Uneven Strategies Working with Different Profitabilities in Portfolio Building Part One ~ forex trading kaskus

9:24 PM in advisors, an, building, different, expert, Forex, in, money, one, part, portfolio, profitabilities, review, strategies, train, unbiased, uneven, with, working

One of the first questions I asked myself when I begun the development of portfolios within Asirikuy was : What if the profitabiliy of the trading systems used is very different ? What will happen if one system is much more profitable than the other one in the long term ? I started to wonder if the most unprofitable system would just drain out the profitability of the best one or if things would improve with time as the systems traded together. Today I will be writing the first part of a two part post which will talk about my finding around portfolio trading of uneven systems and the effect of doing these types of pair-ups in the overall draw down and profitability of a given portfolio.

In order to pair two uneven systems I needed to find two likely long term profitable systems that traded with similar frequency but which had significant differences in profitability that would become larger in the long term. The most suitable system I found was Watukushay No.2 which trades on both the EUR/USD and the GBP/USD. Although both instances are bound to be long term profitable, the EUR/USD instance achieves higher profitabilities in simulation due to the higher presence of the inefficiency exploited by Watukushay No.2 on this currency pair. By pairing up both systems I would be able to see the overall effect in long term portfolio trading allowing me to see if one system would be able to drain the other one or if - despite their differences in profitability - they would achieve a joint effort towards more profitable territory.

To make things even more interesting I decided to increase the Risk used on these tests to 5 also extending the backtests to include 2010 months up until May first. The results - shown below - let us see the big difference in profitability between the EUR/USD and GBP/USD instances of Watukushay No.2 as compounding effects become more pronounced. The contribution of the less profitable GBP/USD instance becomes less significant as time goes by and the EUR/USD instance starts to take a very important place within the portfolio. In the year 2009-2010, most of the position sizes taken are the responsability of the EUR/USD instance while the GBP/USD instance contributes about 5-10% of the trading volume. It is extremely interesting here to note that -in the long term - a portfolio setup eliminates unprofitable strategies by itself, since less account percentage is allocated as the instances fail to accurately perform, effectively protecting the account from the less perfoming strategies.
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However what happens during the whole ten year period ? What happens with the overall losing period length, maximum draw down, etc ? For the Risk 5 tests, the maximum draw down period length and the maximum draw down values for the EUR/USD instance were 658 days and 26.96% while for the GBP/USD instance they were 1026 and 59.41%. However, the portfolio achieves a wonderful effect and achieves - within the ten year period - to reduce the maximum draw down period to 433 days and the maximum draw down to 30.66% just a little bit higher than the EUR/USD instance and much lower than the GBP/USD instance.
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It is also very interesing to evaluate the yearly profits of the portfolio (shown above) which allow us to see how the EUR/USD instance takes over as times goes by. Of particular importance is the year 2002 in which Watukushay No.2 achieves its highest profit on the EUR/USD (note that high risks exaggerate these effects), leaving behind the GBP/USD instance in terms of equity gains. As time evolves even further we note how the EUR/USD instance keeps growing the account and the contribution of the GBP/USD instance becomes very small. In the end, the profitability of the GBP/USD instance achieves a minor increase in average yearly profitability for the account, from 41 to 42% showing that the addition of this instance, eventhough much less profitable did add up to draw down period reduction and increases in profitability in the long term.

Of course, there are still several questions unanswered which will be addressed on the next part, released tomorrow. For example, what happens if we decide to start to trade a portfolio like this just before the worst draw down period of the worst performing system ? Will this expose us to higher risk ? Is the long term risk indicative of the highest possible draw down even when different starting periods are taken into account ? Tomorrow I will try to answer these questions as I continue to research the depths of the world of portfolio trading and combinations of Asirikuy systems.

From todays post we can definitely conclude that the best idea is to combine trading systems with similar profit targets, however if one of the systems does start to fail it is very probable that its trading contribution will be slowly eliminated by the account growth caused by the other systems. This is very powerful in the sense that the portfolio self-manages the profitability of trading strategies and automatically rewards systems that perform better and punishes systems that perform worse.

