Trader Interrupted

Once again, apologies for letting my blog languish.

Since I last posted Oanda has introduced an MT4 client. While this is good news for robot programming it's unfortunate that you have to trade in minimum amounts of 1000 units -- at least if you are trading using the MT4 client.

This has put my theoretical robot strategies out of reach on Oanda's MT4 platform as they depend on small incremental trading strategies. However, reading back a few posts, I think I should resurrect the "profit is my density" concept when I get the chance.  Back testing is free...

Anyhow, hoping to post more and more often too.

Return Of The Robots

Once again I am purely a robot trader.

Part of the reason is that my day job does not allow me to use company Internet or computing resources for the purpose of earning revenue. This is a sensible restriction even if my use would only have been to let me view charts and enter trades.

Now I use the Internet at work purely to watch how my robot is doing. I don't enter trades, I can't access or change the robot's behavior during the day, so really, I'm watching buy and sell events for entertainment purposes. As long as it isn't chewing up bandwidth or interfering with my productivity that is alright.

The latest incarnation of live robot is a bi-directional trader. The theory is that at any point in time prices are going to move in some direction for a while and then in the other direction. This back and forth movement will continue endlessly.

Conceptually, break the bi-direction robot into two unidirectional robots.

With that done, admittedly, it is possible that one of my robots will run out of ability to trade as the price moves a long way in the wrong direction. However, my other robot will be earning a profit during this time. Additionally, I am certainly able to manually reallocate resources between these two robots if and when conditions support the reversal of a large movement.

With the volatility of last week this reasonably cautious robot did fairly well. However, this robot isn't suitable for professional trading as it is allowed to hang onto negative positions for a long period of time.

Perhaps the most important aspect of this robot is the sound it makes whenever it closes a profitable position. Hearing the ka-ching sound whenever there is price movement up or down is very rewarding... as it happens so often.

AUDJPY: Profit Is My Density

No, that's not a typo. It's a rip-off of a line from the Back To The Future movie. Anyway, this post is another in the series of theoretical considerations with respect to various robot building strategies.

In this scenario let's consider fixing our maximum total position size across a specific price range. For example, perhaps we are willing to purchase 10000 units per 1000 pips (remember, I'm generally talking about small account sizes). For Oanda traders this will run you up to about $175.00 in margin.

If you want to limit your overall positions to 10% of your account capital then you'll have to ante up $1750.00 to play in that 1000 pip range. Obviously, a large account value will either give you a larger playing field or a higher density of positions if you don't expand the playing field.

Are you still with me?

I know, at this point things are pretty boring. In fact, we're looking at a simple grid that we can play every time price passes through our space. However, this gets a bit spicier if we can find a way to optimize the open and close activities.

For example, what if we can compress our position openings towards the low end of a short term movement? Similarly, what if we can compress our position closings towards the higher end of price movements within our price space?

If you have good ideas for these processes, then you are set!

My thought is to adjust the probability of closing profitable positions based on the amount of profit a position embodies. For example, perhaps a position with a 10 pip profit has a 1% chance of being closed while a 20 pip profit has a 5% chance of being closed -- per bar. What would this do to the expected profit per position? Are some probability formulas able to provide much better returns?

Remember, we're talking about trading a maximum density of positions while prices move through our trading space. We know our total position, our total risk, and simply want to allow our winners to run as much as we can based on historical price movement patterns. Basically, we know that prices range for a while and then take off up or down. It's the multi-day upward movement that we want to catch... letting go of positions slowly during smaller moves until we can eventually latch onto a bigger move.

I'm probably about 85% into building a new robot based on this concept. I like the measured aspect of this on the risk side. I like the less definable profitability expectation -- it's beyond my math skills at any rate -- which is suggestive of an ability to preferentially capture larger profits. I also like that it should continue to eek out smaller profits if the price decides to languish in a smaller range for some period of time.

Maybe I'll be able to fire this up on Monday.

Trading Week Recap

Since the trading robot, BREAD, was predominantly sidelined for the last couple of weeks I felt the need to do more discretionary trading.

While the capital used wasn't very large it felt great to pull in a 34% increase over the course of the week. If I could scalp like this all the time it would definitely spell the end of the day job. I have dreams of setting up a trading office with spacious rental cubes available for other traders. Rookie's trading pit.

