Currency Secrets

There’s a website that I’ve just recently come across which offers an excellent way for forex traders to automate their strategies.

In a similar style to Mark’s Thinking Stuff Forex trading software where the user is given a NON-programming approach to automating their strategy this web site similarly provides the ability for the user to test a myriad of trading strategies and to then trade those strategies LIVE via your FXCM account.

What made this web site even more compelling was the fact that all this (so far) is offered FREELY!!

Basically here’s how it works:
1. First you start at the SIGNAL end by compiling your entry and exit signals on selected time frames (you’re unfortunately only limited to the signals offered). If you’ve created some exit signals be sure to create a “Contextual Exit” otherwise your exit signals will not be used when you formulate your system.
2. When you’re happy that you’ve got your signals listed, jump over to SYSTEMS and select which currency pair you’d like to test your singals on, which direction (either Long or Short), what the order type should be once your entry signals are satisfied, and at what times you would want your system to run on (i.e. ALL, or just during the London session, or NY session… etc). Lastly, select your exit strategy.
3. Then move over to TESTS and create a new test. Select the strategy you want to test and the date range of your backtest and hit start.
4. Wait a few minutes and you’ll soon have your results sent to your email address.

Easy, huh?

Okay, so what are the downsides of this service?

Well, I think one issue that some people might have is that your systems are public. I suppose this is a negative and a positive, because on the one hand you can look at other people’s systems and tweak them to suit your own trading personality, yet on the other hand YOUR edge may begin to lose its profitability if others start using it.

Another problem is that you’re only limited to 100 signals, systems and tests per account. This may not sound like much, but considering that you can only test one currency in one direction at a time 8 tests can be chewed up quite easily on one system if the user tests both LONG and SHORT on each of the four majors.

Lastly, I’d prefer if I could access the test results better – maybe an export to CSV file or something of that nature. Ideally I’d like to see something whereby we have a table that has at least the following: ENTRY DATE & TIME, ENTRY PRICE, INITIAL STOP LOSS (IF ANY), EXIT DATE & TIME, EXIT PRICE, MAE, MFE, P/L (IN PIPS).

Anyway, HiveTrader is definitely worth a look and I would encourage you to go over and have a little play.

(If you like you can include my username currsec in the referrer ID when you register your account – I don’t make anything by you doing so.)

It seems from what has come across my desk over the last month or two that the easiest way to make money out of the forex market is to sell an ebook or DVD course catered to forex traders (i.e. the forex market).

One such forex course that came across my desk not too long ago stated in their copy that users COULD make US$300 per day trading their method, with only 20-30 minutes day of work.

What shocked me though, as I read through the copy, was that the claim was backed on mere hearsay.

That’s right there was no substantive evidence confirming that a user could make US$300/day – just someone’s opinion!

Yet this course sold for US$2,000 and many bought into the hype.

When I asked how such claims were derived (i.e. from hypothetical backtesting, or from actual trading – whether it be from the person selling the course or from a customer) no such response was given (which didn’t surprise me).

In this internet age things such as this will become more prominent.

Forex trading is a skill. There’s nothing wrong with purchasing ebooks or courses if you believe purchasing the course will enhance your forex trading skills, but try to remain objective whenever you come across such emotive sales copy that has been written by a trained copywriter who is expert in exaggerating claims and enhacing the course without stretching the truth too much.

You may even want to employ tactics that I use before I purchase a product (I’m going to assume that the product being pucrhased here is an informational product, you wouldn’t likely be able to use these tactics if purchasing a signal service, or something more tangible such as forex data):

First thing I do is look for claims in the sales copy of what this product will give me and I try to reverse engineer from the sales copy! What I try to look for are bullet points as these usually contain small snippets of information about what the product will provide. What I do with each bullet point is to try and figure out for myself what each bullet point’s answer is – it will be test of your own knowledge and also your creativity. As an example a sales copy might say:

• Know which direction a currency is likely to trend in the short-term AND medium-term in TEN SECONDS.

Now if you had to think of what this could be what answers would you come up with? Stop, think about it for a minute. Try it for a few seconds and see what you’d come up with.

If I had to have a guess on copy that said something like that I’d probably guess that the course would be either peddling some sort of trending technical indicator (such as moving averages, trend lines… etc) and employing them on different time frames to gauge short and medium-term trend, or perhaps looking at carry trades by assessing which pair has the higher interest rate (for medium-term direction), or perhaps looking at announcements to see whether an economic report will be favorable or not to a currencies short-term direction.

