Measuring System Vulnerability The Market Exposure Index

If you have been reading my blog for a while you may be familar with my use of the term "market exposure", as a matter of fact, most of you may be aware that this is a concept I use most the time to describe trading systems and gauge their possibility to be long term profitable. But, what is exactly market exposure and more precisely, how can it be measure ? Well, those of you who are subscribed to my newsletter may already have seen the video I posted on the FTP about market exposure and how this is vital for the description of a trading system. However, since this concept is pretty important and mentioned throughout my whole website I have decided to dedicate todays post to the analysis of the concept and the formal introduction of what I like to call "market exposure index".

The first thing we need to do if we want to talk about market exposure is to define it. What is market exposure ? There are actually several ways to explain the concept but the simplest one is to think about market exposure as the magnitude in which your system becomes vulnerable to loses as a consequence of the opening of a position. That is, whenever you open a position in the market you are getting "exposed" to losing your money as the market can take a move against you. The vulnerability of any system against taking loses is what I call "market exposure".

Now that we know what market exposure is we are left with a more challenging task. How do we measure market exposure ? How do we measure the vulnerability of a trading system against the market ? The first thing we need to do is think about the factors that affect market exposure, what affects the exposure of a system against the market ? The most important things that determine market exposure are the systems risk to reward ratio and the overall winning percentage of the EA. That is, the probability to win a trade. You must take into account that these two variables have to be deduced from extensive historical or live testing as short tests could bring unreliable results. Also take into account that the probability to win a trade, is never 1, that is, there is ALWAYS the possibility to lose a trade. Stubborn systems, like grid trading systems that assume the market will always "come back" to achieve a profitable result eventually lose as, even though the probability to lose can be low, it is still present and the fact that you are putting your whole account balance at stake makes the system to eventually wipe your account.

So how can we measure market exposure ? This is the reason why I came up with what I call, the market exposure index. This quantity, which is expressed by a simple mathematical formula can tell us if the market exposure of a system is capped. The formula is very simple

market exposure index = 100*(fraction of losing trades)/(average reward to risk ratio)

For example, the gods gift ATR, GBP/USD has a market exposure index near 60. Any market exposure index below 100 implies that the strategy is profitable and adequately capped. Any result above 100 indicates that the system is unprofitable, the higher the market exposure index, the higher the risk of a wipe out. For example, Martingale systems, whose risk to reward ratio increases exponentially with every losing trade have a market exposure which is generally equal to equity over the fraction of profitable trades. Grid trading systems have the same risk to reward ratio, something which lets us know from the start, through the market exposure index, that those are strategies with very important market exposures that WILL cause account wipe outs in the long term.

Hopefully, if you liked the idea, you can start using the market exposure index as a way to gauge the viability of trading strategies and the way in which they protect your equity from the market. Strategies with very low market exposures are the best since ideal strategies would have a very low risk to reward ratio with a very high winning probability. Most of the time, the best systems have a compromise between these two things.

If you would like to learn more about trading systems I have developed and how you to can evaluate and trade automated systems profitably please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Diposting oleh Unknown 15.45 0 komentar

Mathematical Expectancy A Basic Powerful Concept in System Design and Development

Through my last few posts I have mentioned the concept of mathematical expectancy , a very important and useful concept which many people seem to be unfamiliar with. The objective of todays post is to talk a little bit about the concept of mathematical expectancy and its usefulness, pointing out why it is such a fundamental and useful tool in the development of long term profitable trading systems and a key step in the evaluation of any given entry logic. I will start the post with the definition and purpose of mathematical expectancy and I will then continue with some examples and concepts which will show you why the analysis of mathematical expectancy is extremely important and a necessary step in the design of any given trading system.

Many of you may have wondered how successful traders come out with a good entry logic for their trading systems, being manual or automated. How can these people know the chances of success of a given entry logic and use it within their system development ? Many people who are new to automated or manual trading usually have an over-focusing - with little analysis - on the entry logic completely neglecting the development of the money management part. Not only does this pave the way towards the development of unprofitable systems but it doesnt help that the way in which the entries are developped is non-systematical and statistically not rigurous. usually youll find that people develop a given entry logic based on visual observations of a VERY limited number of market situations and then modify the entries in forward/live testing as they fail under current conditions. This speaks about the lack of knowledge of this novice developers and the way in which they view market and long term profitability.

