Currency Secrets

Keeping with the theme of forex simulators another popular software platform is Forex Tester.

(If you haven’t already done so you may want to read my previous review on Forex Simulator.)

Allow me to start by saying that Forex Tester is a much more refined package than Forex Simulator. In fact, user of MetaTrader will recognise the interface almost immediately.

So in what ways is Forex Tester different besides cosmetically?

Here’s a list of things I like about the Forex Tester platform:

• Stop and limit entry orders (as well as market orders) - also applies to exit orders
• You can program a dll using their API library and employ your own strategies
• You can import your own csv, txt or MetaTrader 4 (hst) forex history files - I like it how they use free forex data from sites such as Forexite and Alpari
• You’re not restricted to just forex data you can test anything - even stocks or indices!
• You can exit positions partially
• You can have multiple charts on multiple time frames
• You can take screen shots of your trades
• You can export your account trading history so that you can analyse your trades in Excel
• They provide a chart on the equity curve of your trades
• You can add comments to each trade so that you can analyse your performance better
• They have support by way of a public forum
• The ability to import data and append it to already existing data
• And they allow you to test their platform for free for 14-days

The enhancements that I’d personally like to see in the Forex Tester software, which are also enhancements I’d like to see in Forex Simulator, would be:

• Including economic announcement alerts
• When placing an order slow the speed of the chart down to, at most, the time event of each tick that is plotted on the chart (i.e. 1 minute)
• Automatically take snapshots of each trade entry and exit
• Randomly select an entry time to trade and preferably hide the X-axis

How much does it cost?

The Forex Tester is sold at a good price program selling for only US$135.

In summary the Forex Tester is a better program than it’s competitor Forex Simulator. I wouldn’t hesitate in recommending this product to anyone who is seeking to “train” their mind and better their forex trading.

Test their platform for free and see whether it fits in with your trading requirements.

For those amongst us who play, or have played, a sport at a professional or even semi-professional level would know to be good at the sport practice is an essential part of performing well.

And even if you’ve never played any sport at all you’ll likely appreciate the fact that those sporting personalities you see on the TV have got to the position their in through arduous training and practice.

So what does all this have to do with trading profitably on the forex market?

Well, just as kicking a football, or dribbling a baskteball, or throwing a dart requires skill, trading well is an activity that similarly requires skill. And as skills can be learned we can hone them to improve our results.

So how can we improve our forex trading skills?

My personal recommendation to anyone who asks is to tell them to open up a demo account so that they can become familiar with the operations of their chosen forex broker’s platform, and then, once they feel comfortable with adequately using the platform, to open up a live account and deposit the smallest amount they can. I don’t think anything beats trading a live account.

However, there are other ways of improving your trading skill. One method that doesn’t require any money at all is to open up a free demo account. Demo trading provides users with the luxury of trading the forex market with a pretend account.

Another way of improving your forex trading skill is to look at historical data and either manually trade the charts, or generate code to automatically buy and sell (this though would require another skill and that being learning how to adequately code!).

The least favourable out of all of the above is manually paper trading historical data. I know when I began trading I printed out a series of charts and pretended I was trading. After doing this for a while I began seeing something that I had never seen before, it truly was amazing, I found out that…

I WAS SUCH A CHEAT!!

If you’ve ever manually paper traded you’ll know what I’m talking about. Oh yes, I never thought I wouldn’t happen to me, but alas it did. And it was only when I was honest with myself that I noticed how futile paper trading really was (not to mention expensive with all the cartridge ink!).

Paper trading was dead.

Or so I thought.

It wasn’t until I came across Forex Simulator that paper trading was revived!

What is the Forex Simulator?

In a nutshell Forex Simulator is a program that allows you to go back in time and manually test your strategy by buying and selling as you would have. It doesn’t require any knowledge of knowing how to code and you are given access to data going back as far as 1999!

