Making a Living with Forex Automated Systems Written by Allan Sykes DISCLAIMER Trading carries a high risk and you should never trade with money you can’t afford to lose. The contents of “Trading Forex Using Automated Systems” are for educational purposes and should not be considered in any way as investment advice. Ultimately you, the trader, must take responsibility for your own trading decisions. Although every effort has been made by the author to ensure accuracy (as at Feb 2010) the content of this book cannot be guaranteed as accurate into the future. Past performance is no guarantee of future results. The Author accepts no liability whatsoever for losses or damages resulting either directly or indirectly from the use of the information contained in this book. © Copy write Allan Sykes 2010. All rights reserved. No copies of this document can be made either electronically or on paper Without prior permission from the author. Trading Forex Automated Systems Website: http://dtcoach2.robovore.hop.clickbank.net/ Page 1 of 43 Contents THE PERFECT BUSINESS.............................................................................................................................3 BACKGROUND............................................................................................................................................3 WHY TRADE AN AUTOMATED SYSTEM?.....................................................................................................4 Trading manually takes Time, lots of time….........................................................................................4 Trading manually, especially intraday, is Stressful..............................................................................5 Enter my first Automated System..........................................................................................................6 WHY FOREX?...........................................................................................................................................7 ASSESSING A SYSTEM.................................................................................................................................8 Calculating the Likely return of a system.............................................................................................9 System Velocity as a measure.............................................................................................................12 Using Velocity to compare systems.....................................................................................................12 Could this simple formula be applied to back-test results?................................................................14 What type of system is likely to make the best return?........................................................................17 KEEPING COSTS LOW................................................................................................................................19 Time Scale to Success – Having Patience...........................................................................................20 BUILDING A TEST ENVIRONMENT.............................................................................................................21 Choosing an MT4 Broker....................................................................................................................21 Installing and configuring MT4 for testing.........................................................................................22 Running a system on a demo account.................................................................................................23 GOING LIVE..............................................................................................................................................24 Expect to see a drop in profits when trading live................................................................................25 WHAT CAN BE ACHIEVED.........................................................................................................................26 WHICH SYSTEMS DO I USE CURRENTLY ?.................................................................................................27 WHAT’S NEXT?........................................................................................................................................27 WHY DO MOST TRADERS FAIL?................................................................................................................29 LIMITATIONS OF AUTOMATED TRADING SYSTEMS...................................................................................31 WHAT DOES THE FUTURE HOLD?..............................................................................................................31 SYSTEMS PURCHASED AND REJECTED.......................................................................................................32 Trading Forex Automated Systems Website: http://dtcoach2.robovore.hop.clickbank.net/ Page 2 of 43 The Perfect Business Trading Currencies on Forex (Foreign Exchange) can be rewarding, and has many benefits that other businesses do not have. Just some of these are :- • No need for premises • No stock to purchase and store. • No staff to Manage or pay for • No invoicing, or payment wait time • No VAT or surcharge tax to deal with • No Delivery costs • Unlimited earnings potential However, this does not mean that trading Forex is easy, far from it. Here are some of the issues you must face :- • To Trade you need Trading margin (raw cash to put into a trading account) • You have to learn to lose, before you start to win….. • You have to learn to cope with the increasing stress that trading larger and larger amounts of money brings as you begin to succeed • You have to learn to control your greed, or you will bust your account. Take your time, start small, prove everything. Learn to use automated trading systems as tools. Read on. Background Allan Sykes has been writing and trading algorithmic based systems for more than 25 Years. The history of how such systems development has improved can be clearly seen in the following timeline of hardware and software used by Allan to develop a myriad of systems :- • 1982 Using a Commodore 64 and laser basic to chart price action. • 1983 Using an IBM XT 8088, DOS 2.0 and Lotus 123 to write both indicators and crude formulas to calculate Trade entry. • 1984 Using a Compaq 286DX, DOS 3.3 and a cubix card to allow multiple