December is Here

Today is a very special day, December 01. The end of the year begins, Christmas comes and the forex market starts to change into a very "untradable" and difficult beast. What is so special about December and why do most people avoid this month for trading ? Why is it that trading systems generally accumulate more loses in December ? Today I wanted to write a post dedicated to this wonderful month that on top of bringing us happiness and joy (my anniversary is in December :)), brings us a lot of confusion and problems in trading. Through this post I will try to explain the general characteristics of December and why we should avoid trading it or not.

What is so special about December in the first place ? (Besides snowmen, Santa and Saturnalia) Well, December is the last month of the year and as such many traders and institutions, specially large ones, need to close their positions in order to close their books and pay their taxes. This is not only true in the US but in many other countries around the world in which tax paying, balances, profit targets, and other important business needs to be carried out at the end of the year. What does this mean for us the poor mortals ?

December and January usually mean that the big boys will be taking their profits and closing their year long positions. Hedge fund managers, banking institutions, investment funds will start to close their profitable positions, not only in currency pairs but in other assets which may generate exchanges that may significantly affect currency exchange rates. Last year for example, there was massive profit taking in Dec/Jan from the very fast downtrend we saw because of the economic crisis on the EUR/USD. Such a retracement, which moved the market nearly 1000 pips in two weeks proved to be bad for many traders which tried to sell the retracement thinking that a down trend was still in place.

December also means low liquidity. This is mainly for two reasons. First, no one wants to take positions at the end of the year in the big institutions and central banks and second of all, everyone is on holiday and most people who trade will not be trading the markets. What does low liquidity mean ? Deviations from technical analysis. Probably export/import exchanges and profit taking take much more importance in December and non speculative moves which are inherent to the market may start to play an important role. The tendencies you have seen for most of the year can disappear and your technical analysis can betray you. This is the reason why many people avoid December trading. Because the beast becomes unpredictable (even more so !) and many times the usual trading tactics stop working.

Does this mean you should not trade in December ? well, certainly you can trade in December. For example, there are some automated trading systems that in fact accumulate more profits in December because of the directional counter trends and there are some people who know how the market behaves during this month and can take benefit from it. My advice is simple, be careful with December and January. The first time you face these months dont trade them, observe them and see how they deviate from what you would have considered normal. Would you have been able to profit ? Why do you think the movements happened ?

My invitation, analyze this December and we will write some conclusions in early January. I for one will trade this December with my S&R system, well see if I am able to get good results out of this month. Of course, all automated trading system will trade it, since they are all 10 year long profitable there is no fear for the month of Santa :). If you would like to learn more about long term profitable automated trading systems 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 !

New Improved Forex Killer Strategy long term trading

Well, as many of you may know, I have developed a new forex killer strategy over the last three weeks with good results. This strategy is much simpler than the older one I had published and focuses mainly on the four major currencies. So we will only be trading EUR/USD, USD/JPY, GBP/USD and USD/CHF. I also recommend forex killer users to take a look at automated trading systems, as they may prove to be more profitable and more hassle free than forex killer.

The strategy uses clever money management to improve our chances of taking profit over trading positions. For this strategy, we will use our forex killer software and the daily data for the major currencies saved from metatrader.

- For this strategy you will trade at the end of each trading day.

- Save the daily data for each one of the major currencies in metatrader 4

- Load the data on forex killer

- Calculate the results for all the currencies

- We want a short and long term signal probability higher than 75%. Yes, Long AND Short term graphs MUST have a probability higher than 75% or we do not enter the trade.

- After you get a positive signal go to your trading platform and open two trades in the direction of your signal. Each trade is opened so that a 200 pip loss is equivalent to 1% of your equity.

- Both trades will have a one hundred pip stoploss, one of the trades will have a one hundred pip take profit while the other will have a 100 pip trailing stop and a 300 pip take profit. This clever management means that after the first take profit hits, the other trade is risk free.

- After the trade is opened, wait until both orders are closed through either one of the market orders.

I have tried this strategy for the past 3 weeks on a demo account with very good results. I have had about 6 positive signals which are equivalent to 12 trades. From all these trades, 9 were profitable and 3 are still opened.

I hope you enjoy this new and easier to use, long term trading strategy for the forex killer software. I also encourage you to get my ebook on automated trading systems if you are new to automated trading systems and would like to find a profitable one !

