Moving Averages and Its Applications

In this video lesson, we learn about the application of the moving averages. It is one of my favourite indicators too.

Five Common Mistakes in System Optimization

I believe that one of the most important aspects of system design and use is system optimization. This step in system design is vital since it allows us to adjust a given trading system so that it can more efficiently exploit the market inefficiency it is based on. When done correctly, the optimization of a trading system gives you a more profitable version of your logic with better profit and risk targets in long term performance and a very robust strategy which is not likely to fail even if market conditions change significantly. When done incorrectly, optimization leads to curve-fitted systems which are "fit" to test profitably in the past but fail to profit in the same way in the future. What is the difference between correct and incorrect optimization ? On todays post I will talk to you about this very important aspect of system design and what mistakes system designers and traders usually make that make their optimizations invalid and the resulting trading system useless.

In the end, there is a good way and a bad way to optimize a strategy and definitely all systems can be adequately optimized if certain precautions are taken into account so that the most important "curve-fitting pitfalls" are avoided. I will now describe the five most common and dangerous mistakes made when optimizing and I will attempt to give some solutions to these very usual and sadly lethal blows to long term profitability.

1. Optimization period length. I think that the most common mistake when doing optimization is -without a doubt- the length of the testing period used to optimize. Strictly speaking, optimizations are not bound to be meaningful fit they are done within periods of less than 5 years given that smaller periods of time are not statistically relevant according to long term changes in market volatility. So if you want to optimize your system and avoid curve fitting, use a period of at least five years. Using a smaller period will most likely "fit" your strategy to very specific market conditions and will make it unable to perform correctly as the market changes.

2. Reliability of the simulations. It is very important to note that in order for optimizations to be valid, simulations need to be valid. Optimizing a scalper or a similar strategy which cannot be simulated accurately does not make any sense since the trading results - and thus the optimization results - are not going to represent live testing to any accurate extent. Designing systems that explicitely control one minute bar opening and that use adequate profit and risk targets - large enough to avoid interpolation errors - is critical for adequate optimization.

3. Ignoring the results surroundings. One of the most important aspects of system optimization is to take into account the results "around" the most profitable result you found. For example, if the optimal value for an indicator period for your strategy is 20 when doing a 5 year optimization what happens when the indicator value is changes to 19 or 21, what about 18 or 22 ? It is very important to consider the surrounding since they give you an idea of the possible changes of profitability you will get if the market changes enough so that your "optimal" settings are no longer that good. If your system is very profitable with 20 and then loses 70% of its profitability with 19, then the strategy is not robust enough and it IS bound to fail in the future as market conditions may drift - even if only slightly - from your set results.

4. Fine grid optimizations. Another common problem with optimizations is the use of very fine grids when optimizting. In general, the coarser the optimization the less risk there is to curve fit a strategy since the fitting is done in a "lose way" and results that may over estimate profits and underestimate future draw downs are also avoided to a good extent. In general you should not optimize to any grid lower than 2% and better 5% so if you are doing an optimization of a strategys SL from 20 to 200 do not use steps smaller than 4 to accomplish this.
--
5. Reoptimizing after Optimizing. When you optimize a parameter for given strategy, then optimize another one and then reoptimize the first one to the new profitable results you are most likely doing a sort of "fine grid" optimization in the sense that you are "fine tuning" the first variable to the seconds "best results". This is similar to doing a fully correlated optimization (although less computationally intensive) but it has similar dangers in the sense that increased correlation and probably further curve fitting is introduced. My advice here is to only optimize variables from a first set of parameters in order and avoid reoptimization of a variable after it has been optimized once.

As you see, these common mistakes in optimization are made by most people who want to improve their automated trading systems and all of them are bound to generate very good results using optimizations that are possibly going to be an over estimation of profit and underestimation of draw down in the long term. In a future post I will give you a diagram for optimizations explaining a little bit how I optimize my systems and what "general procedures" I follow so that my systems end up being robust, profitable and with a high like hood of maintaining their risk and draw down characteristics in the long term.

If you would like to learn more about my journey in automated trading and how you too can start to design and program your own likely long term profitable 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 !