Back to reality, BREAD on the other hand snailed along earning 2.4% and 1.7% over the last two weeks. Sometimes I think I live in Bizarro world when I have disdain for a 100% annualized rate of return...

In any case, I think the long tail of H1N1 recovery has finally come about. I should be able to concentrate both on my day job and on creating new robot strategies during evenings.

Tough Week All Around

With the recent downward move in the AUDJPY my robot has been sidelined.

No big deal really but it does point to a possible correlation as I'd noted earlier. After a very good robot week, perhaps with behavior characteristic of a local top and massive robot profit, the market takes a downturn. There are only two data points so far but I'm definitely staying on the lookout for this. Above average robot profits... be skeptical.

On another note, I contacted someone concerning proprietary trading last week. While I had suspected as much, the fact that my robot is willing to be a carry trader during downturns relegates it to the world of personal trading. So, sadly, my dreams of leaving the standard workforce have been delayed.

The biggest negative event is H1N1 making the rounds through my household. It's bad enough when I feel like crap but it's a lot tougher watching my son cough, wheeze and shiver.

Hopefully we'll be back to normal by Monday. I need to get around to making a better robot -- or at least one with different characteristics.

New Robot Rules Fermenting

It's late Friday night, the markets are closed, and all through the house not a creature is stirring. Well, nobody but the scheming trader hatching up another robotic system.

As someone who designs software systems for a living I can assure you that, in terms of making improvements, nothing is more helpful than watching a system in action. The key point here is the concept of "seeing" the results. While this arena is a bit of a different animal I've always been proud to claim that if I could see the problem I could fix it. You see, no matter how complex the problem there is usually something along the lines of a paradigm shift which greatly changes the nature of available solutions.

So, at the end of the week, when I'm not at work, I can review charts, apply various indicators, and see how various changes might affect trading and earnings. During the week I can see or hear positions open and close and watch the daily results tally up. Simple but powerful stuff.

Anyway, the thing that is keeping me awake at night, in a good way, is a relatively easy way to increase the profit per trade. I believe so anyway. Hopefully we'll find out next week... as I'll be developing this new ARTFAB robot pronto.

I do already have a robot trading at an average return of 1.2% per day over the last five weeks (BREAD - basic robot earning all day) but I've set an aggressive stretch goal of averaging 2.5% per day. BREAD just isn't going to get there. Assuming that other people have done much better than my paltry goal really gets the creativity flowing -- as you simply know it's possible if others have done it. There must be a way to get there while strictly controlling risk levels.

I'm sure there are many ways. I intend to find one of them.

Meteoric AUDJPY Rise

I'm starting to get more than a little cautious about the stellar increase in the AUDJPY over the last several days.

While it's true that markets can continue to move higher or lower for long periods of time it's important not to get too caught up in recent events. In fact, though we all react to these things at different rates, you can consider it a warning whenever there is something to get caught up in.

Insidiously, it is often those things that happen over a very long period of time that we forget to take notice of. For example, the smart phone has been growing in leaps and bounds and will probably do so for years, but at some point it is likely to turn into the next PC. If you haven't noticed PC's are now relatively cheap commodity products which leaves PC makers turning to the service sector in an attempt to fuel continued growth.

In any case, this is a point at which I have to resist ramping up the aggression factor in my trading robot... and the notion that it might be a good idea to take a bigger bite out of upward movement needs to serve as a warning to me.

Recent Forex Results

I've had some success analyzing the AUDJPY over the last few days. In particular, whether by luck or otherwise I managed to spot some channels, one of them an apparent bull flag, a wedge leading to 82.00 and then predicting a breakthrough beyond that level.

It's very rewarding to make an observation and then have results conform to your expectations.

Anyway, I'm still letting my robot do my trading for me. It's earning north of 1% per day and I continue to make minor tweaks in an attempt to push the appreciation rate closer to 2% if I can.

Recent tweaks involve looking at various stochastic values in order to adjust position entry scale to some degree. Obviously, as the robot only opens long positions, the idea is to open less positions during periods of strength and more positions during periods of weakness.

It's never as simple as it sounds.

For more radical tweaks or outright departures from the main trading robot I'll strike out with a small amount of capital in a new account. I have one of these experimental robots running right now. It's very heavily tweaked.

I've got another radical, but simple, idea in the wings. It will have to wait until next weekend so that I'll have time to implement it.