Sometimes brainstorming like this has produced new ideas… all thanks to a product I never bought!

If I come across a bullet point that I cannot answer I write it down and come back to it when I’ve gone through the copy. When I’m done I then go back to all the bullets and determine whether the bullet point will indeed enhance my forex trading. For those bullet points that I believe MAY enhance my forex trading skills I look at the price of the product and make one last final determination on whether the price fits the value (that I deem) for me to increase my forex skills.

Sometimes I’ll even search on the internet to see if I can try and find the answer to it before buying the product, because you never know if the seller may have pinched it from somewhere else!

So, one of your main priorities when purchasing any forex product should be: will it enhance my forex trading skills. If it doesn’t don’t be afraid to say no and move on – spending money on forex material is an EXPENSE and will affect your overall profit and loss at the end of the financial year.

Signal vendors come and go, methods have their season, but if you have purchased products that have enhanced your forex trading skills then you’ve got something that will last you a lifetime.

If you’ve created a system before you would’ve no doubt arrived at a point where you would’ve needed to test certain variable(s) to see which figure(s) would be the most appropriate to use.

As an example, if we were testing a simple moving average crossover system on closing prices we would test which moving average periods would be the best to use – these moving average periods are what I term as variables.

Unfortunately most new forex traders test every number known to mankind and proceed to test all of these numbers over their entire historical data. Once the computer has churned out a database of results the trader looks at which variables produce the best Net Profit and then trades those “best” variables.

And the money just comes rolling in by the bucket loads, doesn’t it?

Hardly.

I wonder what the trader would’ve been using had they ran their optimization last month? Or maybe 3 months ago? Would the variables have been the same?

What then does the importance of NOW have over one month ago? Or three months ago?

The only real difference between now and back in the past is more historical data to test over, but what of the future? What if one week from today the best variable(s) to use are different? How often should one change their system’s variables? Every time? Even during a trade?

As you can see optimizing can be very detrimental to your forex system – just when you thought you were safe in finding the best variable a whole bunch of new ones enter!

So what do we do?

One solution is to conduct a walk-forward optimization (WFO).

A what?

In its simplest form WFO allows users to test their system by allowing the computer to automatically test the variables used and, according to the system’s results over the testing period, use the best variable(s) for a predetermined period before re-testing again.

As an example, if we have a WFO on our moving average crossover system, we would test a whole different bunch of numbers for the moving averages over a period of say 3 years (if we’re using end-of-day data) and we instruct the computer to use the best variables that returned the highest Net Profit over the sample period to use over the out-of-sample period being the next 3 months. In 3 month’s time we then repeat the process again: test the system over the last 3 years, locate the best variable(s) that produced the highest Net Profit, use those variables to trade over the next 3 months.

Okay so now the money should start rolling in, right?

Well, the great thing about WFO is that it tests your system’s foundation – as too many people place far too much emphasis on finding the right “magic” number rather than putting in that effort on the method used.

But WFO does have its problems and if you ever do use WFO on a system you’ll more than likely find your systems results rather dismal.

There are several reasons for this with the most obvious being that the system needs 1 in-sample period where no trades will be conducted. Depending upon how large your in-sample testing period is as compared to your overall historical sample you could find that 20-30% could be lost. As an example, if you have a large in-sample testing period, of say three years, and the entire historical sample of your data is 4 years in length then 75% of your data will not be traded, therefore your results will be reduced by 75% than an otherwise simple optimization over the ENTIRE period would make!

Another not-so-obvious reason is that WFO’s (such as those created in Wealth-Lab Developer) only allow one constraint. This means that if we tell the WFO to use the best variables for our trading period those that produce the highest Net Profit (or whatever constraint we use) during the testing period if there just so happens to be a variable that produces one trade yet luckily enough ends up producing the highest Net Profit the WFO will use those variable(s) for the trading period.

“But who cares?” you might say, “it produced the highest net profit.”

Well would you really want to trade a system that had ONLY 1 trade??

Of course not!

So why should your WFO tests be any different?

And this is where WFO testing falls down – it’s lack of additional constraints.