The Forex Simulator allows traders to not only simulate trading an account (which can be set to ANY balance; denominated in any of the following currencies: USD, EUR, GBP, JPY, AUD, CAD, NZD; and set to any of the following leverages: 25:1, 50:1, 100:1, 200:1, 400:1), but it can also allow you to take screen shots of the trades you take so that you can FURTHER analyse your trades to see how you can improve.

I like this feature because as many of you know one of the things I continually harp on in here is for forex traders to constantly review their trading performance. And if you don’t keep records, or screen shots of your trades then how are you ever going to be able to improve your forex trading method?

It’s not until you begin looking at a whole series of charts that your brain will begin noticing familiar patterns with the setups you trade and by logging these charts into your brain’s huge library that you’ll be able to begin seeing common patterns. This is where manual testing has a huge plus over programmatic testing.

So how does the Forex Simulator help?

Once you’ve started trading on the simulator you can look at your trade snapshots and add comments as well as add further filters to each entry to see which method works better.

If you like using indicators in your analysis the simulator contains many of the popular indicators, such as the RSI, MACD, Stochastic Oscillator, CCI, moving averages, even Darvas boxes and daily/weekly pivot points! You can also draw fibonacci retracement and time zones as well as basic trend lines. You also have the ability to plot multiple time frames!

And for those of you who are interested in trading economic announcement releases, you can analyse how an economic announcement behaves by subscribing to Forex Simulator’s data downloader and download 10 second data! You can download data from any and all of the following currency pairs:

• AUDJPY
• AUDNZD
• AUDUSD
• CHFJPY
• EURUSD
• EURCHF
• EURGBP
• EURJPY
• EURUSD
• EURCZK
• EURDKK
• EURHUF
• EURNOK
• EURPLN
• EURSEK
• GBPUSD
• GBPCHF
• GBPJPY
• NZDUSD
• USDJPY
• USDCAD
• USDCHF
• USDDKK
• USDHKD
• USDMXN
• USDNOK
• USDSAR
• USDSGD
• USDTHB
• USDZAR

If you are an economic announcement forex trader by paying for the data download service at US$29.95 per month (or US$14.95 per month if you pay for a year’s worth of data) you’ll be able to gain further insight into economic announcements by taking snapshots and analysing how the currencies move. Other time frames that can be downloaded include: 1 min, 5 min, 15 min, 30 min, 1 hour, 2 hours, 4 hours, 8 hours, and 1 day. This is one of Forex Simulator’s huge pluses, unfortunately though there are a lot of negatives.

Okay, so what about the negatives?

Several things that could make Forex Simulator a stellar product would be:

• Include entry stop and limit orders - unfortunately this isn’t included yet and users only have the ability to enter at market, and exit at stop or limit
• Have the ability to trade in lot sizes rather than in quantity
• Cosmetically I’d prefer if the pause button was a button rather than a tick box
• Custom designed entry/exit columns - currently in the snapshot you are only limited to what the author of this program thinks how you would trade
• Have the ability to import other data external to their data download service
• Easier ways to close out open positions - it would be good if users could just click a button on the active chart window that would automatically close (or partially close) the position
• Allow for partial closes - you can kind of do this by going in the opposite direction to your original position
• Allow news alerts - it would be great if the simulator could store announcements (even if the user needs to find and input the data themselves)
• Automatic addition of new data onto already existing data - it would be great if you could append new data to already downloaded data rather than having to create a new lesson for each download
• Free 14-day trial of the product - unfortunately the only way one can sample this product is to buy it! If this product had a free trial period I probably wouldn’t have purchased it after my demo period (due to these negatives). I also don’t know of too many software vendors that don’t provide at least some demo of their software before purchase, but… I’ve found one here!
• Automatically take trade snapshots when a position is closed - currently only trade snapshots are automatically taken when a position is opened
• Make the screen snapshot trades automatically have the chart snap to the size of the window they are framed in - more convenient
• Better filters for the trade analysis snapshot area - I’d like to have a filter where I can see whether I trade better at certain times of the day, rather than the current date/time filter which just screens trades conducted within a date range
• Randomly choose a starting point and hide the X-axis - after one or two runs of a data series your brain will begin to remember what’s going on and then preempt the moves, it would be good if the simulator could randomly choose a lesson and then hide the X-axis… I suppose it could distort the Y-axis figures too so that you’d never know what you’re trading!