If you would like to learn more about automated trading system development and how you too can learn to develop your own long term profitable systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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Being Close Minded and Being Cautious Two Very Different Things ~ forex trading earning potential

12:42 PM in achieve, and, being, cautious, cftc, close, different, Forex, mean, minded, new, rules, they, things, to, try, two, very, what

I consider myself an investor in the sense that I do not take decisions regarding my trading very lightly, every time I decide to run a system on one of my personal or managed accounts I always take as many steps as possible to ensure that capital preservation and low risk will be the highest priorities. Of course, many people - especially those newer to the scene - view this as being "close minded" and having problems dealing and implementing new ideas. On todays post I want to write a few paragraphs about the difference between being close minded (which refers to being unable to embrace new ideas) and being cautious (taking care of ones capital and risk taking levels). In the end I hope that you will see how both of these things are completely different and how one does not necessarily imply the other.

So why do people view conservative traders as being "close minded" ? The answer to this questions is actually not that complex and goes into the way in which new and experienced traders view trading and how they differ in the way in which they approach their trading accounts and the way in which they trade this money. For new traders there seems to be an urge to gain high returns with small amounts of money, something which is very understandable and aligns perfectly with all the hype and risk taking that can go on with small amounts of money. Since the amounts of money risked by new traders are usually small the sense that the potential reward is much higher than the potential risk is very important.

You will see that new traders will be very easily convinced to use any trading tactic that promises large returns, merely due to the fact that the balance of possible benefit and loss is heavily tilted towards the rewarding side. New traders are therefore much more likely to try new trading tactics which dont have proved long term profitability in order to face the potential and very tempting reward. On the other hand, experienced traders are very reluctant to trade anything that has yet not shown long term profitability because the stakes are - in most cases - much higher (in absolute money terms).

Experienced traders also have an advantage here regarding the number of systems they have seen in the past and which ones they have seen succeed and fail as the years have gone by. Most professional traders will know that certain systems are - by experience - very bad ideas while others are more sound approaches. The answer of new traders to this argument is generally that the fact that no one has done it doesnt mean it cannot be done, which is a valid, yet dangerous argument.
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Professional traders are more focused in the long term ability of their systems to succeed while new traders are more comfortable in using new systems which have a very high probability of failing. In the end it is not that professional traders are unable to embrace new ideas, it is simply that they require these ideas to be put to the test rigorously since every time they have been used they have shown to fail in the long term. This is analogous to the people who attempt to build perpetual motions machines, which would violate the laws of thermodynamics. Since these laws are based on vast amounts of observational data for which an exception to the rules has never been found, there must be an overwhelming and convincing amount of experimental evidence to disprove any of them. In the end the people who do not attempt to build perpetual motion machines are not "close minded" they just know that the laws of thermodynamics work on all the observations of our universe that have been made and therefore such an endeavor is most likely a waste of time.

In trading things work the same way. Conservative traders do not develop martingales and scalpers with very bad risk to reward ratios because they know that these systems have always failed in the long term, even if there is no absolute proof saying that a very profitable scalper or martingale cannot be made, professionals know that this is most likely a complete waste of time since from a very large amount of attempts, none have succeeded. It is not that conservative traders are "close minded" since they will eagerly test new ideas which have not proved to fail so dramatically during the past, it is merely that they are being careful and applying the experience most traders have had in order to trade only systems that can reward them in the long term.

So in the end it is not a matter of traders being "close minded" when they do not embrace ideas that seem to put extreme amounts of risk on equity, it is merely that these same ideas have already shown to fail time and time again in the past. It is therefore not a matter of being "close minded" but a matter of being cautious aiming to put your money in the hands of trading systems that are likely going to work for you in the long term. Where would you rather put your money, in a new company that promises you 100% returns each month (knowing that all of these companies in the past have turned out to be ponzies) or into an investment fund that has given its customers an average 15% compounded yearly profit during the past twenty years ? The same applies to choosing trading systems for your forex account.

If you would like to learn more about how you too can build and design your own trading systems with sound trading tactics that are likely to work in the long term please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)

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Liquidity in Forex Part No 2 Analyzing the Liquidity of Different Pairs ~ forex trading good or bad

5:10 AM in 2, 5, analyzing, and, aussie, different, encouraging, forex, in, kiwi, liquidity, more, no, of, pairs, part, results, the, watukushay

On yesterdays article - which was part No.1 of this post - we talked about the definition of liquidity and the implications of high and low liquidity levels on the forex market. Today we are going to give an in-depth look to liquidity in the forex market, particularly I will talk about recent literature in economics dealing with the evaluation of liquidity on several different currency pairs and what we can conclude and use from this analysis. After reading this article you will have an idea about which are the most liquid and illiquid currency pairs, something which should give you a good idea of what pairs you would want to focus on for the development of mechanical trading strategies.

