Intraday Volatility Breakout System

Following a successful forward test on the GBPUSD conducted by our friend in Bali, we then realized that this particular system must had a good potential for several other markets with high volatility behavior. The first thing that came up in mind was the Hangseng index. Then we asked for a demo account from our close friend at Topgrowth Futures, where we were once teamed up in developing trading systems and trained their traders last year. We really like their “Pro-iTrading” platform. It’s very responsive, with good spread and commission for trading the Hangseng, very user-friendly interface, making it an ideal platform for running an intraday trading strategy.

And as expected, the system has been going well (so far) in this market. We’re going to continue the test and watch how it will perform. Good luck to us.

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Beautifully Recurring Pattern

One thing that keeps occurring repeatedly in the fx market is: a beautifully recurring volatility pattern.
Yeap, it’s soooo beautiful.

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Credit Hedge Arbitrage

After a successful acquisition of a multifinance company in the year of 2006, and heavily restructured the company along 2007, Risenberg launched its first credit hedge arbitrage program. The purpose of the acquisition was to provide an efficient vehicle for Risenberg to develop and run its arbitrage system. The acquisition was a deal worth IDR 10 Billion (USD 1.1 Million). Risenberg partnered with another group of investors in the deal and had been approved by the Department of Finance of Indonesia.

By participating in the program, corporate investors are able to gain an opportunity in an alternative asset class that has a very low correlation to the traditional market (ie. stock and bonds). The program is able to deliver a fixed 11% – 14% annual return to participants. The program exploits a continuous arbitrage opportunity that exclusively accessible only by a small number of players in Indonesia’s interbank money market. This is a close ended investment program, will only be available until a IDR 50 Billion (USD 5.5 Million) is reached.

For more info on the program, please contact Risenberg at www.risenberg.com

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Intraday Volatility Calendar

http://www.forexfactory.com/calendar.php

This is an example of an economic calendar that I prefer calling it as “Intraday Volatility Calendar”. The default time stamp is in Eastern Time, so do adjust it to local time to get a better sense of it.

This is where i consider some fundamental analysis- to some extent- is acceptable, that is for volatility anticipation alone, not for directional analysis. And I prefer the word “anticipation”, because I don’t like the word “prediction”, lol.

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Interest Rate Arbitrage Trading System

We have just added more participants in one of our trading system. The latest one is the proprietary credits desk of Bank Mandiri, the largest bank in Indonesia. We’re still doing some tweaking on our data bridge to make a smooth data exchange between our side and theirs. Our IT people is now installing the bridge in our branch offices to smooth the hedging procedure.

The system is based on some arbitrage approach. All i can say now is it generally exploits interest rate difference between different market levels. Some mild optimization practices have been employed to maximize the profit margin per trade, which now is reaching a 10 basis point.

We are currently running this system for Bank Eksekutif, Bank Bukopin, Bank Muamalat, and several high net worth individuals. An average of 10% to 11% annual yield (nett, after tax) have been delivered to our clients. A maximum of 2%-3.5% drawdown is the level of anticipated short term negative cash flow. It’s not really a draw down because it’s actually in the form of an open trades. We’ve also been considering that forming some offshore business unit where tax regulation is better might increase the efficiency of it. Singapore or Cyprus or Hongkong, perhaps.

We’re now preparing to tap Bank BNI’46 into the system. They have a very deep pool of liquidity which will add more robustness.

Good luck to us!

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M*nkey

“A domino of thoughts”, if you like.
My friend who read my previous blog entry, wrote a deeper thoughts on quals and quants’ approach in investing. He said that both quals and quants share the same key in their investing: consistency and understanding.
And that reminds me of many technical traders who use technical tools like trend lines, mathematical indicators, basic or exotic technical tools, but they never have any consistent method in their trading. They just do a ‘comprehensive analysis’ in each trading decision to be made. And to my knowledge, comprehensive doesn’t necessarily mean applying any method/strategy consistently.
An even more sarcastic coment from a fellow is that he call technical analysts as Mony*t (M*nkey). lol.

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A Technician is Not Necessarily a Quant

An interesting discussion with one of my CFA teacher over emails after our brief discussion in the class the days before. At the end we both agree that technical analysis is a fail approach in investing.

