Trading on the News in the Forex World is Both Defensive and Offensive

Trading in foreign currencies is never an easy occupation.  The market is enormous, as is the stature and financial capacity of most major participants.  For a single retail trader to assimilate every bit of news and financial data and out-guess the “Big Boys” is often an effort in futility.  The exercise becomes more one of managing risks and searching for a strong trend to latch onto for an extended period of time.  Losses are inevitable, but if controlled, then one good trend can offset several losing trades and offer potential profits and the opportunity to utter that favored phrase, “The trend is my friend!”

One learns quickly that major news releases can be a “double-edged sword”.  If you are unaware of a pending major economic release, the subsequent volatility can wreck the most well-intentioned trading strategy.  Fundamental data releases from government agencies around the world influence stock, commodity, and currency markets daily.

However, the forex market tends to react more severely to these releases since the relative value, i.e., exchange rate, of a given currency pair is determined by the global consensus of traders’ evaluation of economic variables.  Typically, the forex market stalls before a major release, then an initial “head fake” ensues while analysts assimilate the data to form an opinion, and once an opinion is formed, the market moves quickly in one direction.  The resulting trend can last for hours, even days in some cases.

Employment data appears to be the largest market mover in this category.  The release of Non-Farm payroll data on the first Friday of every month by the U.S. Department of labor is a much-anticipated event.  The chart below is indicative of the unfolding events:

forex news trading

The market reaction of the “GBP/USD” currency pair is depicted for this previous Friday’s release, the first such release in 2011.  The data is generally released on the first Friday of every month at 8:30 EST, or 13:30 Greenwich Mean Time, GMT, as per the chart above.  As one follows the timeline from the left, the market anticipated good results in the data that would strengthen the Dollar, the “head fake” so to speak.  After recovering during the “assimilation period”, the market reacted in the opposite direction, a 120-pip move, as the employment data was not as strong as the market had believed that it would be.

“Trading on the news” is the moniker given to this short-term trading strategy.  It is often said that it is not for the faint of heart because market movements can be radical with many “head fakes” to deal with before the solid trend takes over.  The shear volume of trading orders also becomes problematic, often inundating the servers and switchboards of forex brokers, such that order execution becomes paramount and the responsibility for executing stop-loss orders is often exempted by your broker agreement.

For those traders that feel worthy of the task, it is highly recommended that you practice several times with your forex trading demo account before venturing into these volatile trading waters.  It is not necessary that you perfectly time the market or guess which direction will be the most likely to occur.  The objective is to grab onto the trend once it has formed which typically takes about forty-five minutes from the release point.

The British Pound pair is generally accredited with the most potential for movement.  In this case, the 120-pip move would have generated a 70 basis point return.  The comparable returns for the EUR, JPY or AUD were in the 55 to 60 basis point range.

Forex Confidante Review

Forex Confidante is an exciting new forex trading program developed by a well known accredited forex trader in Thomas Strigano. Unlike many of the systems and programs online that seems to be developed by unknowns in the forex field, Forex Confidante holds some serious credibility as it’s developed by a former Italian Chief of Trading Operations, which is basically the top trading position in a bank.

Forex Confidante is not a forex robot. It’s not signal service or a charting software system. It’s not flashy or hyped up, but rather it’s a serious, professional forex trading system. A full on forex trading plan that will walk you from A to B and all the time making sure, that you are in the drivers seat. If you’re looking for a forex robot that will do all the hard work, then this isn’t for you. However, if you’re looking for a forex trading system that is developed by a pro and can be learned and used in relatively short time, then read on. Thomas Striganos Forex Confidante system is a breath of fresh air in the forex market. I have looked for something like this for a long time now.

Thomas Strigano is the former CTO of a large Italian bank. CTO is as I mentioned the highest trading position, it’s equal to other top management positions in a bank. Thomas was basically the one making the trading strategy and managing all the other traders. This guy has a well documented history of success. Thomas is something of an anomaly in the forex world in that he is easy to get in contact with and actually writes on several sites on the internet. When I was researching him for this review, I came across a negative post about him and his product on a forum. Thomas Strigano acually signed up and took time to explain why the poster was not making money and helped him learn. As the thread on the forum progressed, the negative poster admitted he was wrong and thanked Thomas for helping him out. I think that really shows some class and credibility. You can probably find that trhead yourself with a quick google.

