Category: Automated Forex Trading

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 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…

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…

 

 

Forex Trading Without Indicators

Many Forex trading strategies rely on indicators. However, indicators are not ideal solution and there are different approaches, e.g. price action trading.

The authours of a popular book “Naked Forex: High-Probability Techniques for Trading Without Indicators” suggest that indicators are not useful, but instead prevent a trader form entering or exiting the market in time.

Of similar opinion is a famous trader Raghee Horner. In her book, “ForeX Trading for Maximum Profit: The Best Kept Secret Off Wall Street”, she states that she doen’t use indicators for entering and exiting the market, but only as a means of confirmation of the market direction.

Indeed, doing Forex trading without indicators sounds very logical. There is an inherent problem in all indicators – they are lagging the market. I.e. the more informative the indicator is, the later this information is available.

This resembles the well-known “uncertainty principle”. The combination of profit and certainty appears to be a constant. The more certain you want to be in the market move, the longer you have to wait, Consequently, the less profit is left to be taken when you enter the market.

That said, we need to point out that everything is, of course, relative. Indicators used in day trading are less lagging. But, on the other hand, market moves are smaller during the day. So the importance of quick decisions is higher. And the main idea persists.

Another problem is that indicators can’t provide the most important information – when the market nature changes. Take a look at the test scenario example #2 where the trading strategy used was to look for a top or bottom after the RSI exceeded 70 or dropped below 30, correspondingly. As you see, this strategy failed when the powerful uptrend started.

As known, in this case RSI can grow significantly over 70 before the top is reached.

We will run the scenario in the above example without using RSI.

Meanwhile, you can check out our price action software that implements an algorithm for detecting market turning points.

Read more on price action trading in Forex not using indicators.

Forex Strategy for Automated Trading

By automated trading, we understand delegating a trading algorithm full decision power to place orders for some length of time – from hours to days.

The advantages of automation in trading are obvious. Algorithms can be used for entering or exiting the market. So, for the exit, we can use much more sophisticated algorithms than convential trailing stops widely used by all trading software. For the entry, algorithm can place a good order during whipsawing.

Can we say that some Forex strategy is best suited for automated trading? Is this a valid question at all? Read further..