Unless you can tailor a WFO to contain constraints that you personally use when selecting whether a system is feasible or not I’d be very wary of using it.

Fast Forex Profits is a new ebook written by Jeff Wilde.

Several things that I enjoyed about this book were its structure, its brevity, and the willingness by Jeff to help his clients.

Jeff doesn’t fill the ebook with forex fluff (you know, the stuff that can easily be found freely on the internet and as you’re reading it you’re wondering why you paid $50 for something you didn’t already know!) – it isn’t found in this ebook, Jeff gets straight to his method and explains it.

Another good thing I liked about Jeff’s product was that he illustrated his system by using video. While I would have preferred a LIVE recording of a trade using his method, his historic video captures were ample enough to ground out any problems the user had in understanding his method.

Unfortunately that’s all that can be said about the things *I* enjoyed about the book.

As to the method… well… it isn’t as sound as I had hoped.

After placing Jeff’s method into Wealth-Lab and testing it on popular currencies such as the EUR/USD and the GBP/USD (which he recommends), and on the 1 hour time frame (which he recommended although he did say that his method worked on any time frame) his method just wasn’t profitable.

Of course, this testing is based on dataHQ’s FXCM data, which could have differing data to Jeff’s.

One last thing that I’d like to note is that Jeff may indeed use this method AND make money – it just doesn’t show historically. The reason I say that he can still make money is that he may apply other filters that he may not be aware of. I know when I taught a friend about flag formations he’d point to all the formations that technically were flags (according to my definition), but upon my seeing these formations I *knew* they weren’t – and the only way I could describe it to my friend was that they just didn’t *feel* right.

And this is why if you’re new to the market I highly encourage you to look at as many charts as you can. Familiarise yourself with what happens before a big move and after a big move. By doing this you are subconsciously locking away a library more powerful than a Cray computer, so that when you start trading the right-hand side of the chart you’ll “see” what is likely to occur next.

Anyway, I thank Jeff for allowing him to see his unique MACD trading method, however, I feel as though users may not be happy with their results.

If anyone has purchased Jeff’s product add your experience below.

One of the last activities that need be done when system testing is removing the sample constraints. This will allow you to test your system over the entire period of your data to see whether it is still profitable and that the drawdowns aren’t increased.

Here is the resulting code without the sample space constraints: CLICK HERE

And for the last time let’s run a watchlist scan as well as Simulation to see how the numbers have panned out.

Watchlist Rankings = 254 trades
6% risk per trade…
Starting Capital = $10,000
Ending Capital = $77,136.58
# Trades = 241 (13 neglected or 5.1%)
Strike Rate = 43.15%
Avg Win = $2,499.55
Avg Loss = -$1,407.42
Avg W/L Ratio = 1.78
Drawdown = -53.75%
Recovery Factor = 0.98

Unfortunately, as discussed in our previous post, this system has an increase in drawdown, but now the drawdown is WAY outside what we’d be comfortable with.

So, it’s back to the tweaking board.

And that’s pretty much it.

I will not have the time to go into detail with reversal based systems, but with these types of systems you are mainly look for price extremes and then looking to take advantage of price moving back to normal.

Here are some entry conditions that you may want to test:

• Bollinger bands on price burst
• High volatility
• Bollinger bands on range bound indicators
• Bollinger bands on non-range bound indicators
• Reversal indicators – stochastics, RSI, Williams %R
• Reversal price patterns – engulfing patterns, piercing patterns, dojis

Those should be enough to wet your appetite in your design of reversal based systems.

Well I hope this FREE series has helped you understand the process of system designing from an area that really isn’t discussed in much detail anywhere else. I hope that with the knowledge you have gained that it has helped you design your systems better and quicker and more robust than what you previously were accustomed at doing. Even if this series has helped you to see another side to your system that you weren’t previously aware of then I would have achieved my result.

In ending, I have tested many forex systems and many fall short of my goals and targets for the system I personally prefer to trade, and this is the very reason why I trade discretionary, however this does not mean that I do not stop testing new methods and techniques searching for a profitable mechanical system because in the end the best way to trade is automatically (without thinking). In fact it would even be better if the entire process is done automatically… the only thing needed done on my behalf is withdrawing the profits!!

So, dear friends, I wish you all the best in your testing of new ideas and hope that one day you will find that system that complements you perfectly.

Ryan Sheehy
Currency Secrets.com