On Mon, Mar 17, 2008 at 1:57 PM, P.M. wrote:
Untuk yang waktu itu nanya ttg John Simmons, (sorry, lupa namanya), here is the link to John Harris Simmons.
http://en.wikipedia.org/wiki/Renaissance_Technologies#_note-WSJ
http://en.wikipedia.org/wiki/James_Harris_Simons

——-start quote—–
Like many other quantitative funds, their RIE Fund had difficulty with the higher volatility environment that persisted throughout the end of ummer 2007. According to an August 10th article in Bloomberg by Katherine urton, “James Simons’s $29 billion Renaissance Institutional Equities Fund has fallen 8.7 percent so far in August when his computer models used to buy and sell stocks were overwhelmed by securities’ price swings. The two-year-old quantitative, or ‘quant,’ hedge fund now has declined 7.4 percent for the year. Simons said other hedge funds have been forced to sell positions, short-circuiting statistical models based on the relationships among securities.”
———-end quote————–

My comments:

John’s track record and methodologies have not stood the test of time.
Almost $4 billion of his total net worth of $5.5 billion only earned in 2004, 2005 and 2006. Last year, his fund suffered as market has swung wildly. Compare that to Warren Buffett’s track record for over 30 decades, which consistenly outperforms market about twice the rate of Standard and Poor’s performance.

And I dont think investment decisions should be delegated to computers.
After all, investment is very subjective and deals heavily with human psychology, which can’t be quantified.

If things get worse, and if the computers still tasked to decide which action to take, we will see another comparable for Long Term Capital
Management, a bankrupt, quantitative hedge fund that also utilised computer model, and had two Nobel prize winners as the directors: Myron Scholes and Robert C. Merton.
Check: http://en.wikipedia.org/wiki/Long_term_capital_management
Attached is the latest letter from Buffet to the shareholders.
Have a good day,

regards,
PM

On 3/17/08, Darma wrote:

Dear Pak PM, a very interesting comment of you, Pak..

we — the quants’ fans — have been very aware of what happened to LTCM.
We’re more considering LTCM as a sample of a mistake that also happen frequently to many discretionary traders. Barings’ Nick Leeson, and the more recent gigantic loss experienced by Societe Generale caused by a reckless discretionary trader is an example of what a big magnitude of a loss, a discretionary trading practice can cause.

In the case of LTCM, those Nobel prize winners were very confident that the low probability events will not happen, much like betting the market wont swing too far away from the twice of it’s standard deviation. Their biggest mistake were they didn’t expect the unexpected to happen. They were dead wrong, and it cost them big.

But a durable quantitative models isn’t about prediction, which we believe is impossible to be done consistently even using any sophisticated mathematical models.

Some durable market models are even done using some simple common sense to exploit some recurring simple market pattern like the “turtles” or any other mechanical trend followers have been doing.

This particular breed of Quants are even expecting the unexpected to happen, an event that will drive the market to make exploitable movement. Some links on this are:

http://www.turtletrader.com/trend_followers
http://www.tradingblox.com/originalturtles/
http://www.turtletrader.com/why.html

You might also want to check on these names: Richard Dennis, Paul Tudor Jones, John W Henry, Ed Seykota, etc.

Although it’s the most popular, but trend following isn’t the only kind of strategy that’s adopted by Quants. Some other kinds are: the range trading strategies, the opening range breakout strategies, etc.

There are a very diverse universe of mechanical trading strategy, ranging from the very short term to the long term strategies. Trend following is only one of them.

I’m getting more interested in knowing your comment on this, Pak. After all, i’m just a learner, a “Quant’s wannabe”, if you like. hehehe…

And I’m very glad to be knowing you, Pak.

—
rgrds,

Darma

On Mon, Mar 17, 2008 at 3:59 PM, PM wrote:
sorry lg sibuk

tapi brief comments: value is not the same with price. Value is what you get, price is what you pay. and this can’t be quantified

and the names that you mentioned never come to my radar. Dont know whether the names appear on the radar of any non-quant fans. If possible, give me the the web links to their strategies, and most important, the performance.
And we will take it from there.

I doubt that their performance will match that of the fundamentalists. If they already outperformed the market for around 20 years (means that they already experienced the bearish period of 1990s and early 2000), then the names may be worth analysing. But if their performance are only accounted for during the bullish period (where everyone is making money, and those who borrow make even bigger money), then these methods have not passed the test of time.

The problem with the trend following is that the method cant predict the turning points (bull all the time during bull period, or bearish all the time during bearish period. The method cant tell when the bear or bull market will end. This is the single biggest weakness of quant (and its siblings: the technical analysis).