Forex Automated Trading EA Championship Worth the Trouble

Each year most of us are very in tune with the latest metatrader 4 automated trading championship. Traders on these contests get hundreds of thousands of dollars out of small initial accounts against demo servers which are modified to show real trading conditions. These includes slippage, spread widening and all the other funny stuff that brokers like to pull on us, the poor retail traders.

Year after year, I have reflected upon the results of the expert advisors and year after year I am more convinced that this contests are badly designed. I think their results are not what most of the people looking for a profitable ea are actually looking for.

First, most of these expert advisors are geared towards making high risk investments in order to win the prize in the short period of time that the contest uses. This fact makes most of these expert advisors far too risky to use for the common retail trader. If I was entering a trading championship I would definitely program one of those expert advisors that can bring up an account size ten times and then margin call the account in a very small time. Sure, there is the probability that the account will margin call in the contest, but since the time frame is so small, the odds are not that against me. For example, a scalper with a 10 pip TP and a 500 pip stop loss is certain to lose everything in the long run, but in the short term it can increase an accounts equity significantly.

This is when the second and most important factor comes into play. I believe most of these expert advisors to be spurs of good luck in the middle of the trading history. Just as I explained above, the contest just happened in a period when the ea was profitable, but that period of time is too small to judge the experts real long term profitability.

We have seen this with the winners of previous championships, for example, the Bogie expert advisor which had second place a year back then failed dramatically as market conditions abruptly changed. This expert advisors are not designed to be stable, consistent profit makers, they are designed to be contest winner, so take your time when thinking about purchasing some ea that won in an automated trading championship.

Stay on the sidelines and wait until the ea has a significant amount of live testing before you "jump in" just by thinking, "it won the contest". If you would like to learn more about profitable free and commercial forex expert advisors please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Ending the Year By Hearing You Out o

Today is the last post of the year 2009. With the end of this year I complete 2 years and 4 months of having this blog and working on automated trading systems and projects. I have to say that this year was the most constructive year I have ever had while trading the forex market. I had many ideas, some good and some bad, I learned a lot about the programming of profitable automated trading systems and I started to publish my research on currency trading magazines.

The blog has also evolved a lot, my vision on expert evaluation is now centered and focus, I have developed video databases, added a lot of content to the newsletter, totally remade my ebook, definitely a lot of changes. I also committed myself to daily posting, something I had definitely thought was almost impossible for me to do, but I now believe to be a good way to stay in tuned on what is happening in the automated trading world around me. Daily posting started in September, and now, more than 120 posts later, I can say that it was a great decision. I feel it has improved my English writing a lot (you be the judges of that !) and it has also helped me develop many ideas about both automated trading and manual trading strategies.

Trading results have also been good this year. All trading systems have behaved like we were expecting from backtesting results. The gods gift ATR continues to be live/back testing consistent as well as the turtle trading system. This new year will be very important for me since it will be the first year I will start as a forex trader. Forex trading became my only source of income near March/June 2009 and now I hope I can keep up with this incredibly odd but satisfying life style for the rest of my life :o).

However, the objective of this post is not to talk about my achievements and hopes for the future (conveniently leaving out all the bad things) but to hear you, my readers, customers, subscribers and fellow traders out. Today, the last day of the year, I want to hear you say ALL the things you think are bad and could be improved about my website, articles, ebook, newsletter, etc. I would like you to tell me what you think is wrong and how you think it could be made any better. I truly want to know any constructive criticism you may have.

Do you think I am a bad writer ? do you think I could improve my content ? What would you like to see included on the blog, ebook, newsletter, etc ? I want to hear you out to start next year with your expectations in mind. There is nothing more important to me than to help my fellow traders out and having a high quality blog content and services is extremely important for this reason. Tell me all the things you would want to have changed, added as well as those things you would like me to remove, improve, etc.

All that said...

!! Have a Happy New Year !!