Anchoring Bias

In Professor Kahneman and Tversky’s 1974 paper, they describe anchoring bias as this:

“In many situations, people make estimates by starting from an initial value that is adjusted to yield the final answer. The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of a partial computation. In either case, adjustments are typically insufficient. That is, different starting points yield different estimates, which are biased toward the initial values. We call this phenomenon anchoring.”

An experiment was done to prove this theory. There were two groups of students given the following arithmetical expressions respectively and were to give an estimate within 5 seconds.

Group A: 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8

Group B: 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1

Group A made a median estimate of 512, while group B made a median estimate of 2,250. The motivating hypothesis was that students would try to multiply the first few factors of the product, then adjust upward. In both cases the adjustments were insufficient, relative to the true value of 40,320; but the group A’s guesses were much more insufficient because they started from a lower anchor.

Similarly, investors always look at the historical price of a stock as the reference point and act on it. Proton used to be the darling of the stock market with prices around RM8 - RM10 in the early 2000. However, due to Asean Free Trade Agreement (AFTA) and other competition, Proton’s market share has plunged from 60% to 24% since 2000. When the stock price declined to RM6 in January 2006 many investors thought it was a bargain (as they reference from the high of RM10) and started to accumulate the stocks. Little did these investors know that Proton later fell to below RM2 two years later.

In another example, investors like to anchor on the 52-week high and 52-week low of stocks and make reference from these two numbers. They tend to think that a stock has the potential to get back to its 52 week high which often leads them buying into over-valued stocks.

Investors like to predict stock prices based on their past performance. However, if you are the proponent of efficient market hypothesis where it says stock price follows “Random Walk” theory, there is no way you can predict the future price. Just like the fair coin game, the previous flips have no relation to the subsequent future flips.


Happy investing,

Pauline Yong

The Three Commandments of the Successful Forex System Trader

Very often people will ask me what is needed to achieve some success in automated trading. I get asked if it is actually possible to live "making money while you sleep" and to exploit market inefficiencies as the market changes. Often people I explain my line of work to are extremely skeptical. For example a person I met a few weeks ago at my sisters wedding asked how this was possible and that if this was possible, why isnt everyone making a profit from the forex market. Oh well, it certainly is useful when you talk to people who have absolutely nothing to do with trading - as a matter of fact - I had not found myself in such a difficult position to explain something for quite a bit of time. In the end, I told her that - in analogy with getting to heaven and the ten commandments - people do not succeed with the use of automated trading systems because they do not follow some very simple principles. I explained to her that there are simple rules that need to be followed when you trade these systems and that deviations - even if only small - can end up making a person fail to achieve the ultimate goal of long term profitability in automated trading.

On todays post I want to talk to you about these "three commandments" I explained to her and why each one of these simple rules is absolutely vital to get success in trading, specifically with mechanical trading systems. Of course, some of you may disagree and some of you may agree but in the end these are the rules I have found to work for me and what I believe "raises the bar" so that only a few traders are able to get to this point. Evidently I have not been enjoying this position for decades and therefore I am still tempted and strive to stay with my "three commandments of the mechanical system trader", hopefully following these three seemingly simple - yet very complex rules - will keep me in my way towards a few decades of forex automated trading profitability :o). Do you want to know more about these rules and whether or not they apply to your current situation ? Keep reading to find out !

1. You shall understand what you are doing. Perhaps this eliminates most of the people out there who are currently wanting to become profitable in the long term using these systems. Understanding is a vital part of success and achieving a profitable position in automated trading will simply not be possible - from what I have seen and experienced - if you do not perfectly understand everything you are doing, the systems you are using and how automated trading works. Understanding needs to be deep and should NOT be merely superficial. Understanding should cover deep knowledge about your systems logic, the inefficiency exploited, etc. If you have not gone through at least a few years worth of trades of the system you are trading in a trade by trade basis doing a trade by trade in-depth analysis then you still need to go a long way before you can consider that you truly know what you are trading. In the end, any effort you wont do is an effort somebody else will make and that someone will take your place as a profitable mechanical trader. So if you want to avoid efforts, this is not the place to be.