Most of us will live to our 70s or 80s (hopefully……..), so I am interested to know which method will pass the test of time so I can live comfortably when I am old. So far, only 2 investment methods worth mentioning: the fundamentalist (if you know what you are doing) and the index investing (if you dont know what you are doing). Other methods, to my knowledge, have failed.

rgds,
PM

Darma to PM

ya pak. very true.
i think an important note is that a true trend following quantitative models arent trying to predict those turning points. predicting turning points is not what “following” means. and i also consider those technical analysts as a dumb group of people, using those lines and mathematical indicators to predict market, trying to outsmart the market. but as long as they still trying to predict, they’ll never be able to perform better than the market.

thanks greatly for the discussion, Pak. I’m learning a lot from it, especially on the test of time thing :):)
–

rgrds,
Darma

PM to me 4:54 PM (18 minutes ago)

sama sama
btw katanya quant fans. Koq sekarang komennya lain? Jadi no fans? yg bener yang mana neh?

rgds,
PM

Darma to PM show details 5:12 PM (2 minutes ago)

hehe, saya quants fan, pak. but not a fan of technical analysis.
they two are very different things. technical analysis and quantitative trading are very different. i always mention technical analysts as “tukang ngecap”, no better then a broken clock. even a broken clock is right twice a day. lol.

using trendlines, mathematical indicators, and all those sounds like sophisticated mathematical formulas, doesn’t mean that one trading using a quantitative strategy, Pak.
the common thing I’ve seen is those technicians trade the market using discretionary strategy, they even don’t know what a positive expectancy of a strategy is.
Yes, they use those technical analysis mumbo jumbo, to give a rocket scientist like of explanation to back their BS prediction. hehehe..

rgrds,
Darma

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They’re Like a Broken Clock

Reading analysis and market recommendation by some analysts in the newspaper, or in my email inbox, or in Friendster bulletin board (yeah, there’s one there), reminds me of this Polish proverb:

Even a clock that does not work is right twice a day.

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Some Hints from the World’s Largest Hedge Fund

I have just read this wikipedia entry on Renaissance Technology (www.rentec.com), an investment management firm founded by John H. Simon. It’s the world’s largest hedge fund, handling assets worth USD 35.4 billion.

Some interesting points:

• It uses market modelling, mechanically process market (price) data to generate trade decisions.
• It trades easily traded financial instruments, not exploiting any complex instruments.
• The models generally perform badly in highly volatile market.
• They don’t use high leverage.

Some excerpt from the wikipedia entry:

Scientifically based investment strategy
For over two decades, Renaissance has been at the forefront of research in mathematics and economic analysis. Renaissance employs more than 150 scientific specialists, including mathematicians, physicists, astrophysicists and statisticians, half of whom have a PhD, who review market data to find statistical relationships that predict the price movements of commodities, currencies and stocks. These employees come from countries as diverse as Japan and Cuba [3].

Renaissance uses computer-based models to predict price changes in easily-traded financial instruments. These models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions. Renaissance represents a validation of the quantitative trading model and trades with such high frequency that it (the Nova fund, specifically) accounts for over 10% of all the trades occurring on NASDAQ some days.

It is worth noting that Nova trades execute purely electronically on direction from a computer model. Medallion fund trades are (in large part) executed through a trading desk, whose goal is to increase the value of the positions the model directs the desk to take by timing market trends and executing in novel fashions (including intra-desk trading).

Renaissance trades at margin levels uncharacteristically low among hedge funds. This allows them to significantly reduce exposure risk, while the efficiency of their computational model allows for consistently high returns.

Like many other quantitative funds, their RIE Fund had difficulty with the higher volatility environment that persisted throughout the end of summer 2007. According to an August 10th article in Bloomberg by Katherine Burton, “James Simons’s $29 billion Renaissance Institutional Equities Fund has fallen 8.7 percent so far in August when his computer models used to buy and sell stocks were overwhelmed by securities’ price swings. The two-year-old quantitative, or ‘quant,’ hedge fund now has declined 7.4 percent for the year. Simons said other hedge funds have been forced to sell positions, short-circuiting statistical models based on the relationships among securities.”

It has just received approval from the Securities and Exchange Board of India (Sebi) to operate in the nation’s stock markets as a foreign institutional investor (FII), according to a report in the Business Standard. (CNBC).