BREAD's Trading Results

Yes, for lack of a better name I am calling my robot BREAD. This is short for Basic Robot Earning All Day. It has been given minor tweaks from time to time but it still continues to follow the same system and strategy... taking advantage of constant price oscillations in the AUDJPY.

While the results don't look all that spectacular I invite you to investigate how this ends up in a compound interest calculator. And, finally, the results for the last four weeks are:

Return	Day
0.1900%	Sun 13 September
3.2339%	Mon 14
3.1616%	Tue 15
3.2615%	Wed 16
2.1510%	Thu 17
0.4442%	Fri 18
0.1850%	Sun 20
2.0259%	Mon 21
0.9016%	Tue 22
1.1536%	Wed 23
0.2460%	Thu 24
0.1338%	Fri 25
0.0000%	Sun 27
0.1900%	Mon 28
0.6862%	Tue 29
2.3444%	Wed 30
0.3317%	Thu 01 October
0.7376%	Fri 02
0.7311%	Sun 04
1.0346%	Mon 05
1.0587%	Tue 06
1.9310%	Wed 07
1.6854%	Thu 08
0.9897%	Fri 09

So far the average rate of return over the life of the robot is ~7.20% per week. I'd like to make improvements but it is difficult to make changes that don't have unintended consequences.

AUDJPY Roller Coaster

Generally, I follow and prefer to trade the AUDJPY. It goes through unwinds from time to time as the bigger players suffer fits of risk aversion.

For the last few weeks we've been bouncing back and forth between 77 and 80. On the way down, with all the gloom and doom blaring in the media, it feels like we must be about to fall off a cliff.

It's difficult not to be scared. After all, anyone who was trading during the last couple years knows very well what it feels like to fall off a cliff. Ouch.

However, it's precisely when everyone is scared that prices adjust too much. How do you know when to get in without trying to pick the bottom? You get in when you have a strong resistance point. You can enter your trade, conditions permitting, and set your stop at a safe distance below the resistance point. You get in when you know there is a large potential upside and a low potential downside.

With all my work on robots I haven't been doing much discretionary trading lately. In a strange way, this is helping me develop patience.

My personal take is that we're going to have variability in the global economic recovery. Some portions of the world will contract while others expand, and then we'll probably get oscillations between those regions. This means that the roller coaster may be the main mode of the markets until everyone starts to settle down and stop pressing the panic button. This could take a very long time.

However, this is great news!

The roller coaster is a great place to trade. As long as you are only trading appropriate amounts of capital per position you have the ability to earn every time we get another cycle of exuberance and fear.

As long as we have people in both camps, gloom and doom vs surprising growth and strength, then the markets will be a great place to be. Just keep an eye out for anything that truly is a disaster in waiting.

In particular, I think we are at a point where different segments of the trading world exhibit different behavior. For example, Australia and Japan exist in a different economic climate than the USA. It's quite possible that traders in these regions, especially those not too tied to US events, won't be feeling risk aversion.

Similarly, sections of Europe seem to be recovering nicely. I can see that many regional traders would not be overly risk averse, in general, and that carry trade strategies might be entertained. For example, China and India are becoming more important in terms of world trade and they don't seem to be necessarily synchronized with the US.

This is another reason for our roller coaster. We may get different directions on the risk trades (carry trades) based on which financial center is generating most of the trading activity. Yet another reason to expect a choppy ride.

Related reading... yahoo finance.

Friday Market Analysis

I am following CNBC regularly (via their web site) these days. I see many of the pundits advocating panic and doom. I suspect they all want to be able to claim they were right when we finally do experience some type of pullback.

However, these braying naysayers of doom really don't have much of import to say. All they really do is act as large forces on the emotions of market players. Everyone is appropriately skittish due to the massive bear movements over the last year or more. It's only natural.

All of these fools who only imagine one direction for the markets will be right from time to time. What they say is not important. What's important is to understand the volatility, or level of price fluctuation, and the amount of risk that this implies when you are trading.

For example, the odd negative number here and there doesn't mean all that much. This doesn't mean the market won't throw a tantrum, but it does mean that there could be a spate of good numbers in another week or two. These trends have variations in them as well. Perhaps because the media jumps on whichever bandwagon has the most passengers the market sentiment gets rapidly overblown.

