Category Archives: Algorithmic Trading

Forex Money Management System: Choosing the Right One

In this article, we would like to share some steps, developed during the years, for choosing the right Forex Money Management (MM) as part of your trading plan. There is no universal Money Management formula which will fit all types of trading strategies. So, we need a way to adapt to every type of automated trading system.

There are 4 core steps,  to go through every time, as follows:

Long-Term Backtest

Long Term Back Testing

The first step is to make a long-term backtest of newly created strategy.  The longer the time span, the better and the more valid the produced results are. One of the ways is to test your systems for more than 10 years time span. If it is long-term based on daily or weekly bars, then it might be better to use 20-30 years of data to produce a significant amount of trades. When you have such a long-term prospective you could rely more (not 100%), that in the future you won’t experience a big surprise, because of a unique market behavior.  It doesn’t matter which trading platform one uses at this step. All of them will produce the data you need for the second step.

R-Multiple Conversion

A way to generate a detailed statement from your trading platform is via excel by converting every trade into R-multiple. You can divide the trade`s gain by the amount of its initial Stop Loss. So if a particular trade has gained 150 pips and its SL is 120 pips, then it is 150/120 = 1.25 R.

The conversion is done for the equalization every market. Every trade has equal weight and across to different market cycles with changing volatility to treat trades equally. So, with this ratio you could compare 10 points gain in Gold with 120 pips on the EUR/USD and 50 pips during quiet market to 200 pips gain during wild juncture.

Equity Curve in R and MaxDD

The next step is to make an accumulated chart using R-multiple ratios. It will look like this:

Equity Curve in Forex Money Management

There isn`t any special calculation at this stage, just simple accumulative math formula.

Based on the chart above, you calculate the MaxDD, which is measured from peak-to through. MaxDD is the biggest equity drop for the entire period of backtesting. So you have to prepare yourself emotionally to face at least as big as MaxDD account decline during the real time trading. So, in terms of Forex Money Management it is the most important information a trader could extract from the past performance.

Choosing Your Forex Money Management System

Choosing Your Money Management System in Forex

Once we have all information we need, it is time to ask ourselves few questions:

  1. How much risk we are willing to put on this particular trading system?
  2. How much equity drop we could tolerate without being burned out emotionally?

Of course, the answers to these question depend on the trader`s capital, personality, and objectives.

For example, if you have a system with MaxDD of 40 R and you plan to be very conservative because, you will trade for your retirement, and you intend to put big money into it, then you could set my max. risk at 10%. So, you should limit your risk per trade to 0.25%. By doing so, you know that your MaxDD will be around 10%. The calculation is done as follows – take your desired risk and then divide it to MaxDD taken from the backtest in R and you will get the risk you have to put per trade. In the occasion it is 10/40=0.25%

On the other hand, if you are willing to be aggressive with the same strategy, by showing willingness to risk as much as 40% of your capital, then putting 1% on every single trade would make sense for your objective.  The calculation here is 40/40=1%.

Summary

We have presented to you a way to determine your Forex Money Management as part of a trading plan. If you prepare enough with your risk per trade, it is most likely to avoid any big surprises, which could potentially lead to trading mistakes and losing money in the future. Of course, we have to reiterate that past performance isn’t an absolute indicator for the future and it is likely the MaxDD to be greater during real trading.

We hope that we have contributed to your knowledge regarding the matter. We wish you a profitable trading.

Why to Consider Automatic Trading Strategy Generation

The use of automatic trading strategy is a “big business” not only for the retail traders but also for financial institutions Due to increasing processing power, fast network connection speeds and new upcoming technologies like ‘machine learning’, automatic trading becomes more and more lucrative. But what does it mean for a retail trader?

Could an Automatic Trading Strategy be Profitable

You probably already have heard about EA’s or so called Forex robots. Those are automated strategies that are coded by a programmer and run automatically on a Forex trading platform. However the sad truth is that only 1% of all Forex robots are actually making money. This is because most automatic trading strategies are designed and optimized only for a specified time period. You buy a robot today and it stops working within two months. Then, a new set of strategy rules or re-optimization is needed to make the system profitable again. This takes time, efforts, and is very costly. Most of retail traders will just buy a robot, discover that it doesn’t work and go and look for another shiny piece of software. After few tries they will probably say: automatic trading does not work and it’s one big lie. But is it?

What is the Next Big Thing in Automated Trading?

The new upcoming technology is the automatic trading strategy generation. Automatic strategy generation technique makes possible to design, test, and optimize thousands of different strategies in a “split” of a second. (Actually it will take some time but it is 10000 times faster then manual programming and testing). Using special tools designed for automatic trading strategy generation anyone without any programming knowledge can produce and test thousands of original trading strategies in a day. It is possible to test, optimize and select only the strategies that are making profit in current market conditions. This would never be possible with manual EA programming and testing.

What Are the Advantages of Auto-Trading

The biggest advantage is time-saving. The new strategies can be automatically generated and tested 24/7. In few days you can test millions of strategies and select only the best ones. The second advantage of automatic strategy generation is the fact that it really works. There are many examples of profitable strategies that are designed and generated not by humans but by computers. The last big advantage is that this is very new technology and there are many new things to discover. The era of automatically generated trading strategies has just begun.

If you want to learn more about auto-trading and auto strategy generation read here about it: Auto-trading blog

Written by: coensio.com