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Choosing a Trading System That Actually Works

I believe a good trading system should be considered for inclusion in one's portfolio in order to potentially enjoy superior returns. Finding a good trading system, however, can be a very difficult process. I believe a good trading system should be considered for inclusion in one's portfolio in order to potentially enjoy superior returns. Finding a good trading system, however, can be a very difficult process. So it becomes necessary to have a way of distinguishing good systems from the rest. Fortunately, there is a way to do this by using a demanding set of criteria that I believe must be met in order for you to consider using the system.

Futures trading is not appropriate for everyone. There is a substantial risk of loss associated with trading futures. Losses can and will occur. No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using the Instant Profits methodology or system will generate profits or ensure freedom from losses.

The purpose of this report is to define the criteria that I believe will enable you to identify the good systems out there from all the rest.

Listed below are the key elements of the criteria set you should use in evaluating a trading system. A good trading system will meet the requirements of each key element whereas many systems will only meet some requirements. For example, a trading system may be advertised as having 80% winning trades which sounds pretty good. However, that same system's losing trades may be 5 times higher than the average winning trade, making the system a net loser.

Mechanical System

The trading system must be 100% mechanical without any human input or overrides. It must also not be tweaked or adjusted as time goes on to fit current data. Also, the system algorithms or rules must not be curve-fitting or tailored to short term, non-repetitive patterns of past data that eliminate otherwise losing trades. A good way to screen for curve-fitting is to look for consistently good results over a minimum of 5 years of past data that meet all of the other criteria outlined in this report as well.

Liquid Markets

The trading system should be aimed at liquid markets where sufficient daily volume exists to easily and consistently execute orders as intended by the system with a minimum of slippage. For example, the S&P 500 Index Futures Market is highly liquid, whereas the Orange Juice Futures Market is far less liquid.

Market Direction Independence

A good trading system will not be dependent on a bull market for its success. It should have the potential to generate successful trading performance in all market conditions; bull, bear, and sideways trading range.

Hypothetical Performance Results

The primary way of evaluating a trading system is based on its historical back tested performance ("hypothetical performance"). But the performance record must include real world trading commission and slippage assumptions. Commission and slippage can cause an otherwise winning performance to actually be a net loser. Beware of any futures trading system performance data where commission and slippage assumptions are not included or are understated.

Maximum Drawdown

An inherent characteristic of investing in general and in trading systems in particular is the maximum drawdown in account value from the most recent peak. This is a very important factor in assessing the risk associated with any system. There are two aspects to consider; the dollar amount of the drawdown as a percentage of the total account value (should not exceed the average annual return) and the duration of the drawdown until a new peak level in equity is realized (should not exceed 6 months). Some trading systems hype great profits over the past several years, but don't disclose drawdowns that sometimes exceed the initial capital invested and last for a year or more. Before selecting a trading system, you must be able to quantify the drawdown risk and find it suitable, both financially and emotionally.

Beginning Account Size

The maximum past drawdown (over a minimum five year period) plus the margin required for one contract is the absolute minimum account size required to trade a system. And to be conservative, it is prudent to add a buffer since the maximum drawdown for any trading system is always in the future.

Annual Returns

Annual returns are measured as net profit after commissions and slippage, divided by the beginning account size which gives you annual percent return on beginning account size. Two things are important here. First, the average annual net profit should be a minimum of twice the maximum drawdown over a period of at least 5 years. Second, ideally there should be no losing years.

Trade Profile

There are two aspects important here. First, the percent of profitable trades should be in the 40-60% range and the ratio of average win to average loss should be in the 1.3 - 2.0 range. Second, the average trade net profit (total net profits divided by the total number of all trades) should be at a minimum 3 times greater than real world per trade slippage and commission assumptions. Beware of systems claiming to deliver greater than 60% winners. Such systems usually exhibit a very poor average win to average loss ratio where a few losing trades can easily wipe out profits from several winning trades.

You Now Have the Tools

By following the guidelines in this report, I believe you are now in a position to distinguish the difference between good systems that have the potential to deliver superior returns and the rest. Remember, a trading system must meet all of the criteria elements outlined here to qualify as a system that you would consider trading for your own account.

The Next Move Is Yours

Trading systems are not for everyone. In particular, futures trading involves significant risk and should only be considered by those who have determined that futures trading is appropriate for them with regard to their financial situation. However, the appropriate use of a good automated trading system could mean the difference between mediocre and superior returns. I believe you now have the tools necessary to properly evaluate a trading system.