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FX Spot Equivalent Futures contracts (SEFs)

Traders prefer using OTC Spot FX to exploit movement in the currency market. Although generally is not regulated in some extent, OTC spot FX provides a much more flexible trading condition compared to exchange traded currency futures (CME). This includes the minimum initial capital required to open an account, and the availability of a very flexible position sizing (you can trade 1 unit at oanda or micro lots at several FX brokers), and also the automatic rollover practice (i was told that exchange traded currency futures contracts need to be closed and automatically re-opened at the end of every trading day, resulting difficulties to track P/L of a certain mid-term positions).

But as we can see, the global currency market is still in its very early development stage. Regulation and market structure are still looking for its best form. One recent development is the introduction of the FX Spot Equivalent Futures contracts (SEFs), introduced by the U.S. Futures Exchange (www.usfe.com) in Chicago.

SEFs replicate spot foreign exchange markets in a U.S. regulated exchange environment. Trading is the same as on over-the-counter platforms, but with the customer protections and transparency of a regulated and cleared U.S. futures exchange.

Brokers available for trading this SEFs are: Lind-Waldock, MF Global Futures (Chicago), Daniels Trading, Infinity Futures, and MF Global Direct (UK).

More pointers:

• Immediately access continuous markets with competitive bid/ask spreads provided by USFE’s dedicated market makers
• Enjoy the opportunity to place orders and get filled inside the quoted market
• Have your positions automatically rolled forward at the end of each day at no cost
• Receive or pay a fair positive or negative end-of-day carry, with no bid/ask spread applied
• Trade with all the safety, security, and protections that a fully U.S. regulated and cleared futures exchange provides

More info:
U.S. Futures Exchange
141 W. Jackson Blvd., Suite 1460
Chicago, IL 60604
T +1 312-356-3900
F +1 312-356-3901

FXLQ Update: Retail Clients Have Priority

A buddy in the Forexfactory Forum posted today an update in a thread regarding the FXLQ crisis.

I spoke to a lady at the receiver law firm. They are awaiting FXLQ and other associated parties for responses, by February 15th.

Then, they will await until March 31st until they make any formal recommendations to the judge… as FXLQ may file for appeal or settle something with CFTC by then. FXLQ has $26million in cash, and $30million in liability. They need to get $6 million to be back in business… a seemingly trivial sum of cash in this business and to meet excess fund requirements.

If in fact there is dissolution, they will recommend that retail clients have priority.

Funds will be returned within two months of March 31st….

This has been a nice indication that trading with a regulated broker, even if it’s an OTC kind of market, still is a wise choice. In an event like this, clients have a proper protection. But we’ll need to wait for another 3 months to get this premise be proven completely.

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Trading/Charting Platform for Indonesian Stock Market

Have been looking for several alternatives of charting or trading platform for Indonesia Stock Market (BEI). There must be some securities who have their own online trading platform, such as the Etrading (www.etrading.co.id), havent found another yet. And some non-broker data providers are the RTI and IMQ.
Havent tried any of them, tho. It’d be nice if theres some trading platform with an integrated charting module where some realtime simulation can be done. Metastock could be the one. Need to ask around about that one.
Have also found this ChartNexus free platform, with free 3 years historical data for Indonesian stocks, but unfortunately there’s no intraday, and can not be used to do some demo or trading simulation. But it can be used to backtest some end-of-day strategy by using their paid expert module.

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FXLQ Update: Waiting for January 28

According to this latest press release regarding the case in CFTC’s website (January 10), the hearing would be at January 28, 2008.

…the CFTC filed an ex parte motion seeking an order imposing a blanket freeze on FXLQ’s assets, ensuring access to FXLQ’s books and records by representatives of the Commission, and appointing a temporary receiver to marshal FXLQ’s assets. The Court granted this motion and entered a statutory restraining order (SRO). The Court then scheduled a hearing for January 4, 2008 to allow the Defendant to show cause why the SRO should not remain in place and why a preliminary injunction should not be entered finding that FXLQ violated the CEA, and ordering FXLQ not to violate the CEA. Recently, the show cause hearing was rescheduled to January 28, 2008.

It would be next week. In the meantime, the court has orderd that the assets to be under the control of the Court-appointed Receiver Robb Evans & Associates LLC. The Receiver will post the most current information at http://www.robbevans.com/html/forexlq.html.

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Another FSA(UK) regulated MT4 FX Broker

It’s been always interesting to find another FX broker, especially the ones those are located in UK, where FSA watchdogging the brokerage business there.
Moreover, this ActivTrades® broker (www.activtrades.com) use Mt4 as their FX trading platform.
Here are some info from their website:

ActivTrades® is located in London and registered with the Financial Service Authority under ref nr 434413. We offer direct access brokerage on all major financial markets combined with the latest and best integrated platforms/solutions for trading Futures, Options, CFDs and Forex instruments.