A simple question then arises. Is there a way to systematically evaluate different entries to know which entry is better, which time frame is better and what exit strategies may be more suitable ? The answer comes in the form of mathematical expectancy analysis- an absolutely simple- yet absolutely powerful technique which allows you to evaluate the POTENTIAL (different from the profitability which comes into play when money management is implemented !!) of a given entry logic. So what is exactly mathematical expectancy and how does it play a role in system development ?

The mathematical expectancy analysis is simply a technique which allows you to know the extent to which the market is bound to move in a certain direction after a given entry is taken. The analysis is fairly simple, you mark every entry for a given logic on a chart and then you mark a set given number of bars into the future. So for example, if you want to evaluate the mathematical expectancy of a moving average cross on a 10 bar period you simply mark each entry and then you mark the tenth bar after the entry. After doing this you determine the high/low of this ten period after the entry. This gives you the maximum the market moved in favor of your entry and against your entry during this period. When you do this over a very large sample size you can determine the average movement in favor and against you and you will be able to tell if the mathematical expectancy of your system is positive or negative. This marks the potential of your entry.

This analysis is very versatile and very important. By changing the number of periods in the analysis you can see if your strategy is better at capturing short or long movements and what timeframe fits your strategy best. For example, some systems may have negative mathematical expectancy on a small number of periods while the mathematical expectancy may be positive under larger periods meaning that the system is better fit at capturing long term movements than short term movements. This analysis also allows you to design appropiate exit techniques for a given entry logic since you know what the average movement against and in favor of your entry is you can calculate an adaptive SL or TP such that in average you will hit the TP and miss the SL.

It is of course terribly difficult to explain all the aspects of mathematical expectancy within a single post reason why I only meant to give a small introduction to the topic within this post so that people interested in system design may know that this technique exists and has a paramount importance in the development of a systems entry logic. Within my website - in Asirikuy- I have made several videos explaining both the theory and practical aspects of evaluating mathematical expectancy over a 10 years period, in additon I have also coded an EA to allow people to evaluate any given entry logic . If you arent interested in Asirikuy then at least you now know this tool exists and you can either make your own EA to evaluate this aspect or you can do your own research to find more information on the subject :o).

If you would like to learn more about what I have learned in automated trading and how you too can design and program systems to use in forex trading please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Diposting oleh Unknown 18.30 0 komentar

Shark EA from forexeasystems a Possible System to Try

I guess many of you have noticed that I stopped forward testing many of the experts I had on my vps starting this year. The main reason is that they showed me a substantially negative behavior that made me change my opinion and in consequence, consider them not worth testing anymore.

Because of this, I am actively looking for some expert advisors to test, free or commercial. I have always been interested on the Shark EA by http://forexeasystems.com/ which is the commercial ea I know with the most extensive forward testing on record (by the seller).

I would like to know if any of you have tried this expert, what your results and opinion are and if you would like me to review the expert, if you think it is worth a try. I think it is but then I dont know anyone who has actually traded it. Well, I thank you again, I appreciate your feedback ! Please leave a comment with your opinion !

An updated review of my opinions about this trading system and my experiences trading it through 2008 (on live accounts) will be posted on September 12, 2009. Please check the Label drop down list on the left side menu and select "Shark EA" to read this review after the 13th. If you would like to learn more about my EA evaluation criteria, why most commercial expert advisors fail and how you can start profiting from automated trading system using long term profitable experts with real profit and draw down targets please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Diposting oleh Unknown 15.16 0 komentar

Why There is No Universal System Differences Between Currency Pairs

Can we build a system that trades successfully on all forex currency pairs ? This has often been a question of the automated trading system world that simply asks if there is a universal inefficiency, an inefficiency that is so common that it can be found an exploited on all different currency pairs. Up until now, the answer to this question has been a resounding and unequivocal NO. To the best of my knowledge no system has ever been developed to work on all currency pairs despite the claims of many system sellers who tell you that you can use their systems on all of them. But why has it been impossible to build such a system ? Why does trading all currency pairs seems like such a big challenge ? The answer lies within the very fabric of the market and the way in which the different currency pairs trade and react. Within the following paragraphs I will explain to you some of the basic aspects of these currency pair differences and why it makes the creation of any universal system extremely hard if not impossible.

You may have been told that inefficiencies in the market arise due to crowd behavior- which is a human characteristic- and that all currency pairs in forex show it to some degree. When you hear this it becomes easy to think that if a system "really works" then it is bound to work on absolutely all the instruments available in the currency market. After all, every instrument is bought and sold by humans and this would make them inherently inefficient.