Martin Chandra is a full-time investor. He has been researching investment strategies and make his own living. For more information please go to http://martinchandra.com/peter-bain/

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Experts who watch the oil market are split on which way oil prices are headed, and just how far. A little over a year ago, most pundits agreed that $40 a barrel was the upper limit for a barrel of crude oil. At the year's beginning, oil had already broken that point, and was selling at $42.50 a barrel. The vagaries of the weather, world politics and actual capacity to meet demands have fueled one of the most volatile pricing years in recent memory. At one point, the price of crude broke $70 a barrel, an increase of 65% over the beginning of the year. And while prices dropped for a short period, at the end of the year, they were still 45% higher than at the beginning of the year. Since the turn of the year, prices have begun their climb again, and the majority of traders believe that we won't see a reversal of that trend in the near future. The conservative predict a price of $80 per barrel. The more aggressive are calling it at $100.

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Forex is all about how to hit the next ball correctly rather than worrying about something of a distant future. The next ball may be for 2 pips or 20 pips or 200 pips or 500 pips depending on a trader?s style.
Anything is possible in Forex.

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Forex trading can be lucrative for the commited. And we just don't mean for the insane either! It takes great commitment to be able to make money in Forex trading, but it's a highly lucrative field for career technicians. The best place to start is with the basics. Thanks for visiting Superior Investor, and good luck with your Forex Trading Career.
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Daily Forex Market Commentary for December 1, 2006

Sat, 02 Dec 2006 04:20:00 GMT
GFT Daily Forex Market Commentary for December 1, 2006
Forex Market Commentary by Cornelius Luca, Currencies Analyst, GFT


The dollar made a collapsing decline on Thursday, due to pure spec and rumored corporate orders.


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Forex Broker Guide

Introduction

The following is a list of questions you may like to ask yourself, your broker and other traders about a particular firm you have in mind. You can use this checklist to narrow down your selection of forex companies to fit your requirements. You might also like to read the forex broker ratings page on this site http://www.goforex.net/forex-broker-ratings.htm to see how other traders are rating and reviewing other brokers.

The following links will also give you some background information on U.S. FCMs (Futures Commission Merchants).

* Selected Financial Data for FCMs http://www.cftc.gov/marketreports/financialdataforfcms/
* NFA Background Affiliation Status http://www.nfa.futures.org/basicnet/

1. Word of Mouth

* What do other traders say about the broker?
* What is their customer service/dealing desk like?

2. Safety of Funds

* Is the broker regulated?
* What regulatory organisation are they registered with and what protections does this afford you?
* Are client funds insured against fraud at the firm?
* Are client funds insured against bankruptcy of the firm?

3. Execution

* What business model do they operate? i.e. Market Maker, ECN or NDD?
* How fast is their order execution?
* Are orders manually or automatically executed?
* What is the maximum trade size before you are put on manual execution?
* Are all clients trades offset?

4. Spread

* How tight is the spread?
* Is it fixed or variable?
* Is it larger for mini accounts?

5. Slippage

* How much slippage can be expected in normal and fast moving markets?

6. Margin

* What is the margin requirement? e.g. 0.25% (max 400:1 leverage), 0.5% (max 200:1 leverage), 1% (max 100:1 leverage), 2% (max 50:1 leverage), etc.
* Does it change for different currency pairs or days of the week?
* Is it the same for standard and mini accounts?

7. Commissions

* Do they charge commissions? (Most market makers commissions are built into the spread, whereas ECN's charge a small fee)

8. Rollover Policy

* Is there a minimum margin requirement in order to earn rollover interest?
* What other requirements or conditions are there for earning rollover interest?

9. Trading Platform

* How reliable is it during fast moving markets and news announcements?
* How many different currency pairs can you trade?
* Do they offer an Application Programming Interface (API) for automated trading systems?
* Does it offer any other special features? (e.g. One click dealing, trading from the chart, trailing stops, mobile trading etc.)

10. Trading Account

* What is the minimum account opening balance?
* What is the minimum trade size?
* Can you adjust the standard lot size traded?
* Can you earn interest on unused equity in your account?