Direct access to the market.

ActivTrades® provides quick and reliable access for trading the following instruments:

• Futures and Options on all major markets like CME, CBOT, NYMEX, COMEX, LIFFE, EUREX, IDEM and Euronext, including open outcry markets.
• CFDs on most traded futures, including CFDs on stock indexes, interest rates and commodities, with guaranteed stops and narrow spreads.
• Forex trading on as many as 28 amongst the most traded currency pairs, plus Gold and Silver, with narrow spreads, competitive swap rates and guaranteed stops.

We allow futures, CFD and Forex trading with extremely low margin requirements. Our platforms display real-time market prices and depth of market screens where provided, using the very latest routing and risk technologies. We pride ourselves on lightning-fast execution and confirmation supported by our dedicated customer service team. Forex and CFDs are traded through MetaTrader4.

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Trend Following the Intraday FX

I am going to base the following view with a certain definition of trend following: entering trades when the market start to go in a certain way, maintaining the open trades as long as the market still move in the same direction, and finally exit the trades when the expected trend discontinued. Purely following. The purest form of this strategy can be seen in Curtis’ white paper that was able to be downloaded freely in his website several years ago. Another form of a pure trend following system can be found in Michael Covel’s first book.

So..
In my experience, trading intraday in the FX market by purely following the trend like that, wouldn’t work as good as when we do a pure trend following system in the daily timeframe. The volatility behavior of the intraday price movement would kill the system by producing too many whipsaws. Even if we used some advanced entry technique to exploit a running trend by using multiple entry like what the turtles do, the wild volatility in intraday FX market is a beast can not be tamed with that prescription.
Using a pure trend following system to trade the intraday FX market would be like asking Mr. Bean cleaning your office desk. It would be such a terrible mess. lol.

Intraday market has its own characteristic, thus need to be handled with different approach.
Would elaborate more into that in another posts next time.

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ATR-derived Stop Loss Level

.

After reading my online buddy’s blog entry about MAE/MFE analysis, i thought it’d be worth posting this note about how we calculate stop loss level based on ATR (Average True Range).

Using a fix n pips distance for SL and/or TP is the simplest way a trader would do. But sometimes, the market would perform differently from time to time. Sometimes the market moves wildly with longer candle body, sometimes it moves very calmly with a very low volatility. A fix n pips SL/TP wouldn’t fit into the always changing market’s volatility behavior.

Moreover, we surely want to test a strategy in several different currency pairs. And because each pair would have different volatility behavior, using an ATR-derived SL/TP level would provide us with a system that can literally self-fit into any kind of volatility behavior.

These are some sample lines from our strategy. It calculates ATR first:

atr_SL = iATR(Symbol(), 0, prm_normalization_atr_period, 1) * prm_SL2atr_ratio;

and then this atr_SL value is used to calculate SL distances as follows:

stoploss = NormalizeDouble(Ask + atr_SL, Digits);

so the value of the SL distance would be based on ATR, not a fix n pips.

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Anticipating Price Feed Difference between Brokers

We have noticed a significant difference in the performance of our systems in several brokers. We have been wondering what may be the cause of it. When we examined the situation more closely, we found that an exact same algorithm has produced fewer trades in a more-filtered price feed environment.

How can this happen? Well, generally, the OTC FX market is a bilateral market, between the market-maker type broker with the traders. Thus the price quoted by each brokers would not be the exact same price. Some brokers apply some filtering algorithm for their feed, creating a smoother chart that may effect the performance of certain trading systems.

So, we have just added some adjustment into one of our algorithm, by adding/subtracting a certain pips off the trigger level as can be seen in the picture below:

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FXLQ Update: $8 Million of Incoming Funds

.

In a pdf file found in CFTC website (court complaint details document), it is stated that the deficit is now only a $3 million (as of December 13, 2007). This means that a nearly $8 million were coming during the period between Dec 7 to Dec 13. And still several days before the hearing on Jan 4, 2008.
Good luck to us

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FXLQ’s Numbers from CFTC

.

CFTC’s number: as of December 7, the adjusted net capital deficit is $11.6.
But, according to several clients who contacted FXLQ for updates on the situation, there has been several million dollars incoming wires into FXLQ’s account at US banks/FCM since the MRA took place. We don’t have any numbers on how many millions they are actually.

