Volume Based Forex Systems Can it be Done ~ forex trading games

4:06 PM in an, article, asian, based, be, can, currency, done, exploiting, forex, inefficiency, it, latest, magazine, my, session, systems, trader, volume

When you analyze the forex market one of the first things that becomes clear is that the finding of true volume information is very hard if not actually impossible. Since the forex market has no central exchange it would require a person to track all of the largest banks in the worlds in order to know the real volume and magnitude of the transactions being done. Doing this in a real-time fashion to get volume data like that of stocks or futures would be a gigantic task that would most likely be frustrated by the complexity and "disorganized" nature of the foreign exchange market. So the question becomes, is there any way to measure volume ? is there any way to design a system based on volume information ? During this post I will share with you some of what I have learned about this problem and the best solutions that we have to tackle this issue.

Even though there is no such thing as a source of true volume information in forex trading, we could find a property that is correlated with trading volume which allows us to trade it in a way similar to how we would actually trade "true volume". The only property which has been studied extensively and which does show a strong correlation with true volume (at least we know this from other markets) is the tick number which corresponds to the number of times price is refreshed on your trading platform. This means that if during an hour there are 50 price quotes, then this hour is bound to have much less volume than an hour where there are 1000 price quotes.

Our problem here would be to use this tick volume information in a manner that is as less broker dependent as possible. Since different brokers have different feeds, filtering and liquidity providers it becomes impossible to actually use values of absolute volume as the starting point of any given trading strategy. A system that would attempt to use tick volume absolute values would certainly fail since these values are totally broker dependent and there is no way in which they can be related with actual market inefficiencies.

However the most interesting part comes when we realize that tick volume does go into predictable cycles and that we could build an indicator that normalizes this values so that we can have an "oscillator" that describes tick volume movement relative to the past X bars. This indicator would be similar to the stochastic oscillator used on price charts with the difference that it would use tick volume data. The oscillator would move to high regions when we are trading near the volume tick high of the past X periods and to low regions when we are trading near tick volume lows. By obtaining volume information that is relative and does not rely on the absolute tick volume values of the instrument we are trading we can make sure that broker dependency would be diminished and the design of profitable trading systems could start to happen.

Such an indicator could be used in several ways to find and exploit possible inefficiencies. For example, we could trade breakouts when volume drops below a certain oscillator threshold or we could attempt to trade continuations whenever there a price action movement with enough tick volume towards a given side. We could in fact also use volume information to find meaningful situations where patterns that would normally not be very interesting become relevant when they happen within the high regions of the tick volume oscillator.
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Certainly it is important to see that although there is no exact true volume information in forex the fact that we do have tick volume information and the fact that this tick volume is proportional to true market volume could allow us to develop successful systems since we have a totally new dimension of information which we dont have when we look exclusively at price charts. However it is very important here to realize that normalization of tick volume information is necessary in order to avoid broker dependency and such other problems that would make system development with absolute tick volume information a total nightmare.

The article right after mine on the last issue of currency trader magazine explores the use of some tick volume information and indicators for the development of long term profitable strategies showing that this indeed can be done, leading to very interesting results. Now it is my turn to see if Metatrader 4 is up to the task :o)

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

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Easy Profit in Automated Trading Logical Proof of its Nonexistence ~ forex trading fundamentals

3:13 AM in a, automated, based, clear, easy, example, forex, in, its, logical, nonexistence, nvo, of, profit, proof, tick, trading, using, volume

Isnt hassle free profit from the forex market all we want ? Definitely the goal of every person that starts to look for an expert advisor - or most at least - is to find a trading system they can simply "set and forget", a trading system that just collects money from the market in a consistent manner with minimal or limited draw down. A "holy grail", so to speak. However, it becomes obvious after a while of being in this business that if it is too good to be true it probably is and that no trading system can provide the owner with profit without an effort to develop knowledge and understanding. However the fact that the other road seems plausible makes a lot of people continue to search for this nonexistent trading system, a quest that brings nothing but disappointment and financial loss for most new traders. On todays post I will be giving you a logic based demonstration that shows why easy profit in automated trading is impossible and why this search is meaningless and will never arrive at your intended result (a system that easily gets you money without any effort).

