Author: forextester

Trend Following Trading Strategy

The very same ideas and algorithm for market entry are fully applicable for exiting the market or taking profits. Here we won’t discuss the case of exiting the market with a stop-loss. And the most important case where this method is needed is trend following.

Standard practice of taking profits is placing a takeprofit order with trailing. Trailing order follows the current market value, being behind it for configured number op pips. At the first glance, the idea is excellent, but the problem is again the market volatility. Trailing order only goes in one direction, so if placed too close to the market, it can be triggered by a pullback. This happens a lot, e.g. because many market operators like to do “stop hunting”.

We suggest using our algorithm to make trailing logic more flexible. To avoid excessive or false triggering, we set the stop level far from the current market level. Basically just over the break-even level. And next we are detecting the local extremes by our algorithm. Once they are identified, we move the stop order close to the extreme. If the market continues moving to the same direction, and we are lucky and the order is not triggered by a pullback, we just repeat the procedure until the stop is triggered.

Trend Following Is Benefitial Only With Accurate Signals

Once the stop is triggered, we are waiting for the next significant extreme in the opposite direction and decide whether we want to re-enter the market in the same direction. This can be lucrative if the trend resumes. However, we can never predict that, so at some point the last re-entry will most probably be a loser.

There is also idea to profit from pullbacks. Which is often called “catching a falling knife”. Which means that having fixed our profit, we open a position in the opposite direction.

This is extremely risky trade, but on strong trends it can be very profitable.

For trend following trading strategy, we use our pivot point analyzer as a trend indicator. As the figure below shows, once we have a trend, the output of the detector is mostly the peaks in the same direction (maximums for the uptrend seen on the screenshot). This, along with other simple geometrical measures makes trend identification quite reliable.

Trend Following Forex Trading Strategy
Trend Following Forex Trading Strategy: Trend Confirmation By Pivot Points Analyzer

 

 

 

Trading Strategies Tips – How To Enter Forex Market

Forex trading strategies are using multiple time frames. However, even if you are not a day trader but just want to open a long-term position, you have to enter and exit the market in the real time. Period.

This means we have to deal with daily volatility, which can sometimes reach 2% and even more. This is a significant number for leveraged trading. Even if the trading strategies are to stay in the position for long time in anticipation of bigger gains. Good entry timing not only gives you more profit, but also lets you place better stops.

Indicators are of no help in real-time here because they are lagging.  E.g. popular oscillator indicators like RSI can show extreme values for days. Market may really be topping or bottoming, but you won’t be able to find the best moment to enter the market.

Markets don’t move in a straight line.  Even powerful trends always have pullbacks. The only reliable observation we can make is that we always see zigzags. If we see a local top, this will always be followed by a turn and then a local bottom.

In addition, markets have a fractal nature. It means that the pattern we see on a short time frame will become a smaller part of the same picture on the longer time frame.

We used this observation in developing price pattern market entry algorithm.  We use it as a building block of all our trading strategies.

Practical Implementation For Trading Strategies

We implemented the algorithm as a part of our Smart Forex Strategy Tester software.

Here is couple of examples how the algorithm works. Both refer to the same sample of market data covering only couple of hours. The detected pivot points are shown as black dots on the graph.

Market Signals Generation For Forex Day Trading Strategies
Example #1. Price action algorithm based market signals for Forex day trading strategies

You can see that the volatility for these 2 hours is over 1%. The graph is an average of bid and ask, slightly filtered for easier viewing.  Note that the pivot points are calculated in real time. I.e. each point is only evaluated based on the price data to the left of it.

In the example #1, the algorithm sensitivity is set higher (note short horizontal sliders) and it captures more pivot points.  As you can see, during  these 2 hours the algorithm generated almost 30 signals. Which are definitely can be used for profitable day trading strategies.

Market Signals For Forex Trading Strategies
Example #2. Price action algorithm adjusted for long-term Forex trading strategies

In the example #2, we lowered the sensitivity of the algorithm (see longer values of horizontal sliders) and it only detected 3 pivot points within same 2 hours.  You can see that all 3 are profitable market entries. Moreover, the algorithm managed to capture both the market top and bottom for given interval.

If you are interested, you can download Smart Forex Strategy Tester and try for yourself.

 

 

Forex Trading Simulation: A Nice Idea To Avoid

Forex Trading is often learned by using trading simulation. The easiest way to do that is using demo accounts. There is a also special simulation software. Compared to demo account, it is more advanced. It can accelerate of slow down the market,  or easily start from scratch. And computer simulation is essentially the same as “paper trading” that was used before the PC became affordable to masses.