Let’s have a look at what you get:

  • Forex Confidante System
  • Forex Confidante Ebook
  • Forex Confidante Video’s
  • Forex Confidante Support with Thomas Strigano himself

Forex confidante is a complete traning and trading system that will walk you trough everything needed to profit from the system. There’s a book and video included and they are both awesome, but there is admittedly a bit of a learning curve to some of the concepts. That’s because this material was not ghost written by a writer but rather written by Thomas himself, which means there is little fluff and all content. This course is packed full of inside secrets that you won’t find anywhere. It’s not basic stuff like watching moving average indicators, but rather systems and methods derived from years of real life trading experience. It also teaches you money management and a bunch of other things you need to succeed in forex.

What I liked:

  • Forex Confidante System (It’s awesome)
  • The Talks and Emails with Thomas
  • Professional Trading System

What I didn’t like:

  • Somewhat Steep Learning Curve.

Ok, on to my personal experience trading of trading with this system. I have traded this system for more than 3 months now and I really like it. I think it’s a very well though out, disciplined and impressive system plus it delivers in profits. I have personally made over 120 pips in two strategic trades in just one day, which is a personal record. It has also outperformed my other systems over a three month period. I recommend you check out his website.

=> Forex Confidante

LMT Forex Formula

LMT Forex Formula is a new forex trading system that is developed by forex whizkid Dean Saunders. Only 25 years old, Dean has already made a huge impact in the world of forex trading systems. LMT stands for Low Maintenance Trading which is a reference to the goal of the system: To minimize actual trading work while maximizing profits. I recently had the chance to test out Dean Saunders LMT Forex Formula for over two months and I have been very happy with it. Read on for the full review.

This system is very impressive and even more so because it’s developed by a young guy like Dean Saunders. Some people may be put off by taking advice from someone as young as Dean, but those people are the same who will never succeed in forex. Never mind, let’s take a look at what exactly LMT Forex Formula is. LMT is not a forex trading robot. I know some people who are a bit confused by this, because LMT Forex Formula does have some of the same qualities as a Forex EA,

in that the signals tells you exactly what to do and when to do it, but you will keep control of your trades and not have to worry about what your robot will do when you are not watching.

Ok, let’s have a look at what is actually included in the LMT Forex Formula:

  • LMT Forex Formula Manual – 47 page manual explaining his system and showing you exactly how to set it up and apply it. This is the core of your system and it will be your trading ‘bible’.
  • LMT Custom Indicators Software – This is the charting and signal software that will let you know when, what and how to trade.
  • LMT Forex Formula Videos – Videos showing you how the system works. It really helps to have videos in addition to the manual.

Earlier I mentioned that LMT Forex Formula is not a forex robot. That means you have to do the trades yourself. That may sound like time consuming work and it could be, but then this system wouldn’t be low maintenance. LMT Forex Formula only requires you to spend and average of 15 minutes a day. That’s not bad. But how can you make money from only 15 minutes of forex trading? The thing is, most forex robots and systems are basic scalping systems. Scalping is the type of trading where you make many small trades over the course of a day. This is very time consuming and requires constant attention and concentration. LMT Forex Formula uses a different approach. It’s all about making fewer but bigger trades. Trades that rake in more pips in one trade than a days worth of scalping. I hope that clears up some things.

In conclusion, how did LMT Forex Formula perform? Over these two last months of testing, I am looking at close to an astounding 400% annual profit. That’s going to turn my $10,000 initial investment into $40,000. That’s just remarkable. I don’t think these numbers are going to last though, but even so, I consider this program as one of the absolute best forex trading systems ever created.

=> LMT Forex Formula

The Perfect Forex Trading System

Many people search for the best forex trading system. Unfortunately the truth is that no trading system or strategy is perfect. All the best traders in the world have losing trades so their systems can not be perfect. So as the perfect trading system does not exit, we need to make one that is the next best thing.

Forex Trading System with a low drawdown

The next best thing to the perfect currency trading system is a system with high profits and low drawdown. This will hopefully give you an edge over the house in the longer term so you can come out on top.

Worst Forex Strategy

The worst forex trading strategy in my view is any strategy that is trading without good money management. Even the best forex strategy in the world could have a disastrous affect on your account balance if it is not traded with disciplined money management.

Simple Forex Strategy

Often simple strategies work best when trading forex. A simple FX strategy that often does well is to look at the weekly charts, find a pair with a firm trend and wait for a 50% retracement on a smaller time frame and go with the trend from there. Simple, but often effective as the forex market is the best trending market in the world. This is a relatively easy fx strategy to follow.

Forex Trading System Algorithms

A trading system algorithm is a series of steps that shows how the system handles entries, exits at a loss (stop loss) and exits at a profit. Ultimately, these need to be coded into a computer system to automate your trading, but implementation is independent of the actual algorithm.