Quick Forex Ideas

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Forex, short for Foreign Exchange, is one of the several markets into which Foreign currencies, stock and assets are traded. Knowing how sensitive these markets are to information and leads, stock brokers and managers are always in search for a source of unbiased reviews, analysis and data, and thus comes FxGround.com, which positions itself as the ultimate place from which operators can get a crash course and quick insight as to what�s happening in the Forex market. The site targets highly proficient traders and beginners alike, by providing a very detailed and useful �School of Pipsology�, where you can learn all the stuff you need to get around in the market and take advantage of a great tool like FxGround.com. In regards to those advanced users I was mentioning, the scope and variety of services they can get from this site is truly impressive, just take look at stuff like the Forex Reviewer Club, where all the site�s registered members review other Forex information tools and sites to determine which the most unbiased, useful alert senders or brokerage firms are. All the community votes affirmatively or negatively on these reviews and thus they come up with a consensual result on the web�s best Forex tools. Other than this, the site provides its users with valuable resources like RSS feeds, latest multimedia news on the market tendencies and a forum, plus an extensive selection of blogs which over financial and forex topics.
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The Tokyo Fix is where the FX rate is established for the day by the banks for their customers. So even though the FX rate may change during the day the customer gets the rate at the time of the fix. There is a fix in Tokyo, London and Toronto (more I am sure). Importers generally settle their accounts on the 5th, 10th, 15th, etc, of the month before and up until the fix ():50 GMT). Sometimes, if there is an "excess" dollar demand $/JPY will continue to climb slightly after the fix. $Bulls will also use this as a staging for extending a rally. $Bears (Yen Bulls) will use this to establish better shorts.
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Most of these can be quite complicated for those who are inexperienced using the Forex. Most professional Forex brokers understand these charts and have the ability to offer their clients well-informed advice about Forex trading.
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Forex - Weak Data Is Only Beginning to Hurt the US Dollar

Sat, 18 Nov 2006 16:29:00 GMT
FXCM - DAILYFX Fundamentals 11-17-06

By Kathy Lien, Chief Strategist of www.


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Money Management

We get a lot of questions about various complex money management (MM) formulas and our preferences. We don�t comment on this subject very often because money management is such a personal issue that it would be impossible to give any universal advice that would be specific enough to have value. Everyone seems to have different goals and tolerances for risk, not to mention varying amounts of capital for trading.

However we do have some basic thoughts and opinions that might be helpful in picking a suitable MM strategy that will help you to become a winner.

Be careful about trying to use formulas that are designed to optimize the returns. In my experience I have found that the most successful traders, over the long run, are not seeking to maximize their returns. The best traders are always seeking to carefully control their risks and to achieve as much consistency as possible. They look for methods to achieve consistent returns with low drawdowns and they are willing to accept smaller returns in the process. My policy has always been to worry about the risk and the consistency first and then to accept whatever returns that prudent approach will allow. I�m sure I will never win any trading contests and I have never bothered to enter one. In my opinion, no one should ever trade like the winner of a trading contest. I apologize for getting off on a different subject here. Lets get back on track and talk about trading in the only contest that matters - the trading that you do every day.

In recent years the strategy of risking a small percentage of capital on each trade has become quite popular and deservedly so. This MM strategy, often referred to as fixed fractional trading, reduces our dollar amount of risk as we experience losses and increases our risk level as we earn profits. The possibility of ever going to zero with such a strategy is virtually nonexistent. However this strategy has an inherent weakness that tends to constantly work against us. If we assume an equal number of winners or losers in a sequence this popular strategy produces net losses if the winners are not larger than the losers. To keep things very simple lets just look at a series of five wins followed by five losses with the wins being equal to the amount we risk. Lets also keep the math really simple and begin with starting capital of 100 and risk 5% of our current capital on each trade. I think that most traders would assume that if they had five losers followed by five winners they would be even. Unfortunately that is not the case.

Here are the numbers: Risk is always 5% of current capital. (I�m going to round the numbers to two decimals.)

Capital $ Risk W/L Account balance
100.0 5.00 L 95.00
95.00 4.75 L 90.25
90.25 4.51 L 85.74
85.74 4.29 L 81.45
81.45 4.07 L 77.38

OK we are already tired of losing. Let�s have five winners in a row and see if we can get our money back.

Capital $ Risk W/L Account balance
77.38 3.87 W 81.25
81.25 4.06 W 85.31
85.31 4.27 W 89.58
89.58 4.48 W 94.06
94.06 4.70 W 98.76

As you can see we had an equal number of winners and losers yet somehow we lost money. Perhaps it is because we had bad luck and got started in the wrong direction. Lets reverse the sequence of trades so that we start out on a winning streak instead of losing. Maybe that will help.