First of all, it is important to understand that liquidity in forex in simply a pain to research. In order to investigate the liquidity levels of any given market instrument we need to have all transaction information including, type, volume and time. This means that we need access to the "books", the registry where all the transaction information of a given broker is kept. Since there is no central exchange in forex, we cannot get the real liquidity values but if we choose a broker that uses a large array of liquidity providers and we take a look at all their transaction we might be able to draw some general conclusions regarding overall pair liquidity values (at least relative to each other).

The Swiss National bank published a paper a few months ago dealing with the evaluation of liquidity on the FX market (you can access it here). Besides discussing previous literature findings regarding forex liquidity the authors investigated the liquidity levels of several different currency pairs using data from 2007 to 2008. The authors used a daily reversal measurement (explained within the paper) of liquidity in order to get a comparable to number to use between the different currency pairs.
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The studys first findings show us that the EUR/USD and USD/JPY were the most traded instruments during the testing periods while the AUD/USD and USD/CAD had the lowest trading volume. The authors also emphasize on the fact that even though the GBP/USD is an important pair it is very illiquid when compared to the EUR/USD, confirming the findings of previous studies and pointing to the reason why the development of GBP/USD based systems is far more difficult than for the EUR/USD since the lower liquidity makes inefficiencies harder to exploit in a mechanical fashion.

Another interesting conclusion is the high liquidity of the USD/CHF and EUR/CHF during this period which the authors attribute to the safe-heaven status of the frank and the economic crisis during 2007-2008. The study also shows us that liquidity is not constant but changes considerably over time with most currency pairs starting to lose liquidity around August 2007 (carry trade unwinding) rebounding slightly and then resuming the downtrend at the end of this year. This analysis shows that stressful periods in the market are characterized by important drops in liquidity having a very strong relationship with risk sentiment.

Perhaps the most important contribution of this article is the development of ways to measure liquidity and the finding of correlations of FX pairs liquidity with other financial instruments or markets where liquidity is more easily measured. This in turn would allow investors to watch for drops of liquidity, something that could be especially important to those investors looking to shield themselves from crisis periods (investors involved in carry trades for example).

Of course, for us the most important findings are the relative levels of liquidity of the different pairs and their relative relationship. From the above mentioned study we can see that definitely system development should be focused on the EUR/USD and USD/JPY while longer term strategies aimed at "harder" to trade instruments should be used on pairs like the GBP/USD and the USD/CAD.

If you would like to learn more about system development and how you too can develop systems for these currency pairs with sound trading strategies please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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Some Trading Advice Trade What you See ~ forex trading kuwait

7:57 AM in advice, building, different, Forex, in, part, portfolio, profitabilities, see, some, strategies, trade, trading, two, uneven, what, with, working, you

It is incredible to see how many traders out there start calling different future price levels and saying that a certain currency pair will fall or rise in the long term and how another will not, etc. One of the first things that new forex traders are tempted to do is to issue forecasts of future price movements of currencies and act accordingly. On todays post I want to write about this practice and how the forecasting of currency pairs should be avoided if you wish to become successful in currency trading. Particularly I want to pinpoint the dangers and flaws of fundamental forecasting and how trading based entirely on price action - with the application of some sound trading principles - is in my mind the best way to achieve success either in manual trading or in the design of automated trading systems.

First of all, it is good to know what I refer to as forecasting. When a person says "The EUR/USD will be 1.60 in 2 years", that is what I call forecasting, an attempt to predict the future based on some evidence that holds no predictive power over such a wide range of possible outcomes. Predicting economic cycles, wide movements, bottoms, tops and similar unpredictable market outcomes are some of the fundamental reasons why new traders fail.

It is easy to understand why so many people fall victim to forecasting. We like to be right and forecasting a given price level that in the long term becomes true is very satisfying. For example, if you said in December 2009 that the EUR/USD would reach 1.3 next year, you would have made a very accurate forecast of what would have happened in the future. However there was no substantial evidence to guide you towards this conclusion and hitting the nail on the head with your prediction might have been a simple lucky guess. Of course, I can say that next year the EUR/USD will reach 1 or 1.5 and probably I would be right about one those forecasts due to the yearly volatility of this forex currency pair.