In this posting, I am going to discuss some price smoothing algorithms.

Price Smoothing – Why Do it?

The trader generally has to transform a price data series into trading signals, but price data itself is very noisy. It is similar to trying to tune into a radio station through a lot of static. It is hard to tell what is important, and what is just random noise.

Noise is the non-tradeable component of price data. If you try to trade it, you will significantly reduce your profits. Clearly, the problem at hand is to isolate the noise from the signal. This smooths the price series so that the underlying direction is highlighted.

This problem is well defined in signal processing and some quite advanced and effective techniques are available, but often traders use very crude approaches. I will start in this posting by discussing the traditional approaches and how they work.

Crude Approaches

I would like to describe two crude noise filters: the breakout and the moving average (and its variants).

The breakout is an entry or exit signal that is triggered when the current price exceeds (e.g.) a 20 day high, or falls below a 20 day low. The parameters that can be tweaked are the number of periods and the amount by which the price must exceed or be below the high or low.

The way that this works to filter noise is through a volatility filter. In effect, the system attempts to remove price volatility attributable to noise and assumes that a price that exceeds a certain level represents a true signal rather than noise.

This is how a breakout can be described in an algorithm:

If price + trigger amount > high of n periods then buy
If price – trigger amount < low of n periods then sell

The problem is that this approach is rather well known, and false breakouts are therefore quite common. This means that the noise from traders entering the market now distorts the signal.

Another approach is a moving average. This is simply the average of the last (say) 20 periods. The result will be a smoother line than the original price series, but lagged by about 1/2 the period selected. A longer number of periods produces a smoother line, but with more lags to price action, while a shorter number of periods produces a less smooth line which reflects more noise, but is more responsive to changes.

A moving average removes noise by reducing the impact of a particular noisy value by averaging it out. Because this is an average, it is still subject to distortion by extreme values, so it doesn’t work well if you have very noisy data, unless you choose a very long moving average period, which causes lags.

The algorithm for a moving average (n period, where n is an integer, e.g. 20) is as follows:

Sum last n periods, then divide by n
Move forward 1 period, then recalculate

The moving average needs to be combined with some other rules for a complete trading system. For example, one popular approach is to look at when 20 period and 50 period moving averages cross over:

If 20 day moving average crosses over 50 day moving average then buy
If 20 day moving average crosses below 50 day moving average then sell

There are some variants to this such as exponential moving averages and median filters. The exponential moving average has similar properties to the usual type but is calculated differently, so I won’t go into detail here. A median filter is more interesting. This has less lag. The algorithm is:

Sort last n periods of price data from highest to lowest
Take the middle point
Use this as the value

Median filters can be used in a similar way to ordinary moving averages. They remove noise by excluding extreme values and looking at the value in the middle.

All these algorithms can be easily implemented in Excel.

Next time, I’ll continue this in more detail and begin to discuss some of the more advanced techniques also.

Ten Essential Forex Backtesting Rules

Here are the ten Forex backtesting points that are essential to your forex backtesting strategy:

  • Make sure that the historical data goes back far enough to provide accurate testing results under a variety of market conditions. If your data extends back only through the latest bull market, you won’t know how the system will perform in a bear market.
  • Before starting the backtesting process, check and double-check your historical data to make sure that it accurately represents real-world trading scenarios of the type that your system is supposed to handle.
  • Always include “out of sample” data. That is data other than the data which was used to build the system to begin with. Otherwise, you will be only testing data that already produces results matching your system’s strategy.
  • If you specialize in trading specific currency pairs, make sure that your data covers those pairs. But for best results, and to allow you enough flexibility to trade additional currency pairs in the future, use as broad a range of test data as possible.
  • Also, to the extent possible, try to utilize historical data that reflects both positive and negative world conditions. With the market so easily affected by terrorism, fluctuating oil prices and political unrest, you need to know how your system performs when the world is facing a crisis as well as how it functions in time of relative serenity.
  • Make sure that your data models provide for a realistic amount of slippage, especially during volatile and fast-moving market conditions when you can be sure that some slippage will occur.
  • Make capital management part of your backtesting strategy. After all, the idea is to earn a profit at the end of it all. It makes no sense to backtest years of trade data if, in real life, you would have run out of money to invest had you followed the trading system’s recommendations.
  • Be sceptical. If your backtesting results show that you have developed the ultimate fail-proof trading system, don’t believe it. Nothing is foolproof. The chances are there is a flaw in your data, or in your testing methodology, so start over.
  • If you don’t have the patience or skills to manually backtest your trading system use commercially available backtesting software.