If you would like to learn more about the content of my website and learn about how you too can be profitable with long term profitable trading systems designed with sound trading tactics please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Why I Like Tech Stocks

Warren Buffett never like tech stocks, he thinks that the valuation of these companies are too difficult to understand! Although Warren Buffett is my idol, but I’m afraid I’ve to disagree with him this time!

As we are entering to the 21st century – the information technology era, I see enormous potential in technology companies. I strongly think that every investor SHOULD and MUST have at least one tech stock in his or her portfolio!

A tech stock could be referring to companies providing the hardware like Dell, Acer, Apple, Sony, Nokia; it could also be software companies like Microsoft, Google, Cisco; or it could be the infrastructure supporting companies like American Tower Corp, Rackspace Hosting and so on.

There are tremendous opportunities in these stocks as technology and computers are part of our lives. Just take a look at the subscription rate of the Malaysian mobile phones, it’s a wopping 106% of our population with about 30million subscribers (slightly more than our 26m population).

Another example, iphone4 has sold more than 4 million since its launch last year. The mobile phone industry is experiencing phenomenal growth, but it is also very competitive.

How to select the best tech stock? Well, just look around what are the favourite mobile phones people are using. As simple as that! Hence, Apple and Google are analyst favourite. But these stocks are too expensive! I agree! So now I’m looking at the following stocks (I’m not recommending, because I’m in no position to recommend stocks, but I can share with you some trading ideas).

Sony (SNE)
Sony is going to launch its S1 and S2 tabs very soon. You may check it out at the following link: http://mobilerival.com/sony-s1-and-s2-tabs-appear-on-video
Appearance wise, I think it can top Apple I pad. Performance wise, its definitely more superior than i-pad because its Android based. For your information, Android has 35% of the smart phone market share as compared to Apple’s IOS 25%. If you think Sony tab is going to be a hit this Autumn, you might want to accumulating the stock now. Currently the stock is trading at PE 30, low debt equity ratio at 0.25, and price to cashflow is 4.45, free cashflow US$6.5billion.

Nokia (NOK)
Many people must be wondering: “Are you kidding me? This stock is losing its market share!” Yes I agree! But do you know that Nokia is going to launch new smart phones with Windows Phone 7? I’m sure for people who are using i-phone, don’t you wish that i-phone is Windows compatible? Precisely, we have been so comfortable using Windows for ages, if your smart phone is Windows compatible, won’t that make you work more efficiently? In my experience, I can’t use my i-pad for heavy duty work, i-pad or iphone for me is only for leisure purpose. So if my smart phone is Windows compatible I’m able to work smarter and more efficiently! FYI, if you intend to buy Nokia, its going to be a longer term perspective. Because Nokia’s new smart phone with Windows Phone 7 will only be launched in 2012. Currently the stock is trading at PE 10, with US$3billion free cashflow.

Happy investing,
Pauline Yong

My Sorry Excuse for a Trading Journal

For those of you who have followed my posts on manual support and resistance trading and who were excited with my manual trading journal I have to say : I am sorry. Certainly I had made an effort to put up the file on the FTP and to trade the system manually so that you could all see what I do to trade these S&R levels but certainly I may have disappointed a few people with the lack of description and the overall lack of discipline in which I addressed this journal at first. Truth be told, I have been terribly busy with my other trading duties and getting all the journal stuff done with all the analysis required would have taken me a lot of time I did not have in my hands.

To top that off, I started with a trade on the GBP/USD which I never even finished analyzing. After that I also did not open other trades on that account which I did trade on live accounts. Why ? Well, sadly the facts of life didnt help and I had to format the computer that carried the mt4 instance in which I had the demo account used for the S&R trading so unluckily for me I lost access to that account and therefore I could not place any other trades. I know that some of you are faithful to my website and in no way have I intended to waste your time. If you have visited my website for a while you should know that I always handle my projects seriously and tend to the needs and profitability of my visitors and customers.

Well I sure made a commitment to write a good manual trading journal and I certainly intend to do so. From now on the demo account of the trading journal will be VPS hosted to avoid any computer problems and I intend to write a small note on the journal every Monday as to why I traded or did not trade that week with a detailed explanation of each trade as I had explained before. Obviously the first trade I made will remain on the journal and I will finish its analysis so that we may start with a finished trade. So I invite you to check the trading journal file every week on the ftp and to check the account statement on the lower part of the left hand sidebar. I of course give you my word that it will be kept updated and that we will certainly learn a lot about S&R trading from it.