Capital $ Risk W/L Account balance
100.00 5.00 W 105.00
105.00 5.25 W 110.25
110.25 5.51 W 115.76
115.76 5.79 W 121.55
121.55 6.08 W 127.63

Looks good so far. Starting off with winners looks much better than starting with losses. But now we have five losers coming up.

Capital $ Risk W/L Account balance
127.63 6.38 L 121.25
121.25 6.06 L 115.19
115.19 5.76 L 109.43
109.43 5.47 L 103.96
103.96 5.20 L 98.76

Hmmm. It doesn�t seem to matter if we start out with a string of winners or a string of losses. Somehow we wound up losing the same amount of money either way.

Obviously we don�t have a very good system at work here but it is not a losing system. With the proper MM strategy we should break even. Our winning trades are only equal to our risk and to have a winning system the winners need to be bigger than the losers. We are winning on only half of our trades and we would be profitable if we could win on more than half. Even though our system is not a good one you would think that it would at least be a breakeven proposition (we haven�t included any costs) because the winners are always equal to the amount at risk and we win 50% of the time. That sounds like a breakeven system, doesn�t it? But if we employ the popular money management strategy of risking a fixed percentage of our current capital we manage to turn the system into a loser. However, if we risked a fixed dollar amount on each trade the system results would improve and we would break even.

The fixed percentage of risk approach to MM is a good one because it keeps us from going broke and it compounds our profits rapidly. Both of those are desirable characteristics but we need to be aware that they come at a price. We should realize that our recovery from drawdowns might not be as fast as we would like and that we can give back profits even faster than we made them.

One strategy that can help solve the problem of giving back the profits too rapidly is to periodically sweep some of the profits out of the account and place them in some other place where they are adding to our diversification and reducing our risk. Now and then we should take some of the profits out and spend them on something that improves our quality of life. This important step gives the dollars at stake a new meaning and boosts our morale tremendously. What is the point of winning and losing and accumulating profits only to give them back at some later date? If we make it a practice to routinely sweep some of the profits our account will continue to grow but it will be compounding at a slower rate than if we left our profits at risk. However if we stumble into a losing streak we will be glad that we took out some of the profits and reduced our bet size.

If we are good traders and we make it a practice to withdraw some of our profits on a regular basis we will eventually reach the point where we have taken out more than we started with. There are very few traders, particularly in futures, who can claim that they have truly beaten the market. Until you have taken out more than you started with the market can still beat you. Trading futures is a zero sum game and winners are few and far between. Taking out profits now and then rather than getting carried away trying to optimize the gains to infinity is contrary to what is being taught these days. Everyone is obsessed with finding formulas to optimize the returns. We need to remember that the trader who has the optimum gains today could easily be tomorrow�s biggest loser. That is a game we don�t need to play.

I think we all need to take a step or two back and look at the big picture. Trading is not really just a game. The money is real. Lets make sure that we are true winners and not just habitual players. Take some profits now and then and put them out of harms way. When we have done this I can assure you that the game is a lot more fun and our trading will improve. Nothing builds confidence like knowing for sure that you are indeed a winner.

Good Luck and Good Trading
by Chuck LeBeau
http://www.traderclub.com/

Thoughts On Forex

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Yes, no liquidity and no conviction by players make the market look like a vagrant loitering in his usual area. Good forecasts and trades. Good sleep is essential for good trading but most of the traders I know of seem to sleep with one eye open
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The Forex trading is perhaps the largest financial market in the world, with a daily average turnover of approximately $1.5 trillion. Foreign Exchange is the simultaneous buying of one currency and selling of another. The world's currencies are on a floating exchange rate and are always traded in pairs, for example EUR/USD or USD/JPY or USD/INR etc.
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forex capital markets



The real battle of bulls and bears for medium-term trend is always around 20 day MA line in Yen market. Daily option activities here and there are of no relevance as far as medium-term trend is concerned.
Yen position traders sit on their positions gunning for several hundred pips at one go. For day trades, much more nimble approach is required. As Yen position trader, please never buy anything below falling daily 20 MA and never sell anything above rising daily 20 MA, no matter how attractive they look. So start buying only when daily 20 MA starts rising, from whatever level, is not only safe but also proven way of making money although it sounds so simple. You can read how Yen traders make intraday moves by watching 30 min USD/JPY candlestick chart or line chart if you are not familiar with candle nuance. 4, 8 hourlies are for positional moves.

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Euro turns bullish - dollar slips across the board

Fri, 20 Oct 2006 21:14:00 GMT
Daily Currency report for Friday October 20 2006

This is only a guide.


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