The Benefit of Hindsight in Trading System

Tuesday, January 13, 2009

Once you know something, such as the past history, pretending that you do not is very difficult. The ways a trader can delude him-/herself while back testing a trading system vary in degree of subtlety. A crude one is to develop a set of trading rules by observing the past history of the market, and apply the algorithm on paper to the same past history.

A more subtle one has to do with the choice of adjustable parameters. It is common to abstract the algorithm, and split it into the "artificial intelligence" (AI) core, capable of "learning", and adjustable parameters which may control the learning process, the application of its effects, or both. A developer would then prevent the AI from learning the future, and run a trading simulation program on historical data, having the AI algorithm fixed, for a range of parameter values and then pick the value that gives the best result. By not letting the AI learn the future, the developer reduces the level of self-delusion somewhat.

The best simulated performance would still incorporate "the benefit of hindsight" albeit in a refined way -- through the choice of the adjustable parameters. While the AI did not learn from the future directly, its way of learning would incorporate the benefit of hindsight, and the results might contain a survivorship bias of sorts. The result? In case of a poor AI, the result will be a trading strategy with a hidden "peso problem".

Below I demonstrate the quality of the Forex Automaton™ AI directly, by removing the selection step and thus the survivorship bias it brings in. I look simultaneously at the entire range of possible "ways of learning", refusing to reject those inside the range. Nor do I reject any of the possible money management styles, for the same reasons.

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4. Low capital start, with $250 as a minimum account size.
5. Liquidity and 24/5 availability are the characteristic factors of the Forex market compared with other financial markets.
6. ForexGen offers a free trial Forex [demo account] that allows you to test your skills and practice without risking real money.

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The Best Way To Start a Successful Trading Career

This will be of great help when you are new to forex trading. By placing demo trades, you will learn a lot about how Forex transactions work. This is a very important step for you in order to be able to learn how to become a trader. A demo account allows one to become familiar with trading procedures, such as placing Market, Limit, Stop, Orders without any risk. Of course all dollar losses or gains using a demo account are imaginary but, as mentioned above, the trading experience you acquire is not.

Making big gains in a demo-account does not guarantee profits in live trading; however, those who are not successful trading on paper rarely are successful when money is on the line.
Once you sign up for a demo account, you will need to try one of the charting packages from the broker you will be using. Any demo software you choose will do because they all have the necessary indicator tools you need.

Once you have downloaded the software you can then set up your demo account and start drawing trend lines, marking support & resistance levels, monitoring moving averages, etc. Once you have a real trading system, you will already know how to place orders properly.

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I have never traded a forex strategy live using any advanced automated methods. At the most, I’ve placed a limit order. Most, if not all of my experience has been with expert advisors in Metatrader.

I realize more than ever that if I could automate my strategies, this may take me to the next level of trading and keep me more involved in the market.

At this point, I need the motivation. The subject of automated trading has always interested me but my issue has always been with trusting a broker and the platform with a live account using an expert advisor. Therefore I’m calling on everyone who has experience with automated trading to share your experiences.

If you’ve used Metatrader, have you found success with any particular brokers? I know there are other automated trading software available that mostly allow trading via an FXCM API but are they any good? I know Oanda also has an API but it costs about $600/mo.

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What Is The Best Way To Be Successful in Forex?

What are the best ways to become a successful forex trader? These results are taken from a Moneytec poll that had over 6,000 respondents and are ordered by most votes first. My comments follow each result.

1.Study by yourself and get experience - Over 45% of the respondents said this was the best way. I have to totally agree with this and is what I've been doing for the last year. One point I'd like to make is that you don't have to do it all by yourself. If you can find a trading partner who has the same drive and motivation as yourself, this could be even more beneficial.

2.Develop your own system - Over 25% voted for this but I think this goes hand in hand with #1. If you are studying by yourself and want to get more experience, developing your own system is an absolute must even if you never use it.

3.Learn from a mentor - 15% said this. I think I've stated my views on mentors clearly in previous posts. Mentors are what you make of them.

4.Open a managed account and monitor it for education - 5% voted for this. I personally have never tried this method. I did just hear last week that you can open a managed account with Raghee Horner called Autotrade FX. You open your own account at TradeDirectFX and it mirrors her every buy and sell order. Interesting concept but I think difficult to learn from. You see all the buy and sell orders but no rationale behind them.

5. Hire a portfolio manager - This was voted as the best way by 2.65% of respondents. I don't get it. I'd rather be self-sufficient and how do you know who to trust.

6.There is no way to become continually profitable in forex - 1.51% negative respondents to this one. The jury is still out on this for me personally. I hope I don't come to this conclusion.

7.Get signal alerts by subscription or live from a guru - 1.09% voted for this. I don't know if this helps or not. I don't like it though. Who do you trust with the never-ending list of scammers out there. If you want to listen to someone else though, there are plenty of sites where you can get free trade calls and technical analysis. In fact, there are just too many out there to choose from.

8.Get Analytical reports and Make your Judgement - Less than 1% chose this response. Sound very similar to #7. The analytical reports are basically going to tell you which way to trade so making judgment calls here is probably kept to a minimum. Not for me.

9.Buy Software or Strategy Description - Less than 1% chose this response probably because this too is very similar to #2, developing your own system. If you are going to trade forex with TA, you need software and you need a strategy.

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ForexGen Introducing Brokers, White Label and Money Manager holders are recognized as a strategic business partners. The main focus of our service is to satisfy our partner's needs in order to deal with a qualified service and gain a huge income sharing plan.

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Forex Pips and Spreads - The Brokers Commission

The pip is the smallest measure of price move used in forex trading. For instance, if the currency pair EUR/USD is trading at 1.3000 and then changes to 1.3010, the pair is said to move by 10 pips. It is an acronym for Percentage in Point (pip).

In the wholesale market, currencies are quoted out to four decimal places, with the last placeholder called a point or a pip. A pip in most currencies is one/10,000th of an exchange rate or in USD/JPY, it is one/100th, likewise you can find for others.

Spread on the other hand is the difference between buy (long) or sell (short) for a currency pair. The bid/offer spread is the difference between the buying (bid) and selling (offer) price. The ask prices are the immediate execution prices for quick buyers or traders and bid prices are for quick sellers.

In Forex market you will find brokers who generally do not charge any commission from you. But they get their money by charging you a spread. As spread is the difference between the bid price and the ask price for any currency being traded, the broker will add this spread onto the price of the trade and keep it as their fee for trading.

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