Here is the complete copy of the press release on December 19, 2007:

Release: 5426-07
For Release: December 19, 2007

CFTC Sues Futures Commission Merchant Forex Liquidity LLC Alleging Undercapitalization in Excess of $11.6 Million

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today that on December 13, 2007, it sued Forex Liquidity LLC (Forex Liquidity), a registered Futures Commission Merchant (FCM) in Santa Ana, California, charging it with being undercapitalized in excess of $11.6 million and also with failing to maintain required books and records.

On December 14, 2007, the CFTC won an asset freeze and other emergency relief that will enable the Commission to freeze the remaining assets of Forex Liquidity and safeguard the interests of its customers.

According to the CFTC complaint, as of November 30, 2007, and perhaps earlier, Forex Liquidity’s net capitalization was below the minimum required by the Commission. As a Forex Dealer Member of the National Futures Association (NFA) offering to be the counterparty to retail customer foreign currency transactions, Forex Liquidity is required to have a minimum adjusted net capital of $1 million; instead, according to the complaint, as of December 7, 2007, it had an adjusted net capital deficit of approximately $11.6 million.

Forex Liquidity is also alleged to have been unable to produce required financial documentation regarding its assets and liabilities. For example, according to the CFTC’s complaint, Forex Liquidity represented in reports and discussions with NFA that its assets at one time included a $35 million ABN-AMRO bond located in Switzerland. The complaint further alleges that Forex Liquidity represented to the NFA that the ABN-AMRO bond (or its proceeds) were transferred to a U.S. registered broker dealer, Commonwealth Financial Network (CFN); however, CFN does not have an account for Forex Liquidity and the account number that the defendant provided to NFA was fictitious.

Accordingly, the CFTC also charged Forex Liquidity with failure to maintain books and records of its business transactions, specifically, current ledgers that accurately reflect its assets and liabilities.

In the ongoing action in the U.S. District Court for the Central District of California, the CFTC seeks an order of permanent injunction against the defendant, monetary penalties, and other relief. The Honorable Cormac J. Carney, U.S. District Judge, issued the restraining order freezing the assets of Forex Liquidity and prohibiting the defendant from destroying documents or denying CFTC staff access to books and records.

The CFTC appreciates the assistance of the National Futures Association in this action.

The following CFTC Division of Enforcement staff members are responsible for this matter: Peter Haas, Richard Foelber, Paul Hayeck, and Joan Manley.
Last Updated: December 19, 2007

Hopefully, we’ll get more facts in the hearing scheduled for January 4, 2008. If they’re good numbers, some other FCMs might be interested in buying the business. In that case, an approximately 1 month would be needed to complete the whole process and we’ll be able to resume trading on our clients’ accounts.

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FXLQ: Important Notice 12/18/2007

.

Here is an email FXLQ sent to our client.
We’ll be waiting for the hearing in the District Court on January 4, 2008.

Tuesday, December 18, 2007
RE: Account # 1xxxx

To our Valued Clients:

We have temporarily suspended operations due to a Commodity Futures Trading Commission lawsuit filed against the company in Federal Court. Please be assured that as soon as we are able, we will return any messages.

There is a hearing in the U.S. District Court scheduled for January 4, 2008 where we hope to resolve all issues the CFTC has with our company.

Thank you,

Forex Liquidity LLC

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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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Recent Discussion and Rumors on FXLQ

.

Some interesting ongoing discussions in FF Forum, at page 3, page 4, and 5 of a thread regarding the recent MRA to FXLQ.
Some points in the discussion:

• This is not another Refco. This one is very different. Not a bankruptcy story.
• Client’s funds are in separated bank account. The amount is sufficient to cover all client’s withdrawal request, but the NFA wants to see available cash in the amount that’s exceeding all company’s liabilities before approving distributions.
• Executives of FXLQ are said to be doing their best to pull in all of their funds located off shore. Several incoming wire in multi million dollars were done, and still more to come to meet NFA’s requirement.
• Obviously, NFA has a certain agenda. The request to pull in all funds to US-banks was on Monday, and the MRA took place the day after (Tuesday). Everybody knows that repatriating millions of dollars especially if a large sum of them are in the form of bonds is not a one-day procedure.

Still, all we can do is just wait for things to unfold and observe any news and rumors. lol.
Anybody wants some beers?

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A Practical Note on Money Management

.