Regardless of how good your backtesting results are, don’t forget what I wrote at the top of this article: “Past performance does not guarantee future results!”

Backtesting is a key part of developing and using a forex trading system. It is not a process to be skipped or taken lightly. If you do not have the mental discipline to backtest your trading system, it is likely that you do not have the mental discipline to use and stick to a trading system.

Forex Back Testing

Back testing a Forex Trading System

One you have identified one or more potential FX trading systems that you are interested in using, or even if you are you are working on developing a trading system on your own, it is critical that you take the time and effort necessary to perform thorough backtesting.

Backtesting is the act of verifying that the system actually performs as expected under diverse market conditions so you can be confident that it will not let you down when you need it the most. If you fail to backtest a trading system you will not have the confidence to do what the system is telling you to do when your instinct is telling you to do something else instead.

Backtesting a trading system involves actually executing that system against historical market data and analysing the trades you would have made according to your system’s strategies.

Backtesting in this manner not only uncovers any hidden flaws in the system, but it also gives you the ability to hone the system’s performance until it is the best that it can be.

Not only is it important that you never skip the system backtesting process, it is also important that you spend all of the time necessary to do the job right. This can be time-consuming depending upon the complexity of the trading system you are thinking about using and the amount of historical data you will be analysing.

However, no matter how thorough, complete and accurate your backtesting strategy is, you should never forget the #1 rule of trading:

“Past performance does not guarantee future results!”

Here are some of the vital statistics that play a part when backtesting your FX trading system:

  • Net Profit/Loss for the defined testing period
  • Historical data date range
  • Universe Currencies included in the dataset
  • Volatility
  • Average gains and losses as a percentage of total trades
  • Amount of capital exposed to risk
  • Win vs. Loss Ratios
  • Annualized returns
  • Risk-adjusted returns

Building a Complete Forex Trading System

So far, we have discussed a few simple indicators, but there is more to a complete trading system than an entry indicator. You need to know when to exit, either at a profit or a loss, and how to size your position.

To build a Forex system, we recommend that you purchase trading software such as Tradestation. Trading software typically has a programming language to allow you to build a trading system and backtest it against historical data. You also need a large amount of price data for backtesting. We selecting trading software, obtaining price data and backtesting elsewhere in this website.

Most trading software gives you the ability to automatically tweak values during testing to automatically find the optimum combination of parameters. Be careful with this feature, you are aiming to build a system that works well in real life conditions, not one that is tweaked to work only for the conditions that exist in your test data.

When you design a forex trading system, simpler is better. You should avoid using more variables than is necessary. If you use enough variables, you can overfit your model so that it appears to work very well in backtesting, however it will not work well in real life trading.

One other important consideration is related to data frequency. If you have access to daily data, you may not see some significant intraday movements. For example, a currency pair may open at 1.1125 and close at 1.1175, and your system may have decided to go long, so you buy at the open and sell at the close. That is great, but how about if there was an announcement during the day and the market temporarily plunged to 1.015, before recovering?

Your system may have been stopped out, a long way from the expected stop loss due to market volatility and in reality may have recorded a loss rather than a healthy 50 pip profit. You need to take price movements within the day into account when designing your system.

An example of a simple trading system

This is an example of a very simple trading system, written in pseudocode.

It uses the Jurik Research JMA tool to smooth data (the parameters are not included here), and buys when the trend of the smoothed data is up, and sells when the trend is down. It automatically triggers a stop loss when there is an unrealised loss greater than twice the average daily volality of the last 3 days. In this way, the stop loss automatically adjusts to market conditions. The only thing it doesn’t do is specify the market to enter and the position sizing.  It assumes a single contract and a single market.

Preprocessing of data: Smooth data using JMA

Entry rule:

If smooth data(now) > smooth data(one period ago) then
Buy
If smooth data(now) < smooth data(one period ago) then
Sell

Exit rule:

If Short and smooth data(now) > smooth data(one period ago) then
Buy to close
If Long and smooth data(now) < smooth data(one period ago) then
Sell to close

Stop loss rule:

If CurrentPrice  Entry Price > 2 x average volatility range for last 3 days then
Exit to close

Hopefully you will be able to use this as an example, and develop your own more refined system that meets your trading objectives. Good luck with developing and testing your own trading system.

Conclusion

Remember; the purpose if a trading system is to take away all emotions so you can buy and sell based upon potentially winning strategies that are based upon technical indicators. However, no trading system will run forever without adjustment. The market changes; your goals change, and your system needs to be kept current.