At the first glance, the idea is clever. Simulators are used virtually everywhere, even in pilots’ training. Pilots are responsible for peoples’ lives – so what can be wrong with the idea of learning forex trading by simulators?

There are principal differences, though. Flight simulators are useful, because airplanes have a lot of different controls that a pilot needs to learn. Doing that in simulator is a way to avoid the risks of their misuse.

Now, let’s take Forex. On the contrary, Forex trading is technically very simple. You either buy or sell. Of course, there are multiple positions handling, stop losses, risk management, etc.  But these all are technicalities. Learning them is important but on itself does not train you in the main component of Forex trading.

Forex Trading Is About Psychology

The problem with learning Forex trading in simulators is that it is too comfortable. But real Forex trading, when there are your own money at stake, is very stressful. And the simulator doesn’t principally teach you how to manage your stress. You might think that you learn some skills that can be then reused in real trading. But this might only work for some, but definitely not for all.

Our Smart Forex Strategy Tester framework can easily be modified to support simulation mode. We are planning to do that, but we don’t see it as a first priority. For majority of us simulators will only do bad service.

Renowned traders don’t recommend paper trading, either. E.g. Raghee Horner (“ForeX Trading for Maximum Profit: The Best Kept Secret Off Wall Street”) and Courtney D. Smith (“How to make a living trading foreign exchange: a guaranteed income for life” our review).

The best way to learn Forex trading is to trade for real. Micro lots are excellent way to start.

Forex Swing Trading And Automation

What is Forex swing trading? By definition, swing trading is targeting profits within one to several days. In other words, using timeframe longer than in day trading, but way shorter than in position trading.  In the day trading, the positions are only kept open during trading session. But as Forex markets are open round the clock, technically, Forex swing trading does not differ from day trading.

Of course, is the trading is done manually, there is an obvious difference. Efficient swing trading requires constant monitoring of open positions, as profit potential is usually smaller there compared to position trading. There a position can be open for weeks or even more so timing of profit taking is less important, and can be done with e.g. day accuracy.

In manual swing trading, we have to leave positions unattended. Which means we have to rely on take profit order trailing of the trading terminal,  which is usually not as efficient as when done by trader itself. The same of course is valid for entering the market. When a trader is resting, the options of entering the markets are limited.

Given our trading strategy is unambiguosly formalized, trading automation easily solves both problems. Here, the trailing of take profit orders can be efficiently done by an algorithm, implementing whatever sophisticated trailing logic a trader might have. Only working faster and reacting immediately. Likewise, the algorithm won’t miss any of the potential market entry opportunities.

Naturally, more realistic semi-automation mode is more reliable as well. The trader can manually make corrections into algorithm activity according to market situation. Basically, this is important in case a of an unexpected technical problem or a software issue. Also we should always be wary of some “black swan” events which can cause unpredictable market reaction. A good example of that can be false tweet about the White House bombing is 2013.

Automated Forex Swing Trading Software

We are developing our automated Forex trading software to be suited for trading swings.   It is designed to run on its own up to 5/24. Keeping positions open over the weekend makes little sense. It can be risky. Markets opening with gap can result in that stops are not even triggered.

During trading week essentially unexpected events are dangerous for the software performance. News releases can be handled by closing orders according to their schedule or not opening new ones in close vicinity. The software is designed so that any trading strategy can be run both in our testbed or plugged to the MetaTrader terminal with a configuration change.

We also develop our Forex strategy testing software suite so that it is able to performs automated testing of swing trading algorithms. Our tests are mainly designed as 5/24.

We also develop automated trading algorithms which use price action approach. The strategies use market top or bottom detection price action.  For the profit taking, we tried several ideas, but haven’t yet decided on the best one.

Apart from the “black swan” events, the only problem with the price action Forex swing trading is whe a powerful trend suddenly begins. See an example. To better handle this situation, we are developing trend price action algorithm.

TO BE CONTINUED…

Generating Forex Signals By Pivot Points Analyzer

Forex signals are notifications of the moments when one should enter or exit the markets. How to generate them?

Note that the accurate decision to enter or exit has a value of its own. It can be completely independent on the used trading strategy.

Even if the strategy is a long-term, and is targeting a profit of hundreds of pips, it is always beneficial to make additional pips with successful market timing.

And of course, timing is absolutely essential for intraday trading, when the daily trading ranges over 100 pips are rare.

