind of trading system is suitable for a particular market.
Here is an article token from an interview with top traders section of the traderslog website.

Kaufman Uses Multiple Trading Methods, Cites Market ‘Noise’
By Jim Wyckoff, JimWyckoff.com

Many traders attempt to find the single-most “robust” trading strategy possible by looking for one set of rules which works for all markets. Such systems don’t take into account the fact that markets can change quickly and dramatically due to a news event, according to Perry Kaufman.

“There are times when a market is volatile, or moves unusually, and you need to take different strategies to trading,” said Kaufman, a market strategist, author and director of research for the consulting firm Kaufman, Diamond & Yeong, based in Wells River, Vt. He was speaking at the Technical Analysis Group (TAG XVIII) traders conference, held here late last week and sponsored by Dow Jones Telerate.

“Price shocks”–a government economic report or other major news event–can quickly turn a quiet, sideways market into a volatile and highly discretional one, he said. A trading system that works in a sideways market will likely not work well in a volatile one.

Kaufman focused on what he terms “market noise,” which is the unpredictable movement of a market. He said more active markets have more market noise, and are therefore harder to trade.

The formula for measuring “market noise” is as follows, according to Kaufman: Change in price divided by the sum of each price movement over a period of time.

More market noise means it takes longer for a trader to identify a trend in a market, said Kaufman. He said the S&P 500 futures are very “noisy,” and therefore need a longer time for a trend to develop. Conversely, Eurodollars have less noise, so traders can jump on a price trend in a shorter period of time.

Very long timeframes make market noise less significant, said Kaufman. For short-term trading, noise is more important than the trend, he said.

“Short-term (price movement) is mostly noise and long-term is mostly trend,” said Kaufman.

“If a market has high noise, you should not trade with a trend-following system,” he said.

Kaufman ranked the world’s markets by their “noise” factor–keeping in mind his proposition that less noisy markets are easier to trade.

Brazil has the least market noise because it’s an emerging marketplace, said Kaufman. There’s less participation in emerging markets. Thus, “you can trade trend-following systems and faster moving averages” in those markets, he said. Indonesia, Turkey, Malaysia and South Africa are among the other less noisy world markets, he said.

The U.S. markets are the noisiest, most active markets, and hardest to trade, said Kaufman. France, Japan, Germany and U.K. markets are close behind.

For more information on Jim Wyckoff’s comprehensive daily e-mail market update, weekly top trading opportunities, and bi-weekly chart update, click here: Jim Wyckoff on the Markets

The quest for ST Trading System

Finding a robust short term trading system is not impossible ? Well, maybe. But sure it is a hard task. Given these 3 reasons below, research on a robust ST TS is very appealing:

1. Math
Higher frequency of trades enables increasing positions size faster in a given period of time (compounding) during run-ups, but also enables decreasing positions size faster during drawdowns.

2. Source of profits
Long term trend-following / Turtle System captures profits from existence of trends (trends often connected with macro-economic cycles). As we all know, markets tend to move in trends but also experience long “choppy” periods, without any substantial move in one direction. Hence diversification is used to reduce negative impacts of non-trending periods in a single markets. Unfortunately, most liquid markets are highly correlated. As a result, these strategies performance depend on the magnitude of trends.

Short term trading captures profits from market inefficiencies, more precisely – from market’s over-reactions. If we’ll sum up all inefficiencies in the short-term level, they’ll add up to a greater amount than in the long-term level. Of course in order to play on short-term basis we must have low commissions and high liquidity – two things which have dramatically improved since ’90s or ’80s.

3. Predictability
Volatility in the coming short-term periods is more predictable than in the long-term periods. Try to estimate the average daily range for the next 5 days. Now try to predict the average yearly range for the next 5 years – error will be much bigger.

To add more on the research, here is some other resources to be read later:
Traderclub Forum

ST vs LT trading

One member of the tradingblox forum, Mr. Cyphrograph (from Poland), brought this topic to the forum

Short term VS Long term trading.