How much is it?

Currently the Forex Simulator costs US$69.95 which ticks me off a little because I purchased my copy for US$149.95! So if you’re looking for a good time to buy I’d say now is as good as any! If John Keister (CEO of Forex Interbank) reads this blurb and takes action on improving his product he could easily raise his price back to the level I purchased it at and it would still be good value!

In conclusion the Forex Simulator is a product that is adequate for new budding forex traders, but probably insufficient for professional forex traders. While the product has some good foundations for professional forex traders seeking to test scalping strategies with 10 second data there is still much to improve on with this product and hopefully these will come to fruition in the not too distant future. When this product reaches its potential it will likely suit all traders alike.

Next, I’ll review another popular forex simulator and will detail it’s pros and cons.

Not all flag formations work out the way as planned. This really isn’t saying anything profound.

However, just as each flag formation has a break point where we know it is likely to continue in the direction of the flag pole it EQUALLY has an opposing break point where when its opposing break point is broken we will see the market retrace back to the start of the pole.

But trading the inverse break does take some knack.

First, we need to know where this break point exists. As a general rule most flag break points occur around the 50% mark of the flag pole, however, experienced traders can sometimes pinpoint earlier entry points and one of these earlier entry points is where the second peak/trough occurs during the consolidation/flag period.

In the case of the GBPJPY and CHFJPY formations yesterday I identified the second peak in both charts. I knew that if these prices were broken it would end the flag formation for how it should normally be traded (being in the direction of the pole).

But what would’ve happened if we’d traded the inverse break?

Entry for the inverse break would’ve been at a move above the 218.31 (+ spread) point, with stops being difficult to place but are generally placed at the low of the flag pole (now can you see why it’s important to have the flag stay within the pole’s range, if we have wicks passing through the extreme it’s hard to not only find entry, but also where to place stops on the inverse). Our target would’ve been the other extreme of the pole being 220.34 which hasn’t been reached on the GBPJPY yet.

GBPJPY chart

On the other chart - the CHFJPY - we would have had entry at the break point of 93.75 (+ spread), with stops either at the low of the flag pole or at the low of the wick that pierced the flag pole’s low. Interestingly the CHFJPY hit its target, being the high of the flag pole at 94.68 (just under 90 pips made).

CHFJPY chart

What tell tale signs were there that the CHFJPY was MORE probable to achieve its target than the GBPJPY?

Not surprisingly the CHFJPY is also forming a bearish flag, however, I’ve never traded the CHFJPY and aren’t likely too regardless of how nice the flag looks.

(The EURJPY is forming a bearish flag too but it isn’t as nice - it has already had closing hourly bars beyond the low of the flag pole at 147.83 making entry a little difficult, although having said that this would imply the EUR is weaker against the JPY than the GBP and the CHF.)

So I’ll be a spectator on this one, and will watch to see if the flag formation unfolds.

Several things I like about the CHFJPY in comparison to the GBPJPY discussed previously is that the CHFJPY has only had one snap at the low 93.29.

Okay, what’s the first thing I check after seeing a potential flag? Announcements. And there’s nothing on the announcement front for the CHF or the JPY so if there were to be a break this may take a little longer but also may be more directional (no whipsaws from volatile announcements).

Alright, what’s our risk:reward?

The flag pole distance is… 94.68 - 93.29 = 139 pips

If we place our sell entry stop at the low of the bar that saw it move below 93.29 (being 93.22) where would I place my stops?