We have developed an algorithm that makes it possible to detect market pivot points in real-time.

Forex Signals At Price Extremes

The idea is based on the observation that it usually takes time for important peaks or pivot points to form. In other words, even if the price has already reached its extreme, it most often oscillates around that value for some time.

So it might take quite a while before the prices start eventually moving faster and farther in the opposite direction. Then, at some point, this process will repeat itself.

Of course,  if the market is trending, the extremes against the direction of the trend will be formed faster. But the idea is still valid.

Our algorithm uses this knowledge and runs the price curve through several  filters with decreasing time constant.

The filter with the biggest time constant (slowest) will detect the peak price value with some delay. At this moment, we check if the current price value still doesn’t exceed the signalled extreme value. If not, we start looking at the output of the faster filter that signals for the next extreme in the opposite direction. This is the moment to enter the market.

On the below screenshot, you can see how well the tool works. Detected pivot points are marked with short horizontal lines.

Real-time Forex Signals for intraday trading
Forex Signals By Pivot Points Analyzer

Note that these pivot points are detected in real time. Meaning that each point marked on the screenshot was detected only based on the price information that was available to the left of it. This makes the algorithm very valuable.

If you want to try yourself how this algorithm works, you can try our Pivot Point Analyzer that is integrated in our Smart Forex Tester software.

An Example From The Dow-Jones

Recently we found an interesting illustration to our method from the stock market.

On the below picture (Dow-Jones), apparently a lot of trading signals were generated at the point shown by arrows. Note the daily trading volume (10B) exceeded its average value (below 0.1B) more than 100 times!

If you look closer, you can see that this point matches pretty well the algorithm we discussed.

Trading Signals Generated After The Pivot Point
Trading Signals After The Pivot Point

If We Need To Use “Plan B”

We need to understand, that, of course, there is no silver bullet. There is no way to tell beforehand, for how long the detected pivot point will stay a pivot point. However, what we do know is that the price line will have peaks and bottoms following in succession.

Suppose that we misjudged the “ultimate” pivot point. And the point where we entered the market turned out to be only the local extreme. So after our entry, markets will make a peak in the opposite direction and turn back.

Still, entering markets close to the extreme gives us clear advantage in this case, as well. We will have more time to react to the direction change. And also more pips to spare to minimize our losses.

Forex Tester Tips

Are you a Forex tester? If you trade Forex market or want to – you have to be one! Trading with an untested strategy is a way to draining your account fast.

What Forex testing means in practice? How exactly do you do it? Let’s assume you have all the software tools and market data you want. What next?

Obvious answer is – with the help of testing software, run your strategy against the market data and see whether it wins or loses.  This is correct, but is only the beginning.

Here we will try to give some tips on what exactly should be done and how. We hope that a forex tester will find them useful. Your feedback is welcome!

Forex Tester Challenges

It is known that to properly define the problem means to half solve it. So, what are the problems that Forex testing must address?

Market data is huge. This problem is the most obvious one. Many years of quotes are available for many currency pairs. Even if you only decide to test on main pairs, still you can literally spend days and days to run your strategy against all data.

Too many moving parts. Also quite an obvious problem, at least for those who tried.

Regardless of how long you spend on running tests, this time will obviously be well spent if eventually you can confirm your strategy is consistently winning. But what if it is not?

Based on tests run, you might get many ideas how to improve your strategy, implement the changes and repeat the tests. But as you know (or will know),  this is a never-ending process. We have too many combinations. Couple them with vastness of market data, and your testing might already take weeks to complete.

Exit criteria and quality evaluation. We bet this is least obvious, and not every Forex tester even thinks in this direction. How much testing is enough? In other words, how can we decide that we can stop testing our strategy and start trading it? And after all the testing that has been done, what is the minimum quality level we can guarantee?

How To Apply Standard Testing Practices To Forex Testing

Testing of man-made products is a well-studied area. Properly done, testing is stricly formalized and meticulously planned activity. Any test project is limited in time, so test planning revolves around the questions like:

  • what exactly to test,
  • to what level of quality,
  • with what resources, etc.

Answering which makes it possible to get predictable level of product quality within desired timeframe and budget.

Does the same approach work for a forex tester? Yes. in the second part we will discuss how.

Forex Tester Tips (part 2)

The Most Important for Forex Strategy Testing is ...

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Forex Strategies Selection

Forex strategies selection problem can literally become a million dollar question. How to find the best trading strategy? Or at least the one that works. This would already be enough.