So, sure, we could see some type of sell-off coming soon. So what? So, don't risk all your money on the notion that the markets, carry trades, risk appetite, GDP growth, corporate profits or whatever will only go up. In fact, cushion yourself by assuming a mini-panic could be right around the corner. Seriously, hasn't everyone been hiding under their sheets due solely to the fact that we're in September?

What am I going to do? I'm going to move more capital into my account. Any serious downtown represents a good opportunity to scale in. So, let it rain, I'm going to wait until all the overextended or panicked fools get forced out, then I'm going to take a peck at an opportunity here and there. Again, just make sure to nibble your way in at appropriate times.

Remember, fear and downward movement provides opportunity, but only if you don't assume you can predict the bottom and thus assume too much risk. When you aren't being pushed into making decisions by market movements you can make much better decisions.

So, early next week, fresh capital into my account. I can apportion this to my robot trading army (I know, but it sounds more fun this way) in small chunks as we come up to significant resistance levels. Unless the world collapses, and if it does my trading account will be the least of my worries, there will eventually be another upturn.

As a side note, I'm planning to make opposing robots this weekend. They will trade long and short positions in different sub-accounts. I expect that one of the two will be earning during up or down movements. I expect both of them will earn during periods that the market is moving sideways. You can't see it but I'm rubbing my hands together in a greedy manner -- think Mr Burns.

Good luck out there.

Thursday Robot Recap

Thursday was a very slow day.

The market was down. The yen crosses took a dive. Everyone is getting antsy about stocks, news reports, and the month of September. OMG, the risk! My robot snoozed for much of the day and had little chance to earn anything useful.

However, amidst all the whining I have to realize that being up about 4.5% for the week isn't so bad.

Regardless, I did tweak things a tiny amount. Basically, the idea is to keep the robot trading for a while longer during downturns. This can be done by shaving a little bit off of positions and forcing a little bit more space between trades.

It seems like a good trade-off. Earn a small fraction less during good days but enable more trading on poorer days. If things don't work out it will be very easy to reverse these minor tweaks.

I also created a new robot this evening. Of course, it's based on the current system, but somewhat simplified. It's running on it's own sub-account with a tiny amount of capital. So, rather than attempting major adjustments on something that is already proven, I'll once again get into an A/B situation and see if there is a clear winner between the two.

On another note, I'm wondering how simple a robot can be and still be effective. Something to ponder as I drift off this evening.

Wednesday Status

Wednesday was a slow day.

The AUDJPY was very quiet, which left little opportunity for my robot to extract revenue. In fact, with the DOW drop at the end of the trading day today we may be looking at a bit of a downward correction over the next little while.

My robot is not very active during downward movements. So, I'll get bored, worry about long term profitability, and otherwise be motivated to "do something" or "fix something" when I shouldn't. I must resist!

Anyway, while today was very slow, my currency trading robot did pull in 1.1% with over 4.3% for the week.

On a different note, I need to name my trading system. It would be nice to call it something other than "robot" every day. I could name it ARTFAB (A Rising Tide Floats All Boats) or something? Hmm, maybe FARTBAD or BADSINE?

Hey, BREAD might work... Basic Robot Earning All Day. Okay, tentatively, BREAD v1.0 is on the job. Unfortunately, bread is pretty passive, getting sliced, diced and toasted regularly. Zzzzz. I'll sleep on it.

Weekend Robot Development

Now that the weekend is here it's time to put on the thinking cap and figure out how to increase earnings, reduce risk or both.

As mentioned in a reply to a comment on the previous post I've reallocated funds, put in a reserve amount and added a manual release amount.

The reserve amount holds back capital from the lot size calculation and the total margin available calculation. This capital is ignored such that the robot acts as if it only has balance - reserve under management.

The release amount, if any, adds capital into the margin available calculation but does not change the lot size calculation. The purpose of this is allow a series of discretionary actions to reactivate the robot once it has stopped trading due to an extended period of unhelpful price movement without adjusting the risk per trade.

The amount of capital released can be reduced as the price moves in a profitable direction. I'm also hoping that the robot will earn above it's target rate so that some capital can be painlessly shifted to reserved status each week.

Unfortunately, all of this might make it harder to report standard profitability numbers. Whether rightly or wrongly I'm going to use the unreserved capital balance as the measurement value of the account. It's what the lot size is based on and I intend to grow that amount X% per week. I'll also be using that value for my theoretical compounding calculations.