Hello everyone. I guess I’m 3rd member from Poland on this forum, together with TK and steady_jake. We had some hot discussion on a polish futures message board, and now I want to continue it at “Trader’s Roundtable” as I believe it is more suitable for that kind of discussion. Here’s the hypothesis: Short term trading can reach the level of robustness (or performance), which can not be achieved by long term methods or long term trend-following systems or – let’s be straight – Original Turtle System. The question I want to ask you is: can we verify the above hypothesis using historical results (hypothetical from backtesing or actual trading figures)? IMHO, Yes we can do it. Since our abilities to predict future are weak, what else do we have beside history? Well-known method used for predicting possible outcomes, namely Monte Carlo Simulation is based on historical figures also.

I want to present a little research I’ve done on this subject. Let’s compare actual trading performance. Turtles vs Active Traders battle. We take 3 famous Turtles on one side (B. Dunn, J.W. Henry, W. Eckhardt) and 3 quants who employ short-term trading methods on the other (T. Crabel, Denali, C-View Limited). Let’s take 2 ratios for measuring robustness / risk-adjusted return / performance quality (name it like you want):

1. Compounded Annual Return / Worst Drawdown (CAR/WDD, monthly basis) – before management and incentive fees,
2. Annualized Sharpe.

Turtles camp:
DUNN Capital Management-DUNN WMA (Nov 84 – Sep 03)
CAR/WDD 0.52, Sharpe 0.64

John W Henry & Company-Financial and Metals (Oct 84 – Aug 03)
CAR/WDD 0.91, Sharpe 0.83

Eckhardt Trading Standard (Jan 87 – Sep 03)
CAR/WDD 1.38, Sharpe 0.75

Active Traders camp:
Crabel Cap. Mgmt-Diversified 1XL (Jan 92 – Sep 03)
CAR/WDD 3.77, Sharpe 1.38

Denali Asset Management-Ascent (May 99 – Sep 03)
CAR/WDD 10.26, Sharpe 2.75

C-View Limited 3XL (Oct 96 – Aug 03)
CAR/WDD 5.62, Sharpe 1.66

Source: www.iasg.com
Disclaimer: I’m not connected with any managers mentioned above.

Well, numbers speak for themselves As you may suspect, figures for short term systems backtested and optimized against the past data are much, much better – especially, when you set worst drawdown figure to around 40% by position size management rules.

Turtles camp has one advantage over active traders: they have longer track records. However, I don’t want to wait 15 years in order to have comparable periods. That is the zillion dollar question: will these excellent CAR/WDD & Sharpe figures sustain in the future?

Where are the grounds for differences between short and long term trading performance? IMO, they’re located in 3 main areas:

1. Math
Higher frequency of trades enables increasing positions size faster in a given period of time (compounding) during run-ups, but also enables decreasing positions size faster during drawdowns.

2. Source of profits
Long term trend-following / Turtle System captures profits from existence of trends (trends often connected with macro-economic cycles). As we all know, markets tend to move in trends but also experience long “choppy” periods, without any substantial move in one direction. Hence diversification is used to reduce negative impacts of non-trending periods in a single markets. Unfortunately, most liquid markets are highly correlated. As a result, these strategies performance depend on the magnitude of trends.

Short term trading captures profits from market inefficiencies, more precisely – from market’s over-reactions. If we’ll sum up all inefficiencies in the short-term level, they’ll add up to a greater amount than in the long-term level. Of course in order to play on short-term basis we must have low commissions and high liquidity – two things which have dramatically improved since ’90s or ’80s.

3. Predictability
Volatility in the coming short-term periods is more predictable than in the long-term periods. Try to estimate the average daily range for the next 5 days. Now try to predict the average yearly range for the next 5 years – error will be much bigger.

Some works on the pipeline

We are now working on several systems. They are counter trend typed system and swing trading system.
As those previous systems, the development are conducted on MT4 platform, partnering with Balidev’s engineers.