Certainly if all instruments traded with the exact same number of people and with the exact same objectives we would be able to easily find a universal inefficiency but the matter of fact is that this is not the case. The first dramatic difference between instruments is the number of participants and the inherent liquidity of each currency pair. Some pairs like the EUR/USD are very liquid while others like the GBP/CHF dont have 1/10th of the liquidity of the former so their price action is dramatically different and the inefficiencies within it become dramatically different. The less people who trade a given pair, the more efficient it becomes since crowd behavior becomes less pronounced and individual decisions start to play important roles.

Then we have other differences that also make the movements of currency pairs different. For example if you are trading the USD/JPY and there is a negative trade balance against Japan then there will be a given fixed amount of money each month that will pull the USD against the JPY just merely because of business transactions that have nothing to do with speculation. The volume of these transactions is very significant and the time in which they are processed and their magnitude will have an impact on the way in which a pair moves.

Many other factors such as central bank intervention and even cultural differences play an important role in the way in which a pair moves when compared to another and all of these factors help to explain why the finding of universal inefficiencies is so hard. However when you look at higher time frames (daily and beyond) there seems to be some coherence and this is the reason why some systems that target month or year long trends manage to exploit the same inefficiency on several different currency pairs. However the success of these systems along the whole portfolio is never total and more often than not there are very strong differences between the profitability of different currency pairs and several pairs where the systems simply do not work.

So will we ever find a global and total inefficiency ? I would have to say that probably no, but if there is a chance it will take a lot more liquidity on all instruments and a lot more market participants to make this the case. Certainly in the future if the market volume on the illiquid currency pairs increases enough we might be able to have - even though not a truly universal system - at least systems that will have better success along different currency pairs.

If you would like to learn more about system development and how you too can build your own likely long term profitable systems based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Diposting oleh Unknown 13.30 0 komentar

Forex Expert Advisors Forex Combo System an unbiased review

The Forex Combo System is an expert advisor that claims to be a proven professional trading system which offers long term profits. The subject of todays post will be to review this trading system according to the evidence given by the authors. As always, my comments on this expert advisor are as unbiased as they can be as I receive no compensation for giving either positive or negative remarks about the system.

The forex Combo system is devided into three different expert advisors which follow scalping, breakout and countertrend trading strategies. The webpage is pretty straightforward and takes us directly to the evidence of profitability for this trading system. The first thing that we see are backtests for the past 3 years for each one of the trading systems. I have to say two things about this, first, giving results in pips is an absolutely misleading way of showing profits (as the actual result we are interested in is actual percentage of equity and how this relate to pip values depends on money management) second, the levels of profit this guy talks about are absolutely irrealistic. Unfortunately it is this type of system that drives most people to say that metatrader backtesting is completely "worthless" and that people should only listen to live testing evidence. Of course, in cases like this, backtesting seems to be flawed because of a) the strategy has serious problems with interpolation errors because it enters trades midbar or b) the strategy has been designed purposefully to overexploit hindsight. Both of this things should be explained by the seller and the values are completely unrealistic and are NOT true. The system shows the classical behavior of a system that exploits a backtesting failure with huge profits and very smal draw downs. It has been shown that when this type of systems are brought to live trading they fail heavily.

The creator of the expert advisor also shows us some very limited live testing information which was suspiciously only carried out for two months. Given the fact that this was started in march and we are currently in septemeber, this guy could have approximately 6 months of live testing. Why doesnt he show them ? the truth is that he probably doe snot because the evidence did not favor his sales very much. Probably the system started to fail after the first few nonths and he therefore did not dare publish the results on his website. I mean, if I were him, I would have trouble sleeping. How could you sell something to people which you know by a fact, is NOT profitable. Talk about being unethical.

If he stopped the testing because he just didnt feel like testing anymore then how the hell can you sell something to people that you dare not trade with your own money ? There is just no way out of this, once you publish live testing you must keep on publishing it indefintely or otherwise it casts serious doubts on both the profitability of the system and the ethics of the person selling it. In my opinion this is just a worthless trading system like many others which has a backtest that is totally worthless and some very limited live testing that is only there to impress people who are easily caught by the idea of heavy profits (which unfortunately can be many).

Of course, this system is totally NOT worth buying and I would advice anyone who finds a system like this to just run away. However, if you would like to learn more about expert advisor evaluation and how you can stop losing and start a long term profitable relation with automated trading lease consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Diposting oleh Unknown 22.31 0 komentar