2. You shall know what to expect. After knowing what you are doing comes to know what you should expect. Traders who are successful using automated trading systems know exactly what to expect from their systems, they know all the characteristics of the systems they trade and precisely what their predicted draw down and profit periods are like. People who understand their automated trading systems and analyze them extensively know the accuracy of their simulations, the length of profit and draw down periods and all other characteristics of systems. Again - as with understanding - we are not talking about a superficial understanding of what to expect. Anything that happens with your system that you do not take into account within your plan will make you unsuccessful so you have to be prepared for every possible case. What if your system reaches a draw down deeper than the simulations ? what if the system has double the number of predicted consecutive loses ? You should know what the meaning of these events are related to your systems performance.

3. You shall evaluate your systems. The last commandment of the successful mechanical trader is to evaluate. You cannot be successful if you trade a system with blind faith - because every system can fail - and continuously evaluating the performance of your trading system and the current market conditions is of incredible importance to achieve success. Knowing when a worst-case scenario will be reached, if the current draw down cycle is too long, if the system is now too risky to be traded, etc is one of the most important aspects of successful mechanical trading.

For people who read this blog who are also Asirikuy members the three above mentioned commandments may have sounded very familiar as I refer to them continuously within the Asirikuy website videos as the Asirikuy mantra : understand, expect and evaluate. From my experience these three simple things are the only actual skills you need to be a successful system trader. You simply need to understand, know what to expect and evaluate performance.

Of course, easier said than done :o) Maybe the first point seems to be the hardest - and it probably is- but the second and third are NOT any easier. Knowing what to expect from a system requires extensive analysis and it requires you to have a very clear understanding about the role and limitations of simulations and the whole way in which the system changes as market conditions start to develop, not to mention a deep understanding of system cycles, their extent and composition. Evaluating is also not very easy to do since it requires the confidence to run your system on live accounts and to weather the profit and draw down cycles trusting your expectancy analysis to be right.

My advice for you is therefore extremely simple. If you want to be successful in automated trading, follow the above three rules and I can guarantee that you will - at least- get to the point where I am today :o). If you would like to learn more about my journey in automated trading and how you too can build and trade your own automated trading 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 !

Forex Expert Advisors FxReports an Unbiased Review

Several weeks ago a website visitor asked me to review an automated trading system company and the products they offer on their website. The website looked interesting to this visitor since they offer forward testing account results updated through myfxbook with confirmed investor access and trading priviliges. Of course, I am interested on reviewing any new systems out there that may appear to be profitable so today I am going to fulfill his request and review the FxReports website and their Arthur, Excalibur, Gneuviere, Lancelot and Merlin automated trading systems. My review will focus on evaluating the claims made by the author against the evidence provided on his website. In the end I will give my opinion on the experts and if I consider them worth buying and testing or not.

First of all, the author of the FxReports website does make a decent web site. The web page does not have any hype and the trading systems are portrayed without any claims made whatsoever. It is my believe that the author wants us to infere the actual profitability of the expert advisors from the actual forward testing results shown. I also like his scam section where he has a list of several different expert advisors which are copy-cats of different freely available trading systems. Definitely by showing that many commercial experts are actually rip offs of free ones he is showing people that definitely they are just buying dreams. Tthe free experts are always available out there, just without the sales pages.

What about the websites forward testing results ? Well, this is were things start to get a little bit bad for the trading systems offered by FxReport. My problem with his tests are quiet a few. All of his trading systems are run on demo, NOT on live accounts and this poses a HUGE problem because of the strategies used by the trading systems. All of these experts take profits in very small amounts, most on even less than 2 or 3 times the spread. This is the classical problem of demo/live testing consistency found when one tries to take small profits from the forex market. When you move that to a live account you will see that reality changes a lot because small profits are affected deeply by requotes, spread widening, etc, which are what mainly differentiates a live from a demo account.

I have seen many times this type of experts which "scalp" different pairs turn to dust when they move to a live account. There is also the problem that when taking such small profits GREAT differences between brokers arise and broker dependency becomes a huge issue. The author obviously does not include backtesting results because at such profit levels the results would be totally meaningless. Probably the EA on backtesting would make trillions due to one minute interpolation errors. There is then no way to accurately measure long term profitability which means that we have no idea if next month the EA will stop working on the market, something which most of the time happens with systems that rely on very low take profit values.

The lack of data to assess long term profitability, the lack of accuracy of forward testing results on this type of systems and the absence of live accounts (which anyway would have to be at least 2 years or older to give a true picture of the system, due to the absence of reliable backtesting) make all the expert advisors on the FxReports website NOT worth buying or testing. I would advice the author of this EA to take the profit of selling 2 of these experts, put up 3 micro live accounts on IBFX, 3 micro live accounts on Alpari US and run a live test so that people can really see the system run on the real market. If this evidence is provided I will be glad to rewrite my review to include this new trading evidence.

