Trading with a “Black Box” approach.

[Dick]

I posted a couple of weeks ago that I was trading with an automatic investment plan. A number of people have asked for more information or challenged my results, so I decided to start a trading journal. It is something I have been meaning to do for myself and I might as well make it public.

There has always been a lot of talk of “black box” trading, where the computer program or paper system tells you exactly which trades to make, how much to invest and when to get out. Some very large trading companies have spent millions trying to develop such a trading regimen, incorporating such tools as neural networks, genetic algorithms, expert systems and other forms of artificial intelligence and accumulated knowledge. To date, apparently no one has accomplished it. Or if they have, they are keeping it very quiet indeed. It has remained the goal of a great many traders, yet also is declared to be impossible by just as many others.

For the past month or so, I’ve been trading with what is close to a Black Box. A piece of software developed by a company named (name deleted. See below). Think of it as a Black Box with lots of knobs, dials and other controls on it. You can make adjustments to it and the way it trades and the level of risk you undertake, but in the end you enter the amount you wish to trade and the pairs you wish to use and it tells you what to do without telling you why. The idea is that you establish a hedge with the dollar as the common currency. An example would be the pound/dollar against the dollar/franc. Since the same currency is on opposite sides of the trade, so long as the pound and franc move in harmony, which they do about 90% of the time, the hedge will maintain an even keel and no significant losses or gains should be made in the overall account.

The concept is to hedge the FOREX market, using the main currencies (pound, yen, euro and Swiss franc, always paired with the dollar) to develop three different streams of income. First off, they take advantage of the disparities in interest rates (swap) between the dollar and other currencies to generate a high rate of long-term return. It is easy to generate returns of 50%, 60% even 100%+ per year depending on the level of risk you are willing to accept. Second they take advantage of swings in the market to scalp small profits even though the overall value of the account remains relatively constant. Last, occasionally the hedge doesn’t maintain it’s balance and the position shows a large profit or loss. If it shows a loss, we just sit tight and wait for equilibrium in the market to return, all the while continuing to collect interest payments every day. If it shows a large profit (I use 5% or more) then the position is closed, the profits are added to the trading account and the whole cycle starts all over again at a higher level. The cost of using the software (which is web based) is $100 USD per month.

On December 1st, 2006 I funded an account with One World Forex, a broker recommended by my investment advice service (they also have arrangements in place with GFT and FX Sol, though you can use any broker you wish. You do not invest directly with my investment advice service). I started with $6,250 USD. I chose to start investing using 15% of my account into the market at 400 to 1 leverage. This broker allows trading in micro lots of $1,000, and the software told me to buy 108 lots of the pound ($108,000), 77 lots of the franc and 88 lots of the yen. The interest return would be 87% per year assuming that I made no other moves. My first day, I earned $15.40 in interest. Since then, I have earned $467.15 in interest through December 22, 2006. This is a return of 7.47% overall on my original investment, or about 0.33% per day. Projecting this forward, I should show a return of approximately 10% per month on interest payments alone.

The reason my interest is higher than originally projected is that I have taken 6 smaller “scalps” of the market as it moved through its cycles. These are also predetermined by the trading software. The combined profit was $157.28 USD. I also had the good fortune to start trading at a time when the dollar was showing a lot of weakness and the pound reached 3-year highs. At times the franc and yen lagged and I was able to take quick profits of $682.21, $379.17 and $386.29. As the pound declined, the franc and yen surged to some extent and I again managed quick profits of $420.62 and $539.22.

The total for all 5 quick profits was $2407.51 USD. Together with the $157.28 previously mentioned, I reinvested all these profits into my account, thus allowing for a compounding of interest. To date, I’m showing a 41.04% return from my trades. As of December 22, my account stands at $9,281.94, up 48.51% from inception. The largest drawdown to date is $1850, or about 35% of my trading account. Three days after it reached its lowest point, I closed the position taking a significant profit.

I intend to update this trading journal every day or so as time goes by. I doubt that I will be able to maintain anything like this level of return, but I hope to remain very profitable. On December 18th, I dropped the yen from my trading pairs, and am currently investing in just the pound and the Swiss franc. I made this decision based on advice from my investment advice service and my own observations that the yen was not moving smoothly with the hedging position I was trying to establish and just wasn’t “playing well with others.” This will reduce the amount of interest I get, but should stabilize my account somewhat. If I make any other changes, I’ll post them as well as the results of my daily trading. For the suspicious out there in internet land, I print out my daily trading reports from my broker and keep them as well as a spreadsheet of my results. I can arrange to show them to anyone who insists.

I hope you enjoy reading along and find this of some interest.

Dick Schmidt.
Los Angeles, CA

If you want more information on my investment advice service's trading system, please feel free to e-mail me or check out their website at: www.mmteam.us/demo. They offer a free trial. In the interests of full disclosure, my investment advice service is a small, recent startup and they are trying to grow their business. They offer their users a chance to profit by enlisting others to use the software and have established a binary compensation plan to recompense any who wish to participate. This is entirely optional and is discussed on the website. Thus I have a small, but hopefully one-day significant stake in this company succeeding.


