Strategy Diversification Higher Profits Higher Risks ~ forex trading kindergarten

7:46 AM in an, diversification, do, easy, Forex, higher, not, of, profitability, profits, proving, risks, scalpers, strategy, the, thing, to

If you look into the Asirikuy website, one of the main objectives around my development of automated trading systems is to develop experts we can use to makeup a successful porftolio of long term profitable trading systems. Most traders - new and experienced - believe intuitively that adding several strategies to a portfolio will diminish risk in the sense that the possibility to attain significant draw down levels will be reduced. However, through my experience and analysis of portfolio diversification I have found that - although portfolio trading is great - great care must be taken in both the makeup of the systems and the evaluation of the actual risk levels used to avoid catastrophic loses due to a "massive" portfolio failure. During this post I want to talk a little bit about the things you must take into account when designing a portfolio and how risk must be carefully studied to come up with a reasonable "worst case" scenario.

Why is portfolio trading great ? Well, we all know that having all our eggs in one basket is not so good. When we use a single trading strategy we are exposed to several problems which can be avoided when many different strategies are used. For example, we are not subject to the "hard hand" of the market as when one of our strategies is unable to profit from its set market inefficiencies another one will most likely be able to. So in the end what we get is a diminishment in our market exposure without a reduction in our profitability since - in the end- we will reach the same profit levels on all systems as if we had if we had run them by themselves. There is also a very positive psychological effect of running portfolios in the sense that "someone" will be winning and you will have something good to look at almost all the time. A shield you wont have if you have to endure the draw downs attained by a single trading system.
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However, new traders generally take portfolio design too lightly. It is simply not a matter of putting all the systems you can within an account, put a very high risk level and hope for the best. No, it is not about that and that strategy usually leads to account wipeouts and other such problems. You need to make up your portfolio with a very clear plan and knowledge of what you will do when certain scenarios present themselves.

First of all, each separate system must have its OWN risk projections and its own worst case scenario (the point where the system has simply become to risky to continue trading). You need to know into how much draw down each system will go because each draw down will contribute to the overall loses of the account. Second - and most important - you need to calculate your portfolio risk accurately. To do this you need to calculate the sum of all the projected draw downs and have this as your worst-case portfolio scenario.

In the end each system will be able to reach twice its historically worst perfoming point (the worst case individual scenario) and the portfolios worst scenario will be the addition of all the systems historical maximum risk levels. In the end, systems have a flexibility to reach higher than expected draw downs (which are likely going to happen in the future) and the portfolio will be able to reach larger than expected risk additions since its "worst point" is an addition of draw down. This in turn means that portfolios have a lower risk thresehold than the systems, mainly because they need to reduce risk through diversification -if this doesnt happen - the portfolio is simply not working.

In the end doing this analysis will ensure that you have CLEAR targets for your risk and clear "stops" in your accounts loses (since you know when to stop individual systems or the whole portfolio). One of the most important things in trading is to have a plan and trading a portfolio with a previous risk analysis is VITAL for survival. Of course, making sure that each one of the systems used is long term profitable is also of extreme importance and something which will make the success of a trading portfolio much more likely. (for those of you who are Asirikuy members a video will be out this Sunday better explaining a lot about portfolio makeup and analysis).

If you would like to learn more about automated trading systems and how you too can build trading systems to achieve long term profitability 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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Proving the Profitability of Scalpers Not an Easy Thing to Do ~ forex trading losses

7:29 PM in advisors, an, do, easy, expert, forex, gun, machine, not, of, profitability, proving, review, scalpers, the, thing, to, unbiased

One of the things I get most criticized about is my evaluation of trading systems which have small TP and SL targets. People often do not understand the reasons why I do not recommend products that seem to be generating "a lot" of money for traders using them. I have been sent from time to time statements from several EA vendors and from third party users showing the excellent results of some commercial and freely available scalpers and they all look surprised when my replies all say the same thing : "your results are not statistically significant", "your results are not reliable", etc. Today I want to explain a little bit more the problem with scalper profitability and why there is currently no scalper available which has statistically significant and reliable evidence of profitability. For the purpose of this article I will define a scalper as any system that has an average profit target of less than 10 times the spread or which closes positions - in average - in less than 5 minutes.

What is the deal with these scalpers and their profitability ? The problems are several and may not be evident to people who are new or inexperienced in the field of automated trading. As a matter of fact, even people who have been trading automated systems for years may not see them clearly if they have never applied a strong mathematical analysis to what they are doing. However these problems are real and they affect all scalpers - as defined above - equally.

What I see as the two most important problems faced by scalpers are the unreliability of their simulations and their unfavorable risk to reward ratio. In metatrader 4, scalpers cannot have reliable simulations mainly because of one minute interpolation errors. These errors which are generated because of the lack of real tick data in metatrader 4 cause both signals derived from price action and position profit targets to be faulted by a significant percentage. This problem wouldnt be particularly bad if the SL value was of the same magnitude as the TP - as both would be affected equally - but the fact that the SL is usually 4-10 times the size of the TP makes these errors absolutely important since a small overestimation in the number of profitable trades equals a great underestimation of draw down.

For example, if you have a trading system that has a 90% winning ratio with a 5:1 risk to reward ratio, a simple overestimation of profitability of 5% in backtesting would equal a 25% increase in the actual draw down suffered by the system. Through the analysis I have done of several systems with small profit targets it is notable that this overestimation is even more important, usually around 15-20% or more depending on the actual closing mechanisms and shortness of the TP.

The most important problem why profit and draw targets cannot be estimated accurately for scalpers - which arises from the unreliability of simulations - is the fact that live execution problems usually greatly diminish profitability in the long term. Variables such as slippage and spread widening - which are not expressed in backtesting - play a decisive role when dealing with automated trading scalping systems.

It is important to note that I am not making these problems up, they are real and ignoring them will have terrible consequences in the long term. In the beginning these problems may not seem apparent as these systems have very high winning ratios and the incoherence with simulations and the appearence of bad losing periods will usually appear later on, after a large number of trades has already been taken.

Does this mean that there are no scalpers that work ? No, that is not what I am saying. What I am saying here is that currently simulations are not valid - because of metatrader limitations - and extensive live evaluation of a statistically significant period - which in the forex market cannot be less than 5 years - is necessary to prove that the systems have a high like hood of being long term profitable. This criteria is derived from extensive statistical analysis of market cycles, a criteria meant to evaluate the performance of a system under very varied conditions. Otherwise, you may just be looking at temporary profit or draw down cycles that may not let you see the global character of the system. For regular systems - with reliable simulations - six months of live/back testing consistency are enough to validate simulations and grant these performance results but for scalpers this simply cannot be done because simulations have all the above mentioned problems - which again - are very real and well documented.

So in the end - yes - there can be a lot of scalping systems showing positive results in live testing results or simulations. However, the fact remains that none of these systems have tests long enough to be considered statistically significant. These systems simply cannot be considered long term profitable because they havent shown adaptation to varied market conditions and the ability to survive in the long term. So even though they may have positive results, I will never recommend - nor use - any system which does not have enough evidence to consider that I will be able to trade it safely in the long term. Small, statistically insignificant trading results are simply not enough to consider any system likely long term profitable (which means that the system has a high probability to work for the next few decades).

If you would like to learn more about automated trading systems and how you too can code your own reliable 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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