If you would like to learn more about long term profitable systems, how to design them, program them and trade them profitably 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 !

The Missing Piece of the Turtle Trading System Trading Different Instruments

As I said in yesterdays post, there is still a lot that needs to be done in order to have a truly complete implementation of the real turtle trading system. Up until now, I have managed to program Systems No.1 and No.2 accurately which make the main logic of the turtle trading system complete. The system can now be traded to its fullest on a single currency pair with any system you choose to trade. Remember that the creator of the Turtle Trading System stated that you could use any of the two systems, whichever you liked the most.

However there is still a big chunk of the puzzle missing, this chunk is portfolio management. Up until now I had decided not to make a lot of effort to program this since we cannot backtest trading of several currency pairs at the same time, however it seems logical to program this now that the initial parts of the system are ready.

So what is so important about portfolio management ? Well, the turtle traders had some very special rules about the way in which they were supposed to trade separate instruments in order to reduce the risk in which they traded their accounts. For example, they were only allowed to enter a number of positions on very correlated instruments while they could enter more positions if the instruments were loosely correlated. This is a sound strategy since correlated instruments will usually move together and therefore placing too many positions on closely correlated instruments would be like putting a lot of positions with the same "directional bias". However, placing more positions on breakouts of instruments that are loosely correlated may give an opportunity to diversify risk.

This adds another programming challenge since multiple currencies (in the case of the forex market) need to be monitored at the same time and currently placed trades need to be taken into account in order to allow or veto the opening of new position within the trading account. However by analyzing backtesting results I have seen that several losing positions may have been prevented in the GBP/USD, EUR/USD and USD/JPY simulations if they had been prevented from entering trades by a correlation criteria. This in fact may mean that risk can be reduced greatly by the implementation of the portfolio management strategies used by the turtles.

To implement all this portfolio management I will merge both experts for the No.1 and No.2 systems and create a third expert that is able to trade whichever system the person wants to trade plus calculate and decide whether or not to open positions based on the amount of currently opened positions and the degree of correlation amongst the instruments traded. After this it will be a matter of years before we know if the strategy does reduce risk and increases the profitability of the system but I am certainly going to include this as a part of my "retirement portfolio" as I have already done with the Turtle Trading System No.2 trading the EUR/USD. If you would like to learn more about profitable trading strategies and how you too can trade and develop your own long term profitable automated trading systems 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 !

To Optimize or not to Optimize The winalot and EAzeGor expert advisors

If you have been reading my blog recently you may have read my reviews on the winalot and EAzeGor expert advisors made by the easy-ea company. You may have noticed that both of these reviews had a quiet favorable tone to them because I think both of this experts fulfill a good chunk of my criteria for a long term profitable expert advisor. However, I did say in both cases that backtesting from 1999 was missing and that such testing would be necessary to assess long term profitability.

After requesting backtesting results from 1999 the company answered that they did not have such tests because experts were optimized on an 18 month basis and were then traded in optimized settings. This is obvioulsy the reason why such limited backtesting is available on their website, because of course, they cannot show further backtests if settings are bound to change on the middle of the experts testing.

Now, the big question arises. Is this good or is this bad ? To optimize or not to optimize ? Well, I of course always favor expert advisors that can self adapt to a certain extent like the gods gift ATR because even though there is an inherent lag in the adaptation, the lag is less than 30 days long and the expert just worries about aligning itself against market conditions. Optimization using 18 months of data could also be a strategy you could use, however, it has to be said that if market conditions for the next 6 months are very different from the past 18 months, then the system is likely to fall into draw down but then, it might realign once optimization is done again. The live testing done on both experts confirms at the moment that this optimization strategy works albeit on the changes happening during the past year.

Given this fact, the fact that considerable live testing exists and the fact that the expert advisors trading style fits many characteristics I demand from profitable trading systems I will say that this experts are worth testing. From next Sunday a demo account will be opened and the testing of the winalot EA will start with testing results being commented each week on my weekly newsletter. Susbcribers should also expect the next newsletter to include demo account investor access information.

If you would like to learn more about automated trading systems and what the necessary characteristics for a profitable trading systems are (and why most commercial experts out there just fail bluntly) 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 this article !