Thursday, April 24, 2008

Risk free FOREX?

Did you know that there is the strategy for trading currencies that is theoretically risk-free? This strategy is called Triangular Arbitrage and it is well described in "Triangular arbitrage as an interaction among foreign exchange rates" by Yukihiro Aibaa, Naomichi Hatanoa, Hideki Takayasub, Kouhei Marumoc, Tokiko Shimizu. The idea is quite the simple: you have account in US dollars - you see the profit opportunity for the following exchange (for example of cource) - convert Dollar to Euro, convert Euro to Yen, then convert back Yen to Dollar. All these conversions are made simultaneously and You get more Dollars at your account.

But how it can be made in terms of your broker trading instruments, i.e. USDJPY, EURUSD, EURJPY?
Michal Kreslik proposed the following idea and it is quite the simple:
Let us imagine three symbols: a, b, c and three fractions: a/b, b/c, c/a.
From the math point of view (a/b)*(b/c)*(c/a) =(constantly) 1.
Let us now replace a,b,c with for example USD,EUR,JPY.
We have (USD/EUR)*(EUR/JPY)*(JPY/USD) = 1 statement now. We got the common tickets for forex trade. Of cource we have no USD/EUR and JPY/USD tickets but we can replace them, so our statement will look like the following:

(1/EURUSD)*(EURJPY)*(1/USDJPY) must constantly equal 1. But this statement is not true. Let's check: (1/EURUSD)*(EURJPY)*(1/USDJPY) = FPI (some variable).

So this FPI (Michal called it because of Fractional Product Inefficiency) never equals 1 but bounces in some range. Even the median point of this range is not unity because of spread.

If we sell EURUSD, buy EURJPY, sell USDJPY (one of the pairs must have fractional lot size) we will not be exposed to any risk related to price movement. If we sell EURUSD, buy EURJPY, sell USDJPY at lower FPI extremum and later (minute, hour, day, week, whatever... because we are perfectly hedged - the same as the we have dummy position) buy EURUSD, sell EURJPY, buy USDJPY at higher FPI extremum - we will get profit. So we have 2 parts of our "trade" - entering the ring and closing the ring. Note again: when we entered the ring we have no risk related to price movement. So it is the same that we are out of the market. Of cource we spent some money to enter the ring (comission).

Quite simple - is not it? Why not try to code it and I did it. I connected my trading robot to my broker's API and went to sleep. When I woke up I was happy and began to imagine how many bags for cash will I need now:

If you do not see the digits: 186 trades, 212 lots (actually minilots in terms of big forex players), comission US$132.06, realised profit US$286,27 and one open ring bouncing near zero (+US$0.02). Note: it is only one ring - EURUSD/USDJPY/EURJPY and only about 3,5 minilots per one hedge. Just imagine how many rings theoretically exist. More than that there may be not only 3 but 4, 5 pairs combination...


(to be continued)

Tuesday, April 22, 2008

EURO hit 1.6019 but it is not a problem for DOLLAR?

EURO rallied through 1.60 at April 22 within New York trading session. But it seems it is the problem of EURO but not the DOLLAR. Why? I trade USDJPY and look at EURO as indicator and it seems no rush DOLLAR sales against JPY so the traders can commit risk trades. USDJPY is a good indicator for risk appetite of traders at forex market because it is good for carry trade. Previously when EURO broke 1.50 I've seen the panic sales of DOLLAR against JPY so the USDJPY rate was down to less than 95 YEN against DOLLAR. I've even seen the record high value of USDJPY hour bar - it was 158 pips down per hour against average value of 29 pips per hour. But yesterday the USDJPY rate was bouncing in a small coridor of about 60 pips for all the day and it stays at 103.

So it seems EURO at $1.60 is the great problem for Europe and very good for US economy.

Wednesday, April 16, 2008

Dollar sinks to record low vs Euro

Dollar shows new lifetime lows against Euro at Wednesday 16 at U.S. home construction and euro zone inflation news . The Euro was 1.5977 against Dollar. So will it hit the 1.60 this week? Will it bounce from 1.60 or will breakout to 1.61-1.62? Please vote if it happens. By the way yesterday I BuyZoned extra 6 pips with Euro downmove. I do not like to trade Euro (I can not explain exacltly why) but I missed my USDJPY trade at the hour open - so I switched to EURO and took my profit for less than a minute. Still Euro trades are less risky than the Cable ones.