Going to have to make some changes to this Journal. I was informed by the people who run the investment advice service I’m using in a broadcast e-mail to all their clients that no one is allowed to post results and mention their name. The reason given was that they are “Becoming a registered IB well in advance of expected decrees from the NFA.” So I either have to delete all the numbers from this journal or delete the name of the company providing trading advice. Since I don’t think this would make much sense to anyone, or be of much use to me, without account figures, I have chosen the latter course and will remove the name of the trading advice provider. Of course, I can only edit my own posts and can’t make any changes to anything others have posted.

If anyone wants to see the free trial I have mentioned, you can still do so. I have posted a neutral website that will pass you through to the investment advice service I use. This website will ask for your name and other info and is designed to collect information. I WILL NOT use it in this way. I don’t think it is right for someone to be pestered just because they want to take a look at a free demo, so NO ONE will be contacted. You don’t even need to give your real name. If you choose to sign up for a free demo of the trading service, then I’ll send you an e-mail offering any help I can give, but that is it. I hate pushy salesmen and don’t intend to become one.

[Dick]

I expected the week between Christmas and New Years to be dead and the market flat. Volume is off a bit, but the market is moving like normal.

Today I made a profit on interest (swap) of 40.71. This was paid for two days, as my broker was closed yesterday. This is about .66% interest on the total account.

I also sold 4 micro lots ($4,000) of the Swiss Franc. This trade was pre-staged by my investment advice service's software before Christmas and was sitting there waiting for a move. I booked a small profit of $30.40 and reset both a buy and a sell pending order, levels set by the software.

All in all a typical trading day. A decent return for such a small account. No excitement, no stress. The account currently is showing a drawdown of about $450, as the Pound is down further than the Franc is up, so until things come back into balance, no other moves are contemplated.

Dick

[Dick]

This isn't what I expected for the "dead week" between Christmas and New Years. Last night I was down $2200 on the Pound, yet up $2400 on the Swiss Franc. Quite a spread. As of this afternoon, I've gained $1,000 on the pound and lost $1,000 on the Franc, to stay just about the same overall. I'm gradually getting used to Hedging, and finding that I like it. Here the market is thrashing around a bit, and I'm sailing serenely through it.

The only change to my account was an increase in swap (interest) of $20.15. I'm finding it fascinating to watch the balance between the two currencies shift back and forth, yet in the end remain in equilibrium.

Dick

P.S. Just noticed I'm now over 50% up in 27 days. Excellent!

[thecurrencydeal]

Hi Dick

Can the system be traded on a long time basis, ie enter the trades and leave
them there for 3-6 months without getting in and out of trades ?

How frequent are trade signals made ? Do they coincide with interest rate
announcement by different countries ?

Is there a pair that's recommended to hedge a long USD/JPY trade or even
AUD/JPY or NZD/JPY ? Or do they only concentrate on the majors ?

Thanks!

[Dick]

QUOTE=thecurrencydeal;966]Hi Dick

Can the system be traded on a long time basis, ie enter the trades and leave
them there for 3-6 months without getting in and out of trades ?

Absolutely. In fact, that is how the program is designed. The originator of my investment advice service only trades 2 or 3 times a year. Buy and hold while collecting major interest (swap) and the occasional small scalp trade is how it's supposed to work. The past month has been unusual in that several opportunities to take large profits have arisen, but not everyone jumps at each one like I do. In fact, I'm the one who is trading slightly outside the usual methods, mainly because I'm trying to build a small account up to significant levels. As I accumulate more in my account, I plan to become more conservative in my approach.


How frequent are trade signals made ? Do they coincide with interest rate
announcement by different countries ?

No, you just get into a hedge trade whenever you are set up with a broker and let it go. Timing (though it can have an affect) is not critical. Interest rates do fluctuate, but only over a very long period and then the changes are gradual. If necessary, we'll make any required changes to the software and keep you trading at the highest return possible.


Is there a pair that's recommended to hedge a long USD/JPY trade or even
AUD/JPY or NZD/JPY ? Or do they only concentrate on the majors ?

To hedge the USD/JPY, you would want to use a currency that has the dollar on the other side of the trade. I would recommend the GBP/USD, though the Euro would work as well. This is a hedge that I have used with great success. We only use four pairs, each with the dollar on one side or the other to maintain the hedge. We use the Euro, Pound, Swiss Franc and Yen, and you can mix and match according to your needs. Right now, the Yen is going its own way and not hedging well with the European currencies, so I have dropped the Yen from my hedge, even though it pays by far the best interest. The Euro is a stable currency, but it is not paying well, so I'm not using it either. Right now, I'm hedging the GBP/USD against the USD/CHF and collecting interest at the rate of 111% per annum. Add in the occasional trade and I'm a happy guy.

