Trading a Martingale Based on Backtests A VERY Dangerous Road ~ forex trading help

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During the past few months I have sadly seen a great increase in the number of Martingale systems flowing around on the internet and their use by new and inexperienced traders. I have also seen some people testing and using Martingale systems with great hope and some with what seem to be some very good results. Many of these people who use Martingales or systems with progressive money management seem to rely on backtesting results to test their theories and sometimes they claim that a 10 year backtest in which no wipeouts happen is "good enough" to consider a Martingale worth running on a live account since it is inherently "safe". Within the next few paragraphs you will see why this way of approaching Martingale trading is terribly dangerous and why people approaching trading in this manner are bound - sooner or later - to wipe out accounts and face the truth about progressive money management, in the end it never works.

The argument here seems to be pretty simple. You know that Martingale systems are dangerous but if you can get a 10 year backtests that shows no wipeouts it means that you are safe, right ? If during such a long trading period and such a varied array of market conditions your system survives then everything should be Okay. The truth is that there a few VERY large pitfalls to this approach.

The first problem with the backtesting of Martingale systems is that there is an inherent error in every backtesting result which can be explained in technical aspects of both the backtesting mechanism and the market itself. A 10 year backtest only gives you an approximation of the results during the past 10 years because - in reality - things like spread widening, requotes, broker differences and the absence of one minute interpolation would have made the results different to some extent.

In the case of Martingale and progressive money management systems the problem is that a very small error in the backtests can make the whole difference between wipeout and survival. Imagine that you have a Martingale system that wipes an account with 7 consecutive loses and the account achieves a maximum of 5 in a 10 year backtest. Now if the system only had 2 additional consecutive loses on any of those losing periods the account would have been wiped. While an addition of 2 consecutive loses to a given trading period for a trading system designed on sound principles is minimal, the effect on a Martingale or progressive money management system is bound to be devastating.

In the end the limitations of simulations make the "certainty of safeness" of any Martingale system a lie since the actual errors and limitations of the simulations are not only important but actually most likely determinant towards the evaluation of systems that are so sensitive to small increases in the number of consecutive loses. In reality, all trading systems are bound to be facing anything between one to three times the number of consecutive loses they have given in historical testing and this makes progressive money management systems always reach wipeouts in real trading.

To sum it up, using Martingales based on backtesting is a VERY dangerous thing to do due to the limitations of the simulations. In the end, ALL martingales are bound to wipe their accounts in the long term. This is a statistical certainty which does not change, no matter what short term results show or what simulations may appear to be telling you. It comes back to the old saying, there are bold and old traders but there are no old bold traders.

If you would like to learn more about the development of trading systems and how you too can design and trade your own systems based on sound money management techniques 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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Why There is No Universal System Differences Between Currency Pairs ~ forex trading glossary

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Can we build a system that trades successfully on all forex currency pairs ? This has often been a question of the automated trading system world that simply asks if there is a universal inefficiency, an inefficiency that is so common that it can be found an exploited on all different currency pairs. Up until now, the answer to this question has been a resounding and unequivocal NO. To the best of my knowledge no system has ever been developed to work on all currency pairs despite the claims of many system sellers who tell you that you can use their systems on all of them. But why has it been impossible to build such a system ? Why does trading all currency pairs seems like such a big challenge ? The answer lies within the very fabric of the market and the way in which the different currency pairs trade and react. Within the following paragraphs I will explain to you some of the basic aspects of these currency pair differences and why it makes the creation of any universal system extremely hard if not impossible.

You may have been told that inefficiencies in the market arise due to crowd behavior- which is a human characteristic- and that all currency pairs in forex show it to some degree. When you hear this it becomes easy to think that if a system "really works" then it is bound to work on absolutely all the instruments available in the currency market. After all, every instrument is bought and sold by humans and this would make them inherently inefficient.

Certainly if all instruments traded with the exact same number of people and with the exact same objectives we would be able to easily find a universal inefficiency but the matter of fact is that this is not the case. The first dramatic difference between instruments is the number of participants and the inherent liquidity of each currency pair. Some pairs like the EUR/USD are very liquid while others like the GBP/CHF dont have 1/10th of the liquidity of the former so their price action is dramatically different and the inefficiencies within it become dramatically different. The less people who trade a given pair, the more efficient it becomes since crowd behavior becomes less pronounced and individual decisions start to play important roles.

Then we have other differences that also make the movements of currency pairs different. For example if you are trading the USD/JPY and there is a negative trade balance against Japan then there will be a given fixed amount of money each month that will pull the USD against the JPY just merely because of business transactions that have nothing to do with speculation. The volume of these transactions is very significant and the time in which they are processed and their magnitude will have an impact on the way in which a pair moves.

Many other factors such as central bank intervention and even cultural differences play an important role in the way in which a pair moves when compared to another and all of these factors help to explain why the finding of universal inefficiencies is so hard. However when you look at higher time frames (daily and beyond) there seems to be some coherence and this is the reason why some systems that target month or year long trends manage to exploit the same inefficiency on several different currency pairs. However the success of these systems along the whole portfolio is never total and more often than not there are very strong differences between the profitability of different currency pairs and several pairs where the systems simply do not work.

So will we ever find a global and total inefficiency ? I would have to say that probably no, but if there is a chance it will take a lot more liquidity on all instruments and a lot more market participants to make this the case. Certainly in the future if the market volume on the illiquid currency pairs increases enough we might be able to have - even though not a truly universal system - at least systems that will have better success along different currency pairs.

If you would like to learn more about system development and how you too can build your own 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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Being Close Minded and Being Cautious Two Very Different Things ~ forex trading earning potential

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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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