Archive for the ‘trading systems’ Category

Forex strategies

Thursday, December 20th, 2012

trading strategyIt’s not necessary for every trader to come into the market and have to figure out their own Forex strategies. Having to stumble through the system to figure things out on your own is what costs a lot of new traders their investments. Thankfully, that doesn’t have to be where you start.

There are a number of Forex strategies that are available to anyone investing in the Forex market, and every trader should evaluate each one to settle on the one that suits them the best. While there are many, this article will focus on three commonly used Forex strategies in play today that can help you make profits.

Stochastics

This is a tech indicator used by a number of traders mainly due to the accuracy of the findings. This technical momentum indicator will actually compare the closing price to the price range of a currency over a select time span. This Forex strategy is helpful in determining potential entrance and exit points for a trader based on the holdings and can be utilized parallel to the non-static average.

The generalized theory here is that within a market that has upward trends, the prices often seal out near their high and of course in a down trending market the prices will often seal out near the low. Data wise this strategy is great for a Forex trader to learn the up and down nature of trading and should be part of any traders bag of tricks.

Elliot Wave Theory

This Forex strategy was named after Ralph Nelson Elliot whereby he suggested that the Forex market moves and reacts to the economy and itself in a series of waves. His belief through study is that the market will move up in a series of 5 consecutive upward trending waves followed by three downward trending waves. He theorized that the movements of the Forex market and other stock markets could be predicted by observing the repetitive patterns by which people drive it.

The waves are based entirely on rhythms within the natural world and there is really no timed cycle. It’s based more on the psychology of the masses and is accurate when you consider that the market is driving by people and people tend to fall into rotational habits with their spending and investment. This Forex strategy merely takes advantage of an understanding of the psychology of investing.

Moving Average

This Forex strategy is yet another technical analysis indication tool used by the average Forex trader and provides information to the investor about the prices at any particular point in time between a number of intervals.

There are three defined types of moving averages:
• SMA (Simple Moving Average)
• EMA (Exponential Moving Average)
• WMA (Weighted Moving Average)

On top of those three, Forex strategies that involve moving averages also look at the MACD or the Moving Average Convergence Divergence. This uses a trigger line that plots the difference between various moving averages.

While there is far more detail available on these Forex strategies, and its good to research them because they tend to get quite complex, this at least gives a trader the simple understanding that there are various strategies out there than can be utilized when you began trading in the Forex market. Take the time to study the many available options and stick with that study until the various Forex strategies make sense and you can find one that suits you.

Best FOREX trading systems

Thursday, April 30th, 2009

How to determine the best forex trading system(s)?

This is the 1 million dollars question as they say.

This is the first and most important question that you should ask yourself before starting an automated forex strategy. Because anything  else depends on how you make your judgment. Not knowing that this is the main question is a big error.

Very often novice traders or bot buyers will look at the return, the backtest return or the recent out of sample return. These numbers are very often the only thing that people look at.

The truth of the matter is that these are not the correct numbers to consider when evaluating forex trading systems.

Here is a back of the envelop list of some of the elements to make your choice:

  1. Currency diversity: does the system trade one or more currency pairs?
  2. Sharpe ratio: this is a much better statistics than return;
  3. Length of back-test: obviously the longer, the better;
  4. Length of out of sample: the longer the time since release, the better;
  5. General/Specific: is the system designed for specific market conditions?
  6. Drawdown: what is the worse case scenario?
  7. Reputation: who is the designer and what is his knowledge?

Looking at past return of recent returns is the most misleading idea. Past backtested returns are easy to manipulate. Recent returns are too short to have any statistical significance. Additionally leverage can also improve these apparent returns. Curve fitting weights is another way to play with returns.

More serious considerations used to find the best forex trading systems start with the Sharpe ratio. Whatever weakness one can find in the Sharpe ratio, it is without a doubt infinitely more potent than a return, which is just a floating number without an anchor whilst the Sharpe ratio is a return anchored by its  volatility.

The Sharpe ratio is just the beginning of a thorough analysis of any system. Drawdown is a complementary measure which is a conditional type of return, the worse return during the period under review. Stress testing and scenario analysis is a more sophisticated type of analysis.

What is the big difference between a backtested track record and a real money trading record? In the first case, a drawdown seems like the drawing of a  little roller-coaster on a sheet of paper. In the second case it feels like you are sitting NOW in the steepest descending part of a real roller-coaster.

The other elements in the list will help to strengthen your decision. Double up your caution and halve your optimism.  Many people are looking for the best trading system, but few find it. Ask your forex broker if they offer any trading system.