First of all we must understand the very basic aspects about logic based demonstrations. When we are faced with a given hypothesis there are several ways in which it can be demonstrated to be true. In mathematics this is done in several ways but one of them is of particular interest to my article. You can demonstrate that something is false if the assumption that it is true leads to absurd results. For example, let us test the hypothesis that the addition of two even numbers gives us an odd number (which is false).

Assuming this to be true :

n, m and k are integers (2n is the definition of an even number, 2k+1, the definition of an odd one)

2n+2m = 2k+1
2n+2m-2k = 1 subtract 2k from both sides
2(n+m-k) = 1 factor 2 out
2a = 1 since n, m and -k are integers their addition is another integer (a)

Since 2a is an even number by definition and it is said to be equal to 1, we have an absurd result. No integer times 2 is able to give us 1 as a result. The hypothesis has been proved false because the assumptions that it is true leads to absurd results.

When it comes to making money from a system without any effort we can do the exact same thing. Let us suppose that there is a system that generates a 200% yearly income which can be traded from 100 USD and used successfully by anyone who buys it. Looking into the sales of the most popular experts we could expect this system to be used by at least 30K people during the first 2 years. This means that 300K USD - assuming each person trades the minimum - will be traded within the first 2 years. After ten years the return of this system would have been 17714700000 which is around 17 billion which is above all other market participants for this same time period. If 300K USD were added each year (of course new sales), the results would be even more staggering nearing more than 100 billion USD.

After 20 years, results become even more absurd and the system is now making a return that would be equal to more than the volume available to be traded. That is, all other market participants would be losing money against this system. This reduces the result to absurd levels since the systems profits surpass the amount of money available from the market. In fact, all the money in the world roughly describes what this system would be making.

The conclusions of this thought experiment are therefore quite simple and straightforward. One of the following things must be true :

• If a successful system exists that anyone can trade then there is an inherent - and quite small - volume limitation to its trading that will thereafter make it lose its profitability or its "tradable by anyone" character.
• If a successful mechanical system exists then there must be strong psychological barriers that make it extremely hard to trade for most market participants
• If a successful mechanical system exists then there is bound to be a maximum compounded yearly profit to maximum draw down limitation that forbids it from reaching the above scenario (a limitation on profits).

Through all my research and work I have found that it is certainly possible to have successful mechanical trading systems and I suspect all the above are in fact true statements. Systems that would be easily available for anyone to use would quickly lose this character as a function of volume and become hard to trade for some reason (psychological, increases in the maximum draw down to average compounded yearly profit ratio) and systems that are already successful are bound to be hard to trade or have an inherent profitability limitation that does not allow them to reach the above mentioned scenario.

In the end, logic is simply undeniable. The scenario portrayed before is an absurd outcome that cannot be reached and therefore limitations to its achievement must be contained within the systems themselves. Systems that may seem to show extremely high results must be volume limited and later become much less profitable and harder to trade while mechanical systems that are profitable in the long term are hard to trade by definition. The above logical reasoning also shows us that there is bound to be some form of profitability to draw down limitation which comes from the simple assumption that the above scenario must be avoided. In conclusion, there is simply no easy long term profit in automated trading.

As you see, the simple power of the "reduction to absurdity" logical reasoning allows us to gain a lot of information about the world of automated trading systems merely by the use of a very simple thought experiment. If you have any comments, suggestions, opinions or other similar reasoning exercises, please feel free to leave a comment !

If you would like to learn more about my journey in automated trading and gain a true education around this type of systems, their uses, limitations and possibilities please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to trading systems. I hope you enjoyed this article ! :o)

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