We don’t have to get a strategy that will be profitable all of the time. That would be ideal, but is is impossible. However, we can analyze and identify the areas where certain strategy works and collect statistics.

But how should we do strategies selection in practice? Obviously, “trial and error” approach will lead us nowhere. The number of options is infinite. To get results in reasonable time, we need a method.

Natural Forex Strategies Selection

Can we apply the evolution principles to Forex strategies selection?

We can take a number of strategies, and a set of the test scenarios. We run all the scenarios for all strategies and compare the results. After that, we select only the best strategies and only the most difficult test cases.

Then, we analyze the test results and make enhancememnts to the strategies that performed the best. In addition, new market data is analyzed and new test scenarios are added to the existing set. Then the test cycle repeats.

This model is difficult to apply without automated trading environment. For that, we need to use adequate method of presenting forex strattegy.  Each trading strategy should be a unique combination of trading logic and parameters.

Next, the strategy description formalism should provide a mechanism to make changes in the strategies as easy as only possible, without need to do coding. We use the Forex strategy description based on state machines – this is one example of how it is possible.

And the most important part in the evolution model is to be able to merge strategies. Meaning that we can easily run multiple strategies as one. Our state machine based strategy description  is suited well for strategy merging, as well.

Forex strategies selection in the above model is impossible without testing tools. We use our proprietory software – Forex strategy tester, which is designed to run multiple strategies against the multitude of test scenarios.

TO BE CONTINUED…

 

 

Intraday Forex Trading Strategies

A very simple question – how to choose Intraday Forex trading strategies?

It is evident, that of multitude of intraday trading strategies, there always should be the one that suites current markets the best. But how do we define the current state of the market to pick this best strategy?

E.g. a successful trader and writer Raghee Horner, when asked of what is going on now in market X, always replies “on which timeframe?”. In her best-selling book (Forex on Five Hours a Week: How to Make Money Trading on Your Own Time), she uses her own market phase indicator – The Wave – to define what strategy to use. Swing or breakout etc. See our review here.

However, this approach is mostly applicable to longer timeframes – the Wave uses 39 periods.

For day trading, we don’t have enough time to wait. By the time the most intensive trading time is over we can only have 1 bar on H4 graph or 5 bars in H1 – to say nothing of the Wave…

So we need other methods to make our decisions.

Choosing Intraday Forex Trading Strategies Concurrently

Our idea is simple. If we don’t know what the current market state is (is this ever possible?) the logical conclusion is that we don’t know what strategy is the best. All should be equal.

So it follows that it makes sense to run all of them – at the same time!

While flawlessly logical, the end result sound silly, dosn’t it?

However, for automated intraday trading this makes full sense.

Due to fast order fill strategies don’t exclude each other.

TO BE CONTINUED

Simple Forex Trading Strategies

What are the signs of a winning Forex strategies? Can simple forex trading strategies be profitable?

Some successful traders agree that the strategy must be simple. E.g. Raghee Horner (“ForeX Trading for Maximum Profit: The Best Kept Secret Off Wall Street”) and Courtney D. Smith (“How to make a living trading foreign exchange: a guaranteed income for life” our review).

If we accept simple Forex trading strategies, the logical consequence is that such strategies must have limited area of applicability. E.g. scalping strategy will most probably fail in trending markets. These limitations, however, aren’t a problem at all: all what we would need to know are just the limits within which the strategy works. With that, we can wait on the sidelines until we see them occur, and then enter the market and use the potential.


Strategy applicability is essentially about stable nature of the markets. This assumption can be treated as “insider information”. So, if we have enough evidence to conclude that a market is e.g. trending up, we can use loose stops and open a long position on every dip.

Furthermore, under this assumption a trading strategy can be optimized by design and testing. E.g. for trends, testing should cover trading algorithm capability of following trends of different shapes and strength without losing too much on pullbacks. In this case, the classic testing approach can be efficiently used.

Trading strategy simplicity also helps in the implementation, especially for automated trading. Trading software design is very important efficiency factor, especially for trading strategy study phase. Research assumes frequent changes, and doing them in the code often obscures the essential factors by programming routine and also increases chances of human error for that (unless you are a hard-core coder, of course). So only when the strategy is “cast in stone” after successful testing, does it make sense to program it. For the study phase, better approach is to design the software so that strategy description would be as clear as possible.

Convenient way to do that is using XML for trading strategy description. In this way, strategies can be constructed of small interchangeable “blocks”. This also makes it easier to make changes in the strategies and compare different strategies.
This approach is also much more efficient for simple Forex trading strategies.