However what we have to understand here is that we cannot come up with conclusions outside of what is being showed by a certain currency pairs price action. I saw many people talking about the EUR/USD reaching a bottom around 1.32-33 when in fact there was no evidence to believe this to be true. Of course, in the end the people who make money are the people who play the market by two extremely simple principles. Take into account support and resistance levels and follow the trend.

Why would you be willing to go against a trend that is so crystal clear on the charts ? There is a reason why trends develop and taking trades against long term trends is suicidal most of the time. Reversals are quite rare and they take long periods of time to develop and for this reason they are not a good strategy to trade, it is much better to wait until a reversal happens and a new trend develops than attempting to enter the "beginning" of a new trend by guessing a reversal is in place. When you watch support and resistance levels not only are you able to accurately gauge the probabilities of price movements but you are also able to get into very good spots for long term trend following.

What you need to understand here as a trader is that you should read the information the market tells you and make an educated guess regarding price movement based on the simple assumption that trends will most of the time continue and support and resistance levels will shape price action. It is a matter of interpreting what the market is telling you and forming a high probability outcome based on these two simple market principles.

So in the future you should not try to forecast the price level of a currency in a few years or attempt to "call" the bottom or top of the current trend. You should focus on following price action relative to support and resistance levels and following trends, entering them on favorable positions based on your first analysis. Trading what you see on the charts instead of what you hear on the news or what you think will happen in the future is vital in order for you to achieve long term success in forex trading. Of course, the above technique is what has worked for me but other ways of analyzing price action and coming up with good probability reading may obviously be possible. Just remember : do not attempt to forecast, just follow your charts.

If you would like to learn how you can develop your own long term profitable strategies using forex automated trading please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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High Probability Trading Risks VS Rewards ~ forex trading office

3:38 AM in a, different, Forex, high, insurance, nadex, probability, rewards, risks, think, trading, vs, way

High Probability Trading has is great points but you must know that with high probability also comes higher risk. Let us take a look at some examples.

A random walk risk assessment would be a trade that is 50/50. In this type of trade you have about the same odds of winning or losing. You risk 50 to make 50.

A high Probability trade would be something like 80/20. You are risking 80 to make 20. The probabilities of winning are much higher but the risk is also higher. You must maintain a high win rate to be successful trading this style.

A low probability/high reward trade is something like 20/80. You risk 20 to make 80. You dont win that often but when you do, it covers 4 losses.

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Got that part? Good.

Now here is the interesting thing. What if you took an 80/20 trade where you risked 80 to make 20 but the probabilities were higher? What if that trade setup had a 90% win rate?

A 90% win rate means that 90 out of every 100 trades are winners. If you win 90 and lose 10, lets do the math...

90 winners x $20 per winner = $1800
10 losers x $80 per loser = $800

Total net profit = $1,000

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So what happens when you find a really good deal. They are hard to find but if you look long enough, they will start showing up.

So lets take a trade I took today. I sold it for $34.50 and it has a 4% chance of expiring worthless. (If I am selling, I want it to expire worthless so I keep the premium paid for it.)

Now this is a rock -n- roll trade. It has a 96% chance of expiring a winner. If it loses, I lose more than the $34.50. I actually lose $65.50. Why would I not take this trade. Lets do the math below...

96 winning trades x $34.50 = $3,312
4 losing trades x $65.50 = $262

Net Profit = $3,050

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Now let us look at a real example. Let us take the EURUSD binary weekly spread this week.

According to the probability studies, there are probabilities for expiring above or below certain prices:

Probability of expiring, Friday at 3pm, above:

1.3575 - 1.21%
1.3525 - 10.37%
1.3475 - 39.67%
1.3425 - 77.05%

Probability of expiring, Friday at 3pm below:

1.3275 - 0.01%
1.3325 - 0.29%
1.3375 - 4.03%
1.3425 - 22.95%
1.3475 - 60.33%

As you can see, the probabilities match up pretty close with the actual nadex prices.

However there is a way to get around this. I will go into this further next time. I will give you a hint. It involves buying way out of the money binaries and selling shorter term out of the money binaries.