Early today I received a PM from one of my online buddy, asking about the money management we use in our trading. I agree that this topic is a very important aspect of trading.
We generally have 3 kinds of money management:

1. Fix number of contract per trade. This is used for testing purpose, to provide a clear profile on the risk/reward ratio of a developed system.
2. A fix gearing ratio. we mainly use this MM method for our live trading. We usually use a ratio of 10. For example, while trading a USD 20k account, we’ll trade the EURUSD with a 200k contract size. This might be translated as two standard lots in certain brokers, or 20 mini lots, or just a simple 200,000 unit when we trade with a non-lot broker like Oanda. When we trade an account with a system on two pairs, we would divide it equally between the pairs. In the example above, if we trade the system on a 20k account, and we’d like it trades on EURUSD, and EURGBP, and GBPUSD, and EURCHF, then we’ll trade them by 5 mini lots each. Sometimes we’ll use a bigger gearing ratio, but 20 is the maximum we could go. This will depends on the backtest result, particularly the maximum Drawdown, which we prefer to be no more than 30%.
3. A certain %-age risk per trade. We have this kind of MM on several of our well-developed long term trend following systems. First, the stop losses are calculated based on some volatility measurement. Then the lot size is calculated based on this. Each trade would be assigned a maximum of 2% to 5% risk on the capital. When we trade several instrument on the same account, we would also divide the lot size equally between them.

There are many sources regarding this matter. Using an “Optimal F” should be interesting to be tested, as proposed by several authors. But to this date, none of our systems use this kind of MM. It’s a very interesting one, tho.

I hope this is clear. please spark more question if there’s anything else I could answer, or you might have some suggestions for me. Thanks in advance.
Meanwhile, I’ll have a cup of coffee.

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Bigger New MT4 Brokers

After the upside-down in the Metatrader brokerage business following the new regulation regarding minimal capital requirement of FCM took place, bigger corporations have started to adopt MT4. Perhaps they start to realize the magnet of MT4 in attracting a significant portion of the retail trader customers.

Among several big names we know who adopt MT4 are FXCM and RCG (Rosenthal Collins Group). FXCM is still planning on this move, it is said to be ready in 2008, if there is enough interest in it.

Meanwhile, we’ve been demoing RCG’s MT4 for several days now. They have a sub-pips spread. As we can see here in the tick chart screen shot below, EUR/USD was traded with a sub-2 pips spread during London/European session:

This information below is taken from tradeviewforex’s website:

• Recently ranked by Futures magazine as #21 out of the top 50 brokers in the world
• Second largest independent FCM
• $46 million of net capital
• $735 million in customer assets, 20,000 accounts, assets over 4 billion
• Can trace its roots back to 1923
• Online accounts: streamlined setup, don’t necessarily need to provide license or utility bill, approval within 24 hours, all money transfers will be in customers account by end of day (typical time is 24-48 hours) enabling trading to begin immediately.
• 15 offices worldwide
• 24 hour trading support
• Straight pass through for unprecedented trade execution
• Three options for accounts: Tighter spreads, higher interest, or straight through processing
• Utilizes familiar MetaTrader 4 software
• You want to place your hard-earned money with a stable, well-capitalized brokerage firm. We have been around for over 80 years, and our financial standing is only getting stronger. Over the past two years, our Customer Funds increased by an astounding 63%. For more information on our solid financial record, see our 2006 financial statements.

But still, we’re looking for a UK-based MT4 broker now.

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Dealers are Still Doing Their Job

We have just received this notification regarding automatic rollover of open position.
Although we have been inactivating our robots since we received the MRA news on December 4, it is good to know that their dealers are still doing their job.

Wednesday, December 05, 2007
RE: Account # 1XXXX

Dear Valued Client:

Please be reminded that your FXLQ Customer Agreement provides for automatic rollover of positions which are not closed during the course of a trading day.

Due to the recent Member Responsibility Action issued by National Futures Association, we are requesting that all clients inform us immediately if they wish to revoke this ongoing assent to automatic rollovers.

If you choose to revoke this ongoing assent to automatically rollover positions, they will be liquidated at market at the end of the trading day, unless you contact us each day to direct us to rollover your open positions during the trading day.

Best Regards,
Forex Liquidity LLC

And up to now, the MT4 client platform is still well connected to FXLQ server, providing live quotes uninteruptably, and the balance of our clients’ funds are still the same as it were.
Maybe they haven’t processed our wd requests yet, but all these facts add more confidence regarding the safety of the funds.

More updates later.

