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Trading Techniques

Thu, Jun 15 2006, 15:30 GMT
by Scott Owens

FX Engines

Automated trading gives most traders their best chance for success in forex, but it’s not the only element of a successful trading record. Traders must know how to apply automated trading techniques and be willing to manually manipulate trades when possible. Combining these two methods – mechanization and discretion – is the path to profitable trading.

Content

ANALYSIS

• Learn about different ways to use automated trading.
• Analyze systems to gauge their suitability for automated trading.

ACTION

• Build engines to see how they execute in an automated environment.
• Experiment with manual manipulation of trades with automated tools.
• Take your results live and succeed.

RELATED MATERIAL

• Test-drive FX Engines for free online at www.fxengines.com to see the power of system building, system testing, and system automation.

About this Report

The Forex Report is a periodic publication that investigates advanced strategies for superior trading performance in the foreign exchange markets. These reports utilize advanced statistical and econometric modeling techniques to create new insight into the trading strategy of the average trader. This Core Concept Brief, Trading Techniques, is intended for traders with all levels of forex trading experience and technical analysis understanding.

To learn more about The Forex Report or to register for delivery of all future reports by email, including Case Studies & Data Briefs, please visit www.fxengines.com

Analysis

The Holy Grail of trading – does it exist? Yes, and its name is Hard Work! All of the debates surrounding the value of hard work vs. automation miss one main point – automation is hard work! Automated trading is not an end in itself, but a tool that immeasurably helps traders cope with the unique demands of the forex market. Once you’ve made the choice to pursue automated trading, you’ll find a wealth of new trading techniques at your disposal.

THE MANY USES OF AUTOMATED TRADING
The first impression of most traders is that automated trading creates a system where a “robot” takes over and makes all of the trading decisions, then executes them. Another version has the trader crafting the strategy and leaving the actual execution – the part that requires the physical presence – to the automation platform. FX Engines is such a system.

Some trading systems are excellent candidates for complete automation. They have simple rules but may require off-hours trading, frequent trading, or some other element that is ideally suited for automation.

Beyond those systems are more advanced and discretion-driven systems. These kinds of systems require trader intervention at some point. Advanced automated systems like FX Engines allow for this kind of nuanced interaction, but some traders are simply more comfortable knowing their hands are on the wheel. These traders often believe that discretion, or the “art” of trading, is the key element, and since a machine cannot possibly employ the level of nuance a human can, they discount automated trading altogether. Yet there is something in automation for all traders, beginning with the basic trading techniques of automated platforms like FX Engines:

Entry Type	Exit Type	Best Use
Automated	Automated	Simple, mechanized systems
Automated	Manual	Mechanized entry with discretionary exit
Manual	Automated	Discretionary entry with mechanized exits
Manual	Manual	Discretionary entry and exit

With FX Engines, all of these options are available, with more on the way. A trader can manually enter an engine but walk away – knowing that the engine’s exit signals will take over and direct the trade to its conclusion. The same is true for automated entry – perhaps while during the night – with manual exit at the point in time determined to be the best exit.

NOT ALL SYSTEMS ARE MADE FOR COMPLETE AUTOMATION
A skilled trader can make money using any toolkit, and in some cases systems will simply be outside the realm of complete automation. Some examples of these systems include:

• Event Driven Systems. Since events are spontaneous, manual entry is required for these systems. Still, an automated system can assist event traders by providing complete control after entry has occurred, all the way to the exit of the trade.
  
• Non-Quantitative Systems. Though technically driven systems have grown in prominence, many traders reply upon fundamental indicators that do not readily lend themselves to automation. In some cases these systems can employ automated entry or exit, and for some the advanced intra-trade tools like FX Engines’ Contextual Exits allow for extremely fine, automated control of trades.
  
• Highly Discretionary Systems. Some traders work off pure feel of the markets, or use little-known chart patterns to dictate their trading choices. In these cases some form of automation will give these traders an edge they did not have access to previously.

What’s the best way to know if a system is suitable for automation? Historical testing. Traders can create engines and test them historically, then let the results speak for themselves. Some engines will show dramatic results with no intervention. Other engines may show excellent results but be dominated by “giveback” – a hint that perhaps some manual tweaking is required. A quick look at the actual trades in the historical test report will allow the trader to determine what happened and how they could have possibly intervened to improve the results.

Once engines with a comfortable set of parameters are in place, live testing can begin. Remember, FX Engines’ test trades are identical to its live trades, so demo trading with complete automation or with some manual manipulation will replicate live trading conditions. Once tests have successfully met targets, real trading puts the trader in a position to have automated trading techniques like these positively affect the bottom line...

• Trading Techniques

Published on  Thu, Jun 15 2006, 15:36 GMT