Robot Strategy / Development

Without getting into detailed specifics I thought I'd try to answer a recent question about the strategies I'm trying with my various robots.

First, a bit of background in case this is the first post you see on this blog:

• I design software and systems for a living
• I've been trading for years -- learning through the heart of the downturn.

With that out of the way I'd suggest looking at one of my posts about microtrading.

You may also want to consider the fact that the Australian economy seems to be doing very well with respect to the rest of the world. I've been pointing that out on my blog from time to time. Also, if you follow AUDJPY as I do, you may notice that the RBA just hiked interest rates by 25 basis points. This bears out a previous post about the long term carry trade prognosis dated September 2008.

Anyway, what this all means is that I'm happy to open long positions in AUDJPY, to some pre-defined level of risk, and then wait for this currency pair to give me some profits. To get down to brass tacks, the AUDJPY trading robot looks for what appears to be decent entry points, perhaps via stochastics and/or moving average crossovers, and then opens up micro-positions.

Sure, often the robot is wrong for some period of time. Who cares? With confidence that the AUDJPY will eventually rebound, and/or pay decent carry trade rates, it doesn't hurt to wait. Besides, when the robot is wrong, trades entered at even lower levels can often be closed for a profit, repeatedly, prior to a later price rise allowing the short-term carry trade to be closed for a profit.

In case you are thinking this sounds like throwing darts here are a few of the strategic points that guide this strategy:

• The fundamentals over the next period of years points to a rising AUDJPY.
• A future period of panic is unlikely to exceed the unwind that occurred during the recent financial crisis.
• A rising AUDJPY will eventually allow any position to be exited profitably during a new high.
• Using microtrades allows frequent trading within precise levels of accumulated risk.
• Adding logic to enter positions at what will often be an opportune time greatly improves the odds of taking profit from a position quickly.

Another robot, currently experimental, trades the EURCHF. The idea here is that this currency pair is relatively stable compared to some others. Here I'm basically trying to play a mathematical game. If one were to open a very small long or short position every few moments the price would eventually make at least one trade direction profitable.

The reason this is interesting is that you can define the rate of return you want. Trade N positions at size S per hour at P pips profit and you will earn $D. Of course, it isn't so simple, but that's where the challenge lies. How do you keep from accumulating all your long positions at a recent top and all your short positions at a recent bottom? How do you keep from accumulating positions during a lull in price movement? How can you goose profits during active periods to make up for price movement lulls?

This thing is a work in progress, is not significantly capitalized, and probably is a pure dart throwing exercise. However, it does keep me busy. This is important. If I don't keep busy I'll worry too much about what's happening in my AUDJPY sub-account and either make discretionary trades or tinker with something that is already working well enough.

Anyway, all strategies face the same basic issues. These include:

• Prices will eventually move up and down in varying amounts.
• Accumulation of positions incurs increasing levels of risk.
• Avoidance of risk decreases maximum theoretical gains.
• Carry trades have long term pressure supporting the carry trade.
• Carry trade pairs have periodic unwinds.
• Long term economic fundamentals are plainly visible to all but very often misunderstood.

Traditional robot development is based on the same concepts as discretionary trading. Find a high probability entry point, based on risk versus reward, set an appropriate stop-loss, and then wait to see the result.

In a nutshell -- my current robot strategy is to look for long term predictability and then try to take advantage of that predictability as often as possible using small individual units of risk.

A final word of advice. If I'm wrong about the AUDJPY, and it doesn't have a long term rising trajectory, then I'll have an unproductive robot sitting on some carry trades. Similarly, if you decide to take advantage of a longer term trend, make sure you have a solid basis for your predictions.

Trailing Stop Strikes

Well, whether it is a small correction or not I have no idea, but the USDJPY has gone down enough to remove me from the market. So, my profits have been pocketed and I need to look for opportunities to get back in.

The same is true for my AUDUSD holdings.

I'm starting to look into the USDCAD, in the long term, but there is always the risk that the US dollar will take a dump when the Tuesday interest rate news comes out. It would be hard to imagine that we could get to parity, or that we could stay there for long, but there is always the chance that the war in Iraq will push us there. I see an incredible load of debt being heaped on the USA combined with an inevitable drop in spending when the war ends.