Again, for all of those who have been looking at a journal file that was not updated, I am sorry, but from now on the journal will be one of my primary concerns related to the website. However if you would like to learn about automated trading system and what can be done to design profitable one please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

What Doesnt Change Talking About Inherent Characteristics of the Market

Perhaps one of the most important questions you can ask yourself when you start using automated trading systems is : how will I survive in the long term ? This is one of the most common inquiries made by traders new to the field since it seems to be evident that the market is an ever-changing beast that does not allow the mechanical exploitation of any inefficiency for too long. New traders often experience this when they first begin to use automated trading systems. Their systems do very well, then fail or they never do well at all. Besides the fact that many of these systems dont have adequate evaluation- leading with inadequate and unrealistic expectations to long term loses - traders almost never ask themselves : what doesnt change ? It is obvious that if you want to exploit a given characteristic of the market for long term profitability you have to look for characteristics of the market that remain constant as a function of time. But are there any ? On todays post I want to share with you my view about market changes and why - even though the market changes- some characteristics of the market remain constant.

When you start to trade the market seems like an invincible beast that behaves in a very unpredictable manner. I remember that the first few months I traded I used to think "I got it" only to discover that the market would rip my strategy apart the next few months. I used to behave erratically - like most new traders behave- modifying my strategy every week in a desperate attempt to "adapt" to changes in market conditions. Of course, my focus at that moment wasnt the understanding of market inefficiencies but the massive multiplication of my money from 500 USD to a few million in a few years.

It wasnt until much later that I decided to stop my journey and build an understanding. If I ever was going to make money from this seemingly chaotic thing, I would need to find the "science" behind it. It became important for me to understand how the market behaved, what changed, what didnt and what strategies could be built that would most likely work for the next 20-40 years. I needed strategies that could work for long enough to build myself a decent income and NOT strategies that would put my capital into excessive risk or work for a year and then wipe my account.
--
The question becomes : what doesnt change ? After reading a lot of books and watching market behavior for many months, I started to realize that the only thing that doesnt change in the market, is the specie trading it. The market is traded by humans and therefore any aspect of the market imprinted with human behavior should remain fairly constant. As many traders have discovered I started to see that - although individual human behavior is very different - crowd behavior doesnt change very much. I then read a few papers on game theory experiments applied to economics on groups of people across very different cultures and the results started to match up as the groups became bigger. I then realized that - what doesnt change - is simply the way in which crowds react to price action.

How do crowds react to price action ? You see manifestations of this everyday - not only in the form of market trends - but in the form of long term reversal and continuation patterns, support and resistance levels, etc. There are some characteristics of the market that simply do not change, characteristics which have appeared time and time again during the past 30 or 40 years. Evidence of this is present on almost all market instruments from the GBP/USD, to gold, to the DOW index. However you will notice when you do a close analysis that - even though these objects are ever-present within market instruments - their AMPLITUDE and LENGTH changes as time evolves. A trend that may have been only 200 pips long in 2004 can be 1000 pips in 2010 and the reason why this happens is related with the markets trading volume.
-
-
As time evolves and there are more people in the world, the amount of money being moved in the markets becomes larger and therefore the extent of inherent characteristics of the market caused by crowd behavior also become larger. Through different market conditions, there may be larger or smaller movements of money, causing overall changes in the extent of market moves that appear like "large changes in market behavior" but that are no more than the same old characteristics viewed under the looking glass of a different volatility. For this reason, the key - I believe- to the exploitation of long term market inefficiencies seems to be the use of an inherent market characteristics that changes only with market volatility. Trends are a perfect example of this fact and there are many examples of successful trend following systems that achieve their long term profitability through adaptive criteria based on market volatility.

If you would like to learn more about automated trading systems and how you can build your own likely long term profitable systems with sound risk and profit targets 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 !