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Need Some Fresh Air

We have just received an update from our contact. It is said that there are two NFA officers in FXLQ’s office today, supervising the process of fund withdrawals to make sure it goes properly. This should add more confidence for a clean finish on this matter.
I need some fresh air. Still holding my breath, tho..

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The Coldest Winter in Chicago

Perhaps it’s the coldest one. Because i can even feel it from here when having this conversation with my contact. I hope things are going well.

Darma: dear P, if you hear any news pls let us know. thanks
P: I will
P: did you send the form?
Darma: yes we have sent the form
Darma: in the case document, i saw this that makes me worry:
“FXLQ is prohibited from distributing, disbursing or transferring any
funds, including to existing customers, without the prior approval of
NFA.”
P: You should have the funds in 3 days
P: from today
Darma: wouldn’t be any delay because of the need for NFA approval for each transfer of money?
P: I don’t think so
P: your money is seperate from the firms money
Darma: and P.. I and my client still trust you. if you have any suggestion on brokers we should choose, pls advice
P: ok , thank you
P: I’m sorry about what happened
P: I will call FXLQ again later
Darma: thank you. i hope we wont get any delays.
Darma: this makes me nervous, actually
P: there shouldn’t be
P: I’ll call later
Darma: you know better the regulation and the situation there.
Darma: yes, please let me know anything you can get.
P: it also happened to One World Forex
Darma: btw, how are you? it is winter there, isnt it?
P: they are cracking down
P: yes
P: COLD
P: I don’t like the cold
P: how about you?
Darma: do you have plan for christmas or new year?
P: no
Darma: im fine, except with this fxlq thing. my multifinance business is going well. as well as the chemicals
P: not yet
P: good for you
P: I need to shower now
Darma: ok P.. good luck to us!
P: you’ll be fine
P: I’ll call them later
P: and make sure
Darma: ok thank you
Darma: thanks.

I prefer spring over winter

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FXLQ notification

We have just received this notification letter from FXLQ.
I immediately discussed it with our clients and we decided to send a withdrawal request.
The completed forms have been sent several hours ago, and we’ll see hows it gonna be.
Wish us luck!

Tuesday, December 04, 2007
RE: Account # 1XXXX

To our Valued Clients:

The National Futures Association has today issued a Member Responsibility Action against FXLQ. You can find the notice on the NFA’s website: http://www.nfa.futures.org/basicnet/Details.aspx?entityid=0362216&rn=Y.

Effective immediately, FXLQ is not allowed to take on any new customer positions. Therefore, all of our systems have been set to allow only rollover and liquidations.

We apologize for any inconvenience this has caused, and direct you to our website if you wish to withdraw your funds: www.fxlq.com/docs.

We are working diligently to clear this up as quickly as possible and look forward to renewing a full relationship with our customers.

Sincerely,

Robert Gray
President
Forex Liquidity LLC

And now we need to find a good UK-based MT4 broker to tap our robots in.

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Prediction is Nonsense

.
Thanks to R who consistently posts useful articles in his journal. This time he posted a link to an article at the economist.com. The most interesting thing for me in that article is these paragraphs. It is stated that,

To show how this works, Messrs Frydman and Goldberg examine the PERSISTENT failure of economists to predict movements in the currency markets. According to Kenneth Rogoff, an economist at Harvard who has long attempted to find rational models for predicting currency fluctuations, “it is stunning how hard it is to explain movements in exchange rates.”

All the models based on rational expectations now say that, on fundamentals, the euro is overvalued against the dollar, he reckons. But does that mean the dollar will soon rise? Mr Rogoff says he has no idea.

In rational-expectations theory, a range of variables including inflation, interest rates and growth should have a predictable impact on currency movements, but in practice this theory has proved less useful for forecasting than tossing a coin. Among rational economists, the debate is over “whether the glass is 5% full or 95% empty,” he says. Only over longer periods—say two to four years—is there any evidence of exchange-rate predictability, which is far too long to be useful to traders or policymakers.

So, isn’t it clear now.. just stop predicting.
Develop a trading model. Not a prediction model.

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Due to the regulation…

Due to the regulation we strictly comply with, Risenberg Capital are not soliciting/offering any advisory services, nor any managed account programs nor any kinds of investment products to clients from Indonesia.

Existing holders of account(s) with FXLQ (USA), or FastbrokersFX (USA), or MIGFX (Swiss) –under their very own discretion– can have their account(s) to be traded by any trading robots provided by any vendors under a Limited Power of Attorney (LPOA) arrangement.

For information on Risenberg’s project on mechanical trading systems, please send us your query.

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