On a different note, I find myself sitting on the sidelines. I don't like being on the sideslines, but I don't want to keep throwing money at a market to see if I can a place where it will stick. That costs too much. Maybe I'll investigate some carry trade ideas. For example, the EURTRY is appealing, though very risky.

Riding the USDJPY Train

Well, imagine my surprise to wake up to a hugely profitable swing in the USDJPY.

It's too bad that I wasn't awake during the action. I could have increased my position on the way through and grabbed stupendous gains from it. Anyway, I cannot complain, as I've added almost 10% to my account.

Isn't it great when you accomplish great things in your sleep?

Of course, I should note that I did have some losses on this pair during it's downtown nearly a week ago.

Forex Review: Taking Stock

The weekend is a good time to review what happened during the last week, take a look at long term charts, and to think about new trading strategies for the future.

As a relative newcomer to the game I'm taking my first good look at the idea of rollover. Basically, when you make a trade, it doesn't really involve your own money. You borrow one currency (the base currency) to exchange it for another (the quote currency). The margin deducted from your account for the trade can be thought of as extra money to ensure you can afford to buy back enough quote currency to pay back the original base currency lender.

Anyway, without getting into the details of timing, you pay interest on the currency you borrowed and earn interest on the currency you bought. If there is a difference in interest rates, and their often is, you can earn revenue for as long as you hold onto the quote currency. Of course, the reverse is also true, such that you could be making net interest payments too.

As for trading strategies, looking at the long term charts shows me that there is a lot of uncertainty and volatility in the markets these days. This spells risk. Times are dangerous. I've seen it suggested that now is a good time not to risk trading on the Forex if you are an inexperienced trader. This isn't going to stop me from playing with my tiny account though.

Personally, I'm looking at the USDJPY as a source of opportunity. Yes, as you know, opportunity is a synonym for risk in the arena of investment and speculation. The question is, how low can the USDJPY really sink? Is there going to be a fundamental change in the financial status of Japan with respect to the USA? As always, you have to consider your ability to stay in a position that doesn't move in the direction you want, and how much risk to your capital you are willing to allow.

Trade Free Weekends

It looks like The Rookie has survived another week. Although, I have to admit I'm holding my breath on a few underwater instruments this weekend.

In particular, the USDJPY took a heavy knock on the jaw and is lying face down waiting for the three count. Maybe the weekend will be long enough to let the coach clean up a few wounds while the dollar catches it's breath for the next round? Get up Rocky, get up!

The Australian dollar was showing a little strength. Better yet, the AUDUSD was bobbing up and down and I was able to shave some pips here and there right up until the last couple of trading minutes. A couple of extra dollars in the account can make a big difference -- not so much for the value as for the extra margin buffer.

Personally, I was disappointed by the EURCHF. Cheffy, my pet name for the CHF (pretty clever, I know) was busy chomping on the Euro's nuts from the moment the US jobs report came out. Come on, we don't need the Euro to be a surrogate for the US dollar. Anyway, I'm just grousing because it would have been nice to see a little more traffic going in the opposite direction to the recent stampede.

Speaking of stampedes, the EURUSD was feeling pretty uppity. I'm afraid a large portion of my potential gains were penned up via some, in retrospect, cautious limits. That's really too bad, but as my last post said, I got some learning out of that too. Maybe one of these days I'll know enough to catch a bit of ka-ching here and there.

Heck, I guess I was spread all over the place. Pretty aggressive for a complete rookie if I think about it. Anyway, the GBPUSD was a bit ambivalent about the recent news. Sure, it left the dollar in the dust for a while, but the pound suffered from a guilty conscience and came back to offer encouragment. However, by the end of today it was tired of waiting up.

I'm thinking that once I can clear out of my current positions I'll move to trading within a basket of somewhat offset instruments. Heck, I'm sure I can figure out tons of ways to give away bits of money here and there. Most importantly, yes, it's still fun. I'm still stuck to the screen like a fly on a lightbulb. Yes, I am aware that usually this isn't too good for the fly. I'll change my analogies when I'm a cash magnet.