Remaining on the burner are concepts such as the meta-robot and email notifications to be issued when the meta-robot identifies various conditions suitable for discretionary decisions. If these turn out to be useful I might even set up some type of free mailing list.

Recent Forex Efforts

Since the recent yen cross meltdown started I've been trying to keep from getting caught on the wrong side of any massive downward moves.

As I generally trade only the AUDJPY, mostly on the long side, things have been pretty quiet!

However, we are now facing some resistance at 74.50 on the 1hr -- which should be illustrative. We have done what might be a triple bounce off of support in the vicinity of 70.90 or so too. I'm thinking we may have another downturn to confirm support but we could certainly get right back to business without it.

In any case, as the market is starting to act rational, I'm just about ready to start trading according to my own particular style.

Back From A Trading Break

Well, it's been a while since I posted. Things have been hectic, but I did just take a short vacation. No running water. No cell phones. No internet. No trading. There were, however, lakes and fish.

I think I'm ready to do some serious speculation at this point... as long as the market behaves.

Hopefully I'll soon be posting and tweeting up a storm!

We'll see.

Theory: Trading With Little To No Margin

As I often do, especially when the markets are excruciatingly slow in determining when to make the next significant move, I've been thinking about Forex.

Take a mental walk with me...

The DOW falls from 10,000 to 5,0000 and loses 50% of it's value. It returns from 5,000 to 10,000 and gains 100% of it's value.

Wait, think about that for a minute. In the normal world having the ability to gain double digit gains, per year, is considered excellent.

If you are confident that an upward cycle will eventually happen, in a suitable time frame of course, then movement is valuable. If you aren't trading on margin, and you don't have the associated risk, then you can afford to look at each dip in price as an opportunity.

While this may be applicable to the DOW, it is ever more applicable to the Forex markets. If you are trading with little or no margin it's simply a matter of scaling your entry and exit based on price moves. This is very similar to the gridding concept that I posted recently.

However, when the margin is gone the risk is gone. You choose the price range you expect and scale your entry and exit points within it. If you must, you leave some positions in place while you recapitalize to attack another range. In fact, perhaps you simply allocate a set number of dollars per thousand pip trading range. If the price falls into a lower range you simple ante up and play within a lower range -- while your higher range positions provide interest income.

However, keep in mind, it's possible that currency pairs adjust interest rate differential. This could erode or reverse the suitability of holding a pair over a long period of time.

Forex Analysis Post-Review

Well, did anyone notice what happened based on the forex analysis I posted over the weekend.

The EURUSD, posted here, indeed moved upwards a bit before resuming it's downtrend.

The AUDJPY, posted here, with a followup here, broke it's support line and henceforth fell like a stone.

Nice. While I obviously am not able to say which way it will go in advance, it seems I was able to pinpoint the action points well enough (in advance) for you to catch some serious pips.

Was That My Correction?

A few days ago I was saying that perhaps the AUDJPY would pull back after it's very fast rise up into the 71.xx range.

It continued rising to somewhere around 72.80 instead. However, early last night it was bumping down around the 70.00 mark. Was that my correction?

My three hour (I trade with Oanda) shows leg room all the way to 68.xx if it's thinking about correcting.

That's the trick with Forex trading, you never really know whether it's done going in any particular direction or if it's just throwing you a feint.

What can I say? Roll with the punches.

Riding the AUDJPY Sideways

So, it looks like we've had several days of sideways motion on the charts. I don't mind at all.

As long as you buy on the low end and sell on the high end these are good times to play in the market too.

For periods of non-trending action I like to watch the stochastic and RSI indicators. The stochastic are reasonable but they do give a ton of false signals. The RSI can help corroborate their action a little bit.

Something I like to do, especially because I continue to expect a long term upward trend, is buy a long position and see what happens. If the movement is what I like to call rational, I'm willing to buy another below it. When the higher of the two long positions is profitable, I'll sell it.

This effectively replaces my higher position and makes it harder for the market to dislodge me with a downward spike. Then, because I do expect the market to go up over the long term, if it does, I can potentially have multiple well placed positions just waiting to reap in the gains.

However, as with anything, it's harder than it sounds and you'll want to use small position sizes.