Dont have time today but hang in there...

Again, this little blog post was to just get you thinking a different way... HAPPY TRADING!
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Uneven Strategies Working with Different Profitabilities in Portfolio Building Part Two ~ forex trading keywords

10:50 PM in advisors, an, building, different, expert, forex, in, part, portfolio, pro, profitabilities, review, robot, strategies, two, unbiased, uneven, with, working

Yesterday I started to discuss the effect of running a portfolio with systems that have very uneven performance. I used the GBP/USD and EUR/USD instances to exemplify this case and show you exactly what the effect of running systems with very different profitabilities is along a very wide range of years. However once post was not enough to discuss all the effects of running such uneven strategies and several questions still remained. On todays post I will finish my discussion on this matter, answering the remaining matters as clearly as I can. I will attempt to discuss the effect of different starting times in running a portfolio and how this affects the global profitability and risk/draw down targets of a portfolio built upon the join venture of uneven strategies.

On part one of this post I was able to show you how running a portfolio of two long term profitable systems has an overall profitable effect regardless of the global differences in profitability. I showed you how the GBP/USD and EUR/USD instances contributed somewhat equal profit/draw down percentage in the beginning of the account and how the contributing power of the GBP/USD instance grew smaller as trading progressed. Of course, this means that the portfolio starting time may prove decisive as different startup periods may lend themselves to different contributions of the separate systems. Some very important questions start to come out as a consequence of this matter. Will the account face higher risk targets if the account is started right before the worst draw down of the worst performing strategy ? Will long term draw down targets be an underestimation of the potential draw down ?

In order to answer these questions I looked at an account started right before a very significant draw down period of the GBP/USD instance which started in mid 2009. I ran a test from January 2009 until May 2010 and compared the results obtained for the 10 year portfolio for these same months. The first thing we can take into account is the draw down figures of both tests. The maximum draw down in 2009 of the 10 year test was near 9% while the maximum draw down for the test from 2009 to 2010 is 28%. It is however worth noting that this 28% is inline with the maximum historical draw down of the 10 year portfolio which is 30%. Looking at the equity curves of both systems displaying percentage gains and looking at monthly performance gives us a better idea of what is going on.
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As you can see, the 10 year portfolio has already diminished the participation of the GBP/USD instance significantly while the 1 year and a half test still has both experts contributing roughly the same since they havent had a chance to compound profits significantly. The result is that the strong draw down period on the GBP/USD eliminates a lot of the profit of the EUR/USD instance but the profit made by the later is enough to hedge the loses made by the GBP/USD account and put the overall portfolio in a profitable point.

I have to say that a careful analysis of similar periods - in which an account is started right before the worst draw down case of the worst performing instance - reveals that this is exactly when the maximum draw down portfolio levels are reached. In this case, a level of about 28% was reached which is close to the expected maximum historical draw down of the ten year portfolio (starting in 2000) at 30%. Running different initial periods were the account is started right before a GBP/USD instance unfavorable period shows us that draw down between 20-30% show almost all the time. However, the EUR/USD instance is always able to hedge this draw down and get the account to the other side.

As we saw on part number one of this article, the overall larger compounding effect of the EUR/USD instance ends up eliminating most contributions of the GBP/USD instance as it fails to perform up to the same level. Interestingly, this shows that the startup point does not increase risk but the 10 year maximum draw down appears to be the draw down combinatorial "upper-limit" that determines the draw down attained when experts are started within an unfavorable period. The 10 year estimation therefore becomes a valid estimate of future draw down limits and doubling it provides and accurate worst-case scenario.

In the case of systems with very different performance levels, the use of a continuous portfolio in which the most profitable systems take lead seems to be a good solution. However it is still easy to wonder if there is any other better way. Is there a better way when systems have similar profit levels ? Is there a way of examining portfolios in which we can be absolutely sure that the importance of the startup point is not critical ? How can we trade a portfolio in such a way that a very clear draw down limit is attained ? Answering all these questions and studying portfolios in depth has led me to the development of a series of portfolio guidelines and investment rules that I will talk about on tomorrows post and that will be discussed in depth this Sunday on an Asirikuy video... Stay tuned for the release of the Atinalla project.

If you would like to learn more about my journey in automated trading and how you too can develop a portfolio of likely long term profitable systems based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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