Oops I did it again!

USDJPY has no range for today so I focused on cable. More risky, more spiky trades but the reward is sweet. I entered the BuyZone at 1.97005 and put my limit at 1.9715. Do you see the red candle? My limit hit and immidiately (less than a second) the price dropped to 1.9711 and then even to my entry point.
First minute I was in about -6 pips loss but I did not reverse or close because of overall cable trend. Also I look for EURO action as an indicator. EURO was up so I did not take my stoploss.
So I got my sweet 14.5 pips and was out quickly. I do not care the next candle is green.

Tuesday, April 15, 2008

Buy Zone or AAPLing the Juice

Buy Zone is the very simple trading setup based at classic breakout strategy with very small breakout straddle width. It was introduced by Avery The Rumpled One at

Originally it was used for trading AAPL and some other tickers at the beginning of the trading session. Avery says that the trading setup is "so easy as to wake up in the morning and to squeeze some apple juice". Sweet apple juice. Later Avery began to use this setup for currency trading at session open, i.e. Tokyo, Sydney, NY open breakout. Then he found that this seup can be used every hour not only session open. He traded GBP, EUR, but now he trades JPY only. Why? Because the comission for this pair is the lowest one, the spread is usually 0-1 pip, no sudden spikes as with GBPUSD. But Avery used Tradestation and he wrote all the indicators for it. So many traders asked somebody to code the BuyZone for Metatrader.

My small contribution for the BuyZone was writing the bz_everyhour.mq4 - so after that I inspired Avery and other pirate traders to code extra stuff for MT4.

So look at the right picture. The buy entry is when the price is within 2 blue lines. Opposite entry - 2 red lines. No stops - opposite entries (personally I do not reverse). You must begin to think about close and reverse whe price returns to hour open dash line. The takeprofit is ~6 pips, do not be greedy. The setup is very simple. Do you believe that "cool" indicators will help you to earn money? Trade the price but not indicators.

P.S. You can visit and download all the extra stuff and documentation for the BuyZone absolutely free.

Sunday, April 13, 2008

Markets are driven by .....?

Forex market (as other financial markets of course) uses continuous double auction mechanism to match orders and execute trading. ECN-broker clients can easily understand this mechanism by looking their Market Depth/Level II window. They see that limit orders arrive every moment (continuous), there are Bid/Ask sides ( double ) , and they put their own limit orders to the order book at the appropriate price (so it is auction) .

There are many mathematic models of this mechanism and many research institutes try to build the theory of the market behaviour. One of the models is based at fact that every market participant is motivated by making profit and he(she) uses all his intelligence to make that profit - so the whole market is a perfect rationality and it is driven by very clever participants.

The other model is based at zero-intelligence market participants ( COMPLETE IDI0TS??? ). This model can be used to make strong predictions based on a compact set of assumptions, even if these assumptions are not fully believable.

So what is the conclusion? If zero-intelligence model is good one how do you feel when you give away your money to idiots? Do idiots know what the price will be the very next moment?
So never give your money away.

Friday, April 11, 2008

Have no money for a good charting software?

If you start to trade forex with a small account (for example US$1000) you can not afford buying professional solutions like NeoTicker, Tradestation...
It will be silly to start trading with US$1000 and spend more than US$1000 for charting/order execution software, will not it?

Is there a way out? Seems to be. There is wonderful Metatrader platform which is very popular with the beginners and has tons of expert advisors, indicators and other stuff.
I've googled "ECN+Metatrader" but it seems no ECN broker has Metatrader datafeed. As I understood the main problem with connecting Metatrader order execution system to ECN type broker is the fact that MT4 can not handle partial order filling.
So what to do? Instead of digging API/SDK of your ECN broker and Metatrader engine you can do very simple things:

  • Load Metatrader4 with the default datafeed from Metaquotes (I personally use Alpari datafeed).
  • Load your favorite MT4 indicators.
  • Load and customize your ECN broker engine for order entries so the ECN program window simply overlaps Metatrader at your monitor screen.

You can ask the question - is it accurate enough to be datafeeded from one source and executed from the other? I checked - it is accurate enough.

I know the really great man - TheRumpledOne - who uses Tradestation datafeed and MBT/EFX as the order execution system.