Perform frequent backtesting. Pay attention to your win/loss ratios, and don’t be afraid to make changes when changes are warranted. And never forget that : past performance is no indication of future returns.

Price Movements in Trading Systems

Some models are based around an assumption of price movements being normally distributed, or Gaussian. For example, if a price has moved from a base by 3 standard distributions, based on statistical princples and assuming that price movements are normally distributed, it is unlikely to move further but revert to the mean.

However, if you actually chart price movements, you will find that they have a “fat tailed” distribution. There are a lot of large up and down price movements. If you build a model based on normal distributions, it is likely that you will suffer significant losses.

Identifying trends by removing noise

Any successful trading system must have the ability to let you to distinguish an actual trend from normal market “noise”. Noise is price movement that does not indicate a tradable trend.

Most technical indicators use some sort of filtering, typically a moving average or exponential moving average.

One way of doing this is the Breakout. A breakout occur when the price of a currency pair surpasses the high or low price of the pair from a specified number of days. The 20 Day Breakout is a commonly used model.

If your trading system used the 20 Day Breakout model for trend identification, it would automatically generate a buying signal when the price of the currency pair exceeded the 20 day high by a specified number of pips. If the price dropped below the 20 day high by the specified number of pips, the system would generate a sell signal. This is a filtering approach – the filter is that the price must rise or fall by a certain amount

Another common noise filtering approach is to use moving averages to smooth the data by removing noise to show long term trends. A moving average is simply the average of the last n trading periods, where n is number of periods. An exponential moving average is similar in practice, but uses a slightly different approach.

If you use a larger value of n in a simple moving average, the filtering will be greater, but the filtered data will lag the actual data. The lag is approximately ½ n. This is a problem, as your system will be unable to make timely trades – by the time the moving average detects that the trend has changed, most of the price movement has already happened.

You can use a moving average in two ways. You can either find a change in trend by comparing a smoothed data value with the previous one – if it is greater, then the trend is up, if it is less, then the trend is down (provided you have smoothed the data enough to remove random price movements).

The second, and more common way is to use a combination of two moving averages, one a long term average, the other a short term average. When they cross, that is a trading signal.

A more sophisticated filtering approach is to use digital signal processing algorithms such as Kalman filters to smooth the raw data. Typically, these algorithms smooth data with less lag than simple moving averages. One smoothing tool is JMA (from Jurik Research). This can be integrated into Excel or, more commonly into tools like Tradestation. These filters are typically proprietary, but can save you a lot of time and trouble during system construction.

There are other ways of identifying trends including momentum trading using moving averages, and generating trade signals based upon the identification of support and resistance levels.

Building FX Trading System

There is a lot of information available about how to use trading systems to make intelligent forex trades, and there’s even more information available about buying someone else’s trading system. But what about if you want to build your own trading system? There’s not a lot of information about how to do that.

This article will cover the basic principles of building a reliable automated trading system that has the goal of generating trades with positive expectancy. This means that on average you will make money.

Think of a system with positive expectancy as being like a casino’s house advantage. Gamblers may win money from the house, but overall the casino has an advantage that allows it to make money over time. You need the same advantage in your trading system.

Types of trading systems

These are the four basic types of trading system in use by most FX traders:

  • Breakout trading system: Breakout systems monitor the price of currency pairs and generate a trade signal in the direction of the trend if the price breaks through a certain level.
  • Reversal trading system: Reversal systems look for a trend that is near completion and then generates a trade signal in the direction of the reversal.
  • Indicator trading system: An indicator system is designed up to monitor the trader’s preferred technical indicators and then generates a trade signal when one of those indicators is met.
  • Trend-based trading system: A trend-based system determines when a trend exists as well as the direction of the trend. It then executes a trade signal in the direction of the trend. This includes volatility based systems.

In this tutorial, we will focus on breakout and trend based trading systems.

Trading system objectives

The purpose behind having and using a trading system is to receive consistent answers to these critical questions:

  • Trend identification: Selecting a currency pair that is trending and suitable for trading
  • Position sizing: The quantity to trade
  • Entry signals: When to execute a trade
  • Stop loss signals: When to exit a losing trade
  • Exit signals: When to exit a winning trade

A trading system doesn’t guarantee that you will never have a losing trade (although you should be able to make money over time if you have a positive expectancy). It simply guarantees that all of your trades will be consistent and that your trading decisions will not be influenced by anything other than the rules of the system.