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Newsletter # 6
20th March 2005
Hi and welcome to the latest newsletter. It has been sometime since the last one, but I have been very busy after the TradeCraft launch. I have launched a campaign on some of the popular portals, including FXStreet, ForexSites and ForexTV.
I have sourced an alternate training course and there is an interesting article about Neural Networks.
Question and Answer Session
On Thursday, March 24th at 15:00 GMT (10 am EST), I will be the guest expert on the daily 'Question and Answer' spot on FXstreet.com. My subject will be 'Mentoring - Luxury or Necessity'. I look forward to answering your questions. You have to register and you can do so here (link). It is possible to read my paper in advance and submit questions. By the way, there are some very interesting guests appearing on these sessions. Ed Ponsi has recently done and excellent series on educational subjects and I was particularly taken by a recent session by Igor Labaj about new technologies changing the face of traditional investing. Igor has also written an article on the same subject for this newsletter, which follows later in this Newsletter.
If you don't know FXstreet, it is
a very popular FX portal with many features, such as live rates, news, charts, a
forum, and much more. Well worth a visit.
"FOREX
TELEVISION is the world's first rich media portal dedicated to providing
information about the global forex marketplace. Through innovative technology
and strategic partnerships, we endeavour to provide an unparralelled experience
to our end-users. Our goal is to provide the latest news and data in a timely
and dynamic fashion. At the
heart of our business are video news reports that are gathered from multiple
sources around the globe and streamed via the FOREX TELEVISION Media Hub. In
addition, we will provide live prices, text-based news and charting capabilities
to traders, analysts and other participants in the global forex
markets. Our
approach to news-gathering and content disemination enables users to see a broad
range of market perspective from many sides of the forex
marketplace."
Courses
Judging from feedback, not everyone is suited to a self-paced e-course. Therefore, I have been looking for an instructor-led e-course that allows the student to participate in a classroom environment and also to study material at his/her own pace. I found the FX Power Trading Course from FXCM. I was worried that this course was just a lure to get people to open accounts at FXCM, but I was pleasantly surprised when I learned that this was not the case. Apart from using the platform for learning how to place trades, etc and the excellent IntelliCharts application, there is no propaganda.
I have actually been through this course and I can vouch for it; The instructors are professional and they take time to answer all questions, no matter how 'far out' they are. The course is spread over a month (22 lessons) and the emphasis is on technical analysis skills. There is no 'glitz' or fancy systems and there is nothing that you cannot pick up in books. The main difference is, that you have the comfort of having the instructor on line and a peer group. Cost? $500.
I still believe the Rapid Forex courses represent good value for money, plus the systems, that if followed will bring success IF you understand risk management. I have been challenged several times on this $200 to $30,000 statement in the course. Is it possible? yes - so is winning the lottery! Is it probable? That is the question. None of the system-peddlers I have come across mention the risk aspect of success with their system. If you risk 100% of your capital on every trade, you can soon turn $200 to $30,000 if you don't get ruined before, which the law of probability of ruin dictates. You could do it in 7 trades, even with a 1:1 risk/reward ratio, but the likeliehood of having 7 winners in a row is pretty slim and, in this example, one losing trade would wipe you out - not to be recommended! However, if you made 65% per annum, your $200 would become $30,000 in 10 years - that is more do-able, - if you understand risk.
I don't want to give
the impression that I do provide a forex course as a part of mentoring. I am
available to give one-on-one tuition on all aspects of trading at my normal
rate. It is just that I would like to show you alternatives. "You pays your
money, and you takes your choice" as they say. The important thing is, that you
understand the basics before embarking on
trading.
More than one way to kill a cat.... (Part Two)
This is the third in a series of articles about how to make it when you don't have the capital.
Seed funders (those people and institutions who are willing to initially capitalize budding maoney managers) will say that there are three important things they are looking for in a trader 1. Track Record 2. Track Record 3. Track Record. Why is this so important? Because it is important that a trader can demonstrate performance over a period of time. How long is that? Preferably 3 years, but the industry is so short of talent, that they will look at 18 months to 2 years. Are they looking for huge returns? I would say not - they are looking for consistent results. The Forex market is known to be 'fickle' in that some managers create great numbers one year, only to underperform in the next. This can be down to the method employed. Many managers are 'systemmatic', in that they have developed a system that normally works best in a trending market. The counterbalance to this is the 'discretionary' traders, who take a more pragmatic view. Some of the systems are so called 'black boxes', developed by mathematicians, so called 'quants' and do provide good returns.
Consistency is the key. A good measure of consistency is the Coefficient of Variation (CV). This is the standard deviation of the returns divided by the average and shows how stable the result is. Supposing we had a 24 month period with monthly returns of around 1% (say, with a standard deviation of .001283 and an average of .99%. The CV would be 13%, which is very good (the lower the number the better). If there was just 1 month with a negative return, say of -2%, the picture changes dramatically: The standard deviation is now .006239, the average is .87% and the CV is now 72%. This is why the CV is such a good measure of consistency.