Wednesday, April 9, 2008

GBPUSD bounces from x.xx15 and x.xx85 values

I am glued to my monitor when I am trading so I've seen many times that if GBP breaks zero levels seems it will bounce from +15 or -15 (x.xx15 or x.xx85). Look at the picture of the 9.04.2008 news release for cable.
I entered the trade at 1.9696 and immidiately put my limit order to 1.9715. So less than 10 seconds I grabbed 19 pips and after that the price returned to 1.9700.
So the same situation seems to be with x.xx85 level. I can say that the probability of the price will bounce from these levels is high but I can not tell anyone the exact probability because I have no high quality tick data for a large period of time. If anyone has such a data - please calculate this probability.
I do not recommend you to enter the trades at these levels because I did not run the statistical analysis and the trades against the hour trend seem to be more risky but these levels are good to fix your profit.

Tuesday, April 8, 2008

Mental stop

I've picked up the trading strategy with very tight stops so my takeprofit is about 6 pips and my stoploss is about 4-7 pips. I do not want my stoploss point to be suddenly spiked out so it is mental one.

Mental stop is the hardest thing for a beginner. The beginner can sit in red and pray that it will turn green and immidiately catches small green pips. So why you can sit in red for an hour if you usually take your profit in 5 minutes?? It is all about the beginner's psychology. The beginner probably read the rule of the thumb "CUT YOUR LOSSES AND LET THE PROFIT RUN" about 10 000 times but he lets his losses run and cuts his profits.

So if your take profit usually occurs in 5 minuts why you can sit for hours in losses? If you are not in green for a "long time"(this time depends on timeframe you trade) - do not pray but cut your losses. If you see your mental stop (for example 7 pips) is about to hit and suddenly the price retraces to -2 pips, very next quote it goes against you to -3 pips - do not hesitate and take these "-3". Think in the following way: "It retraced from -7 to -3, so I just earned 4 pips. Next time I am in trade I will go for less pips to breakeven. The other opportunity is waiting".

So when the ship starts to sink - do not pray - JUMP!

Sunday, April 6, 2008

Edward's Top Ten Reasons Aspiring Traders Never Succeed

Edward a.k.a Eudamonia published them at my favorite forum. These reasons are really golden ones, so great respect to Ed:

People are always looking for new indicators. And when new indicators are
scarce becomes quiet. For the past several months Avery and others
having been telling folks that all they need is the BuyZone. But most people
don't listen. They want another indicator, another setup, or they say that
Avery's methods can't be backtested (in TradeStation or some other weak arsed
software). I hear a lot of this baloney. I thought I'd post some ideas on why
most aspiring traders never make it.
  1. B.S. Backtesting. Why is it B.S you ask? Because as Michal told me -
    "Edward you must KNOW what you are doing". And most people haven't the foggiest
    idea of what they are doing when it comes to trading or programming let alone
    both. Too many good ideas are annihilated by stupid principals. Do you really
    think that Avery and other savvy traders are taking all market orders for a
    scalping system? Do you really think that I don't know what the market is doing
    within a 1 minute bar? Or that I care what the S&P was doing in 1997 (the
    market has changed in several big ways since then)? Or other such rubbish? Get
    real. 99% of all aspiring traders are not smart enough to effectively backtest
    their ideas because they can't trade in the first place Which is why they
    attempt to program their way out of the problem. This is effectively like trying
    to beat Tiger Woods by creating a robot golfer with your 1 college robotics
    class and $200. Not going to happen! So what should an aspiring trader do
    instead? Try forward testing your ideas. It takes longer to build a
    statistically relevant database but your results will be totally
  2. No money = no money. This is a simple but really prevalent problem. I
    just talked with a trader two weeks ago. He could not understand why he has
    blown out 2 $5k accounts trading the Russell - and he was trading 2 contracts! I
    told him that even with my best system I would not trade 1 contract on the
    Russell with less than $5k. Got that? You need money - at least $15-25k and then
    only if you can trade will that do you any good.
  3. Heard about the "X" indicator. This is the Jesse Livermore principal.
    When I first read Reminiscences I thought Jesse was an ass for listening to all
    those turkey tips. But it's more true than ever today. Instead of "tips" these
    days its indicators. Buddy I got a new indicator for you - it's called the "Big
    Money" indicator. What does it do? I have no idea - but it will make you a
    fortune. Only $599.99. You want to know my secret indicator? It's called the
    BuyZone - it's a classic breakout indicator. Been around for at least 50 years.
    I also use another arcane indicator - it's called a moving average :0. That's
    all you need! The rest is all about your trading competence. As Jesse says -
    only the market can tell you about the market. Indicators are only a guideline -
    the operator is one who can discern true market action.
  4. No Discipline . This really should be number 1 on the list - because
    it is really caused by laziness and the desire for "easy money". Trading ain't
    easy. Running my catering business with it's cranky brides, broken equipment and
    moaning employees is still easier than trading. Got that? Depending on your
    method and timeframe even a good system will experience flat periods or
    drawdowns lasting weeks or even months! If you haven't tested this thoroughly
    then you are doomed! You think it's gonna be easy to lose again and again over a
    two-week or two-month period. Are you still going to be as eager to take the
    last trade as the first? You'd better if you want to make it! It's like I told a
    guy last week - the market pays me to take a licking for 8 out of 10 times so
    that I can really beat the living $#*&! out of the market that 1 or 2 times
    and make it all back and then some. Even scalping has it's dry periods - nobody
    is immune.
  5. When do I get out of here? A couple weeks ago I was working with an aspiring
    trader and we were simulating (tick by tick) exactly how I do my trade setups. I
    encouraged him to try some of his trade setups and was stunned. He had fantastic
    entries (actually they were classic TA such as butterflies and flags) . But what
    really stunned me was that he had no predetermined exit plan. NONE! He would
    ratchet his stops tighter and tighter as the trade went on (regardless of what
    the market was doing) And then he would wait until the market literally scared
    the poop out of him to exit or his stop was hit. This is so common I can't
    really say more than that. To give you all an idea I spend a lot more time
    working on exits than entries. Any idiot can tell a breakout or a momentum move
    is beginning. Only a genius trader can exit at precisely the right moment.
  6. Don't watch the market enough to know anything. Most of the "back testers" I
    talk to don't watch their market in real time It's a bold statement but one I
    think is true. Do you want to trade like Avery (or any other skilled trader for
    that matter)? Then do what I do every morning - sit in front of the market for
    the first 2 hours and do NOTHING else but watch. It's critical that you accept
    NO distractions. Watch the price. Watch how your favorite indicator (i.e. Moving
    Average) reacts to the price. Watch volume (if you've got it for your market).
    Watch time and sales. Do this for 6 months to a year. It will change your life I
    promise. If at the end of 6 months you can't discern when "sustained movement"
    is about to occur then quit trading. Save yourself the heartache. I guarantee
    that 99% of you (o.k. you have to be able to physically see) could do this and
    see what I see (or any experienced trader sees). Only 1% of you will listen. Too
    bad. BTW you need to watch the market during relevant hours. The most important
    time of day for the Russell is 9:30 a.m. EST. For the Euro/Pound it's the London
    open (followed by the NY).
  7. Lack of persistence. People who end up succeeding have failed many
    times. Failures fail once and quit. Keep failing. Keep working. According to
    what most people say it takes about 3 years to start being successful as a
    trader. I find this to be mostly true. Actually it's all about hours. For myself
    it took about 3 years spending an average of 20 to 30 hours per week testing,
    trading, failing, working...But I'm not the brightest crayon in the box - some
    folks might figure it out faster. Live breath and eat trading. Think about
    nothing else. Be obsessed (I sure am). Go beyond work, beyond play into simply
  8. Why am I trading this market/timeframe? Another ever so common problem. I
    hear "I got into Forex because of this stupid course and now I want to learn how
    to trade Forex" a lot. And not just for Forex. It is so important that your
    methodology, your psychology and your checkbook all support your market and
    timeframe. If you choose a market and timeframe arbitrarily you will get less
    than ideal results. I wouldn't try to scalp the Urea market for 2 ticks and I
    wouldn't try to swing trade the mini S&P. Why? Because they are not the
    ideal markets for those activities (unless you have a seat at the exchange for
    the Urea market I suppose). Also I wouldn't look only at daily bars for a
    scalping setup or at minute bars when I'm swing trading. You'd think that this
    is common sense but it's not. Are you trend trading - then look for markets that
    trend frequently (i.e. currencies). Are you interested in volatility based
    trading - then look at volatile markets like the DAX and ER2. Nuff said.
  9. Lack of decisiveness. Usually there is a reason why we lack decisiveness.
    It's because we haven't thoroughly tested our idea or become confident with
    trading our style. I strongly encourage simulated real-time trading to solve
    this problem.
  10. Afraid to succeed. Weird huh? With a capitalistic society you would
    think we wouldn't have this hang up. Is it because trading looks physically easy
    to do? Is it because it is hard to see how it benefits society? Is it because we
    are unsure of ourselves? It is an interesting dilemma. But I ask you this: What
    is your contribution to society from your day job? If you are in an office you
    push papers for someone (either the government or commerce) - who do you really
    help? If you are in retail, construction etc. your work may have more obvious
    effects. Most people find it hard to overcome this fear of success in the
    markets because the markets have no limits. None. In the next minute the Russell
    could go up or down 20 points and you and I have absolutely no ability to
    control it. Your account can go down to 0 (or worse) or increase by millions
    depending on how you manage it. In no other job are we so empowered (our income
    can be limitless) and yet so fearful (we can also have negative income). Trading
    is about freedom - and freedom can be a scary thing. Are you sure you want to be
    free? Edward P.S. I know most of you aspiring traders won't read my post so for
    a limited time I'm offering the magical "Pooper Scooper" indicator that wins 99%
    of the time (never mind what happens that 1% of the time). Right now I'm
    offering this indicator on a limited basis for the low low price of $999.99.
    This is a once in a lifetime offer! P.M. me for details.