Just as with the GBPJPY analysis I’d be inclined to place it above the high (+ spread) of the second peak formation in the flag consolidation period, being 93.75 (+ spread). My risk for this trade would then be…

93.75 - 93.29 = 53 pips

Our risk ratio is 53:139 equating to 1:2.6, and again to improve this ratio I’d probably look to sell a small amount of lots NOW with stops above 93.75 (+ spread) knowing that if the CHFJPY were to get to this level the entire bearish flag formation would be nullified.

But again, I’m not likely to trade this currency pair as I’ve never traded flag formations on it before.

(Interestingly though the high on 31 August @ 95.65 and the low of 5 September @ 93.65 gave us a 50% zone @ 94.65 - the highest the currency got on 7th September last week was 94.68 before it eventually fell its 139 pips forming this week’s flag pole.)

Interestingly on the hourly GBPJPY chart we have a nice flag formation that has something a little different than the GBPUSD flag formation from last week.

There are several things about this flag formation that I’d like to briefly discuss (a screen capture shot of what I’m currently looking at can be seen here).

As with all flag formations we need to check for any announcements that could cause problems. We’ve already had some semi-important JPY announcements, but they haven’t seem to have done much. We do though have some important GBP announcements being released today, namely, PPI and Trade Balance, and both appear to be somewhat mixed - the PPI seems to indicate that the GBP will weaken, whereas the Trade Balance is slightly positive for the GBP.

Hmm… tough call.

But we’ll move on to our analysis of the GBPJPY flag formation.

As with all flag formations it’s important to gauge what is happening with the market’s activity in the consolidation period after the pole. Notice during the GBPJPY’s consolidation period we have lower lows and lower highs - in fact we have the currency falling beneath the low of the flag pole! This shows me that there is inherent weakness of the GBP against the JPY.

But it causes us problems when trading this formation.

Why?

Well, one way to trade a flag is to place a stop order at the low of the flag pole and wait for the currency to break in the direction of the pole. In the case of the GBPJPY we would place a sell stop order at 217.58 (the low of the flag pole). However, the currency has already bobbed through this area several times and failed to continue the break - indicating strength at this support zone.

So what do we do?

There are two things that I do in these cases:
1. I place a sell stop entry order at 5-10 pips below the low of the failed breaks. The lowest low during the failed breaks was 217.36, therefore, I’d be likely to place an order at 217.29, otherwise…
2. I go at market with my sell entry order if the GBPJPY has an hourly close beneath the 217.58 price. As the GBPJPY has failed several times to close beyond this price this would indicate weakness. However, the bar that forms this close beyond the 217.58 low needs to be a breakout type bar - i.e. it needs to close near the low, and have it’s open near the high (it needs to show that she’s ready to go).

I’m more inclined to do the first strategy as the close beyond the low may see my entry waaay below the low, however, I’m concerned about my risk:reward ratio with the sell stop entry order at 217.29.

Let’s calculate the reward for this trade.

The distance of the flag pole is… 220.34 - 217.58 = 276 pips (50% of this would be 138 pips)

So the reward for this trade would be 276 pips.

What would be my risk?

If my entry was at 217.29 where would I place my stop? Some may be inclined to place their stop at the 50% mark of the flag pole - being 218.96 (+ spread), however, I think this is unneccesary for the way this flag has formed. And my reasoning has to do with the way the flag has formed. I think a better risk stop would be the second high formed during the flag consolidation at 218.31 (+ spread). Picturing this in my mind I know if the market falls to 217.29 and then rallies back above 218.31 the flag would CLEARLY have failed.

Our risk:reward ratio would therefore be 102:276 which isn’t bad (anything above 1:2.5 I trade, with 1:3 being the best).

To improve my risk:reward ratio I’ll likely place a trade now to sell a small amount of lots while the currency is consolidating and place stops for this order around the 218.31 (+ spread) area.

This would mean any movement above 218.31 would indicate a failure for this flag formation and all open sell entry orders that haven’t been hit would be cancelled.

Getting back to the announcement conundrum - I’d probably still trade this formation if everything holds, however, I’ll be keeping a close eye when the GBP announcements are released - I’m hoping there will be no whipsawing action.