The lesson here is to record your performance and hang on to the trading records. They must be available for audit by one of the major accounting houses (PwC, Ernst & Young, etc). Being able to present the key numbers to a seed funder is also vital, and the TradeCraft system features CV plus other key statistics to establish your track record.
Part 4 to follow
next issue: Can you do it all yourself or do you need
support?
New technology solutions are changing the face of traditional investing
As mentioned, I was impressed by the subject matter of a recent FXStreet Question & Answer session. One of the reasons we can participate in the forex market is technology. On-line charting, for example, means that we have easy access to technical analysis that just 30 years ago was done by hand. The latest use of computers features 'neural networks' to create systems that remeber like humans and recognise patterns in prices accordingly. Igor Lábaj and his colleague have developed such a system that is proving to be successful.
Igor started his career as independent trader in 1996. He traded various markets and instruments like spot, forwards, options and CFDs. In 2001 he commenced a cooperation with prof. Dr. Peter Sincak, head of Center for Inteligent Technologies, with the goal to create a unique trading system based on artificial intelligence and expert knowledge. This was crowned after 14 months and since then he uses this system successfully by managing his own account. In 2004 after few years of testing and using this system in practise Igor decided in his company, NFG Consulting Ltd., to offer this system also to traders and investors around the world and created a new web site for this purpose.
"New technology
change the investment. The change
means the yielding of investment decisions based on human research to decision
based on technological research.
One of the most progressive new Artificial Intelligence tools are Neural
Networks. Artificial Neural
Network (ANN) is an information proccessing model that is inspired by the way
biological nervous systems, such as brain, process information. ANNs are able to
learn, similar to people. Why use neural networks? Due to their ability to
recognise from complicated data series like daily exchange rates a various
patterns and detect trends that are too complex to be noticed either by humans
or other conventional computers. Their ability to learn by examples makes them
very flexible and powerful. They are also very well suited for real time systems
because of their fast response and computational times.
Efficient portfolio may also help. Efficient portfolio is a way how
to lower risk and raise expected returns. The idea of efficient portfolio was
discovered and pioneered by Harry Markowitz in the 1950s. Authors of these
concepts won the Nobel Prize in Economics in 1990. These ideas are collectively
known as Modern Portfolio Theory. Donīt put all your eggs in one basket is the
simple expression of this concept. You may know it from your trading. If you bet
only on one currency pair and your position is not doing well you either wait
for the market to turn around or you are stopped out from your positon. If you
however enter two positions and one goes against you, you still have the chance
to do better with the second position. Not in the case you trade only one
position. In fact you can have a low risk portfolio that is actually made up of
high-risk assets, as long as the assets in portfolio donīt move in lockstep with
each other. Dissimilar price movement diversification protects you from having
all your investments go down at the same time. If you have two portfolios with
the same average return, the portfolio with less volatility will have a greater
compound or geometric rate of return. How is this possible? Letīs calculate a
bit and imagine we have two portfolio with average rate of returns of 30% and
initial investment of 100.000 USD. What will be our investment worth in these
different portfolios after two years? The first portfolio achieves in each year
30% return. At the end of the first year our portfolio is worth 130.00 USD, at
the end of second year 169.000 USD. The second portfolio has the same average
return but more volatility. In the first year the return is 60 % but in the
second year portfolio achieves no return, on average this second portfolio has
30% return. At the end of first year we have 160.000 USD and the same amount at
the end of second year because of no return in the second year. You can see,
that even in case of the same average return for both portfolios the closing
value of the less volatile portfolio is 9.000 USD greater. This difference is
caused solely because of less volatility inherent in the first portfolio.
Trading strategies for all. Every trader or investor has his own risk aversion or risk tolerance. Unfortunately, most investors do not know the risks they are taking. A key component of any investment plan is understanding and measuring risk. Risk is created by the volatility of the marketplace. It is the range of up and down movements in a price of a currency pair. The historical risk of an investement can be statistically measured using standard deviation. Standard deviation describes how far from the average the historic performance has been. The other important risk statistic number is maximum drawndown. It tells you what was the biggest fall in the value of your account. Maximum drawndown and standard deviation can help you to find the most optimal leverage size in order to not risk more than you are willing to accept short-term and at the same time achieve your long-term goals. It is always important to find your own forex mentor who will help you achieve as much advantages from these new technologies as possible."
Tips for Tradecraft Users
After you have closed a trade it is possible to paste a chart from your charting aplication into the trade xx spreadsheet. This should show the period of the trade and the system you were using for the trade. This will make analysis much easier and will help you when you review your trading system.
I use Paint Shop Pro to do this, but any drawing or photo editing program that can capture screens can be used. Simply copy the image and embed it into the sheet, as in the example below.
Final Thoughts:
I want to hear from you! If you have an interesting
experience with any aspect of trading and would like it published, let me know.
It could be a system you have developed, experience with a broker, experience
using a system. (If you have any brilliant performance records that you wish to
share, I would like to see a copy of the trading record from the broker,
please)
Archive - You can read the previous newsletters here:
Good trading!
Steve Pickering
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