Thursday, April 3, 2008


The current spread for GBP/JPY is 6 pips. But what will happen if I type "204.60" in the "Limit price" window and press "BUY"? I by myself will reduce spread to 4 pips! And there will be the probability of my buy order being executed at 204.60 or better! I can put any price I want, even 204.5850, 204.5810, 204.5801!

So what is the conclusion? There is NO FIXED SPREAD when you trade against other traders! Traders form this spread by themselves! Spread can be 1 pip, 0 pip. Sometimes the spread is negative!

Wednesday, April 2, 2008

If they invent the time machine...

If i had a time machine... For one day only... Let it be the very small time machine, it will look to the future for 1 minute... What would I have from it?
Nothing, except of couple of billion dollars in my pocket for tomorrow :D

If they invent the time machine - how long it will take to overall financial collapse? One day or just 5 minutes only?

Ok, that is just a dream only. The fact is that now no one, once again : NO ONE can predict the future. So why 96-98% of traders are whiped out for the first year? Because they do not have super-duper "predicting indicators" or "100% generating 100 pips per day strategy"? I suppose that is not the answer.

I suppose the answer is very simple and everybody know it. But it is very hard to use it in practice of trading - I checked by myself. The answer is :
CUT YOUR LOSSES AND LET YOUR PROFITS RUN (applied to the time frame you use to trade).

You also knew this answer, did not you?
So hardest thing for the beginner in trading seems to take losses, and main thing I need to learn is to take them.

Tuesday, April 1, 2008

"Wake up, Neo! Matrix has you"

So many ads telling me that I must try FOREX with them. Because they do not charge the comission or their fixed spread is as low as N pips. When I try them I can see that I can not place limit order less than N pips away from the current price. When I try to get in the market - their order processing engine tells me that I was requoted.

Is it the objective reality? No!
The market makers invented the fixed spread and it will kill me if I trade short-term. But the reality is there is NO FIXED SPREAD at forex.

Maybe better to pay the fixed comission instead of fixed spread? Sure!
Finally I found the right broker for me. The keyword to search is "ECN type broker". I picked up the MBTrading/EFX Group (EFX seems to be a part of MBT, if EFX handles only forex accounts, with MBT you can also trade stocks). I picked up them because:

  • I can open account with US$400 only.
  • The comission is low. For USD/JPY it is US$1(entry+exit) only for the minilot.
  • They provide with free-of-charge SDK with C#/CPP/VB samples.
  • They provide with LEVEL II data which is very usefull for short-term traders.

The minus of the ECN broker (it seems any ECN broker) is that he does not provide me with free-of-charge charting software, so I must look around for the solution. I can not invest more than US$1200 for the NeoTicker with the account size of US$1000 only.

Choosing the right forex broker.

If my goals are about 4-10 pips how can I do with "slippage" and "requotes"???
If my target is 6 pips and I was requoted with 3 pips not in my favour - so I gave 50% of my expected profit away!!!

What to do? It seems scalping is a bad idea? I can profit my broker but not myself. Is there a way out?

Yes, there is a way out!

Trade against other traders not against market maker. Is it possible? Is it possible for a guy with very small amount of funds to deposit?

Yes, it is possible.

The keyword is ECN (Electronic Communications Network).