Thanks![/QUOTE]

[Dick]

Just when I thought the year was going to close out with a whimper, I checked in on my trade last night just before going to bed and found that I was up about $400. I had planned to take the trade off when it hit a 5% profit level, or about $450. As I watched, it crept up and touched $450, so I promptly closed all positions and took a $450.90 profit.

I wanted to get out of my current trade to reallocate my account. I had been playing with my investment advice service's portfolio allocator trying dozens of different scenaros and decided that since the Pound/Franc hedge was so much stabler than the hedge had been when I included the Yen, I could afford to invest a larger percentage of my total account. Thus I am now using 20% of my account at 400 to 1 in a GBP/USD to USD/CHF hedge. This raises the interest (swap) level to 111% per year. I earned an interest payment of $32.48 today.

My total account has grown from $6250 to $9917.05 during the month of December, a gain of 58.67%. In theory, I still have two more days left in the month, but that interest won't be paid until next Wednesday, which is also next year, so I'm closing the books on 2006. I count this as a good start, not definitive proof that this is the ultimate trading system. Really looking forward to seeing how it performs next year. See you then.

Dick

[Dick]

Started the New Year off with a bang. I expected peace and quiet, but then again that's what I expected over the holidays and wound up with lots of action. Late on Monday the market started up again (wish I could figure out the exact schedule, it seems to follow no rules I could divine) and I found that I had taken a preset scalp trade in the GBP for $44, as well as earned interest of $32.48. Then just before I went to bed, I took a $408.36 profit and closed out all my positions. I took it a bit early but I was having troubles with my cable company and they told me my data feed might be out for up to 6 hours, so I opted to sit out the rest of the night. Looks like it cost me a couple of hundred dollars, but that's life.

Today I reallocated my account and bought a GBP/USD vs. USD/CHF hedge for 20% of my total account at 400 to 1 leverage just in time to qualify for an additional $34.98 in interest (swap). Predicted interest is about 110% per annum.

I also deposited another $1,000 in my account (from a small late-in-the-year windfall), so my total is now $11,436 with an initial investment of $6,250 plus a recent addition of $1,000. Overall I'm ahead slightly more than 66% since the first of December.

A happy New Year indeed.

Dick

[Dick]

"May you live in interesting times." The old Chinese curse keeps running through my head. What happened to the holiday and first of the year blahs, when nothing was supposed to happen and the big traders were all on vacation? Early this morning (about 1 AM here in LA) the Pound hung a bit while the Franc surged. I tried to take a profit of $575, but by the time I managed to get my trades closed out, it had slipped to $508.56. Since it only takes me about 10 seconds to close out my positions, you can see the market was started to rock and roll.

Rather than jump right back in and establish a new hedge, I decided to wait a bit and see which way the market was headed. Sure glad I did. The Pound promptly dropped 100 pips, with the Franc not nearly covering the move. At the level at which I trade (2.8 contracts of the GBP and 4.05 of the CHF) I would have had a drawdown of about $1200 in half an hour. I should have gone to bed and gotten back in this morning, but I didn't and paid the price. I am now showing a drawdown of almost $1700. Oh well, that's trading. We can't make good decisions all the time. In fact, one of the main points of my trading system is that it trys to eliminate such decisions from our trading.

On the bright side, I earned $110.25 in interest (triple interest Wednesday!) and the market seems to be coming back into a balance. I'm currently up a little over 75% since December first.

Dick

[Dick]

So what's up with the Pound? Or rather, what's down with the Pound? It has gone into a tailspin for some reason. I read that the report on construction starts (or something similar) wasn't up to snuff, but I wouldn't think that would put the currency into such a steep dive. As far as I can tell, the dollar has been a bit stronger, but nowhere so strong as to explain the dive in the Pound.

Anyway, very early today (about 1:30 AM Pacific Time) the Pound dragged me down to my largest drawdown so far. I was in the hole about $3100 at one point. I was starting to get a bit concerned but realized that it was only about 25% of my total account and that I had faced similar dips before. It's just that I'm now playing with more dollars, so the losses look bigger. As I type, the hedge has recovered some and I'm currently down about $2,000, about 16%.

With my investment advice service's trading system, there is only one thing to do. Wait it out. The hedge will get back into balance in a day or a week or whenever, and in the meantime I posted a gain of $35.88 in interest. It doesn't look like much compared to the trading numbers, but it is still a gain of 110% per year.

Dick

[Dick]

Funny how things go. I expected this week to be quiet and it has been very active indeed. I expected the non-farm report to be a big mover and it didn't do much at all. Dropped the Pound a bit more, but the Franc moved up smartly to offset. Hedge is holding steady. Collected $35.55 in interest and shut down for the weekend.

I used to look forward to the weekends when I was day trading. Time off to get some sleep and rest my much abused eyeballs. Now I miss being able to check out how the Forex is treating me. If I work at it, I'm sure I can turn a relaxed style of trading into a tense staring match with the charts. Relax, it's the weekend. The market is closed. Go watch football.

Dick