processing (for optimisation). • 1986 Using Compaq 386SX and windows 2.1 to do more of the same but faster. • 1989 Using a Viglen PC with 486DX and a beta copy of Windows 3.0. • 1994 100Mhz Pentium with windows 3.11 running ‘TradeStation’. • 1997 230Mhz Pentium MMX running windows 95 and ‘TradeStation’. • 1999 Pentium 3 @ 550Mhz running windows 98 and ‘Tradestation’. • 2001 Pentium 3 @ 1000Mhz running XP and a mixture of ‘TradeStation’ and eSignal. Trading Forex Automated Systems Website: http://dtcoach2.robovore.hop.clickbank.net/ Page 3 of 43 • 2003 Pentium M @ 1.7Ghz running windows XP, ‘Tradestation’ and eSignal. • 2005 Pentium 4 running windows XP, eSignal and bespoke API handling to place and control Trades automatically via Interactive Brokers. • 2006 Intel Core 2 Duo @ 2.13Ghz running XP and eSignal and Metatrader 4. • 2008 Intel Core 2 Duo @ 3.2Ghz running XP and eSignal and Metatrader 4. • 2009 Multiple Dell 1U rack servers (3Ghz Xeon duo core) running windows server 2008 clustered for optimisation. Development environment now MT4, plus DLLs coded in C++ in visual studio. Optimisation using neural networks, processing MT4 based trading system file outputs. And the future …… • Self aware, fully conversational neural network Trading via several dozen client based live account systems expected within the next 4 - 6 Years. The above list may seem daunting to someone contemplating having a go at Trading today, but you needn’t worry. If you are going to develop a trading strategy, then Yes, the learning curve is steep, but if you just want to Trade such a system, then there is a plethora of systems you can try. What’s more, there are good systems out there that do not cost the earth. I both develop and purchase trading systems, and I Trade a mixture of both for a living. I have developed an assessment process that allows me to filter the chaff from the profitable, when purchasing someone else’s system. I have also developed a measure that allows me to compare their expected success with my own. I can do this before risking anything more than the purchase price of the system. As of July 2009, I have purchased and assessed more than 280 systems, as well as having written and Traded more than 45 of my own. Interestingly, out of those 280 purchased systems (over some 15 Years) only 18 Have proved worthwhile, with only 2 still being Traded. Why Trade an Automated system? Trading manually takes Time, lots of time… Simply put, it saves time and stress. In 1982 I used to spend upwards of 3 hours after the Daily markets shut to input data and calculate what prospective trades there are. All done late in the evening, before actually placing these trades the next Day during the active session with my Broker. Trading Forex Automated Systems Website: http://dtcoach2.robovore.hop.clickbank.net/ Page 4 of 43 Weekends would be spent compiling summaries of the week’s activities, as well as optimising systems for the next week. Although I loved my work, it was all significantly time consuming ….! Today, I spend almost no time Trading. The automated systems I use do 90% of the work. I spend 10-15 hours a week setting off optimisations and back-testing new modifications to existing systems, or perhaps evaluating a new system I have purchased. Other than this, I am free to do more or less what I want. Trading manually, especially intraday, is Stressful Talk to a manual Day Trader, and they spend upwards of 6-10 hours watching patterns form, calculating trade entry, making the trade, watching a trade unfold and closing a trade. An active Day Trader can place 10-50 Trades a Day. The stress levels are quite something. Measured heartbeat rates of active Day Traders have been known to nudge 180 beats a minute at peak stress moments. Quite a few ‘burn’ out in a matter of Months. For me this stress grew as trading time scales got shorter. Intraday Trading being the most stressful. Stress also made me alter the rules of my trading strategy. I would shorten profit takes, move stops too tight and generally cause Trades to lose money….! I just new there had to be a better way. Trading Forex Automated Systems Website: http://dtcoach2.robovore.hop.clickbank.net/ Page 5 of 43 Enter my first Automated System My first automated system worked on End of Day charts, and produced an alert list that included where to put the protective stop, and profit take. At the end of each Trading session this list would be generated and I would simply place the Trades with my broker and leave the system to it. Completely hands off. This was around 1987. I used to Trade US stocks then. Early Days for automated systems … ! Over time this system developed into a fully automated system, that even placed the pending entry orders (complete with active stops and profit takes if the initial entry was taken) directly with my broker, all fully automatically. All I had to do was check to make sure the orders (and any stop movements) were correct which took 15 minutes in the evening, and I was done until next evening. This was around 1999, just as brokers started to offer trading online via the internet. The main thing is that this system taught me, is that a Trader should concentrate on assessing a systems performance and modifying the system for maximum gain with Trading Forex Automated Systems Website: http://dtcoach2.robovore.hop.clickbank.net/ Page 6 of 43 minimum risk, as well as monitoring the market being traded for personality change. The idea here was to assess when to trade, not undertaking the actual trading ….. ! This was a revelation ! The stress did not disappear, but did become manageable. It also freed up the most important commodity of all … TIME. I now had the time to study. To develop new systems. I even developed my own code library in TradeStation (although funnily enough I do not use TradeStation today, partly because of the $199 a Month subscription costs, and additional costs for data). Over the next 25 Years I learned to develop Trading systems that were (and still are) pretty sophisticated, and even earned a Masters degree in software development in the process. Today, you do not need any of this. Today, with a broadband link to the Internet, and a modern PC you can purchase, assess and Trade an automated system to make money. This can be done part time initially, and over time can become very lucrative. Do not be fooled though. This is not an instant path to wealth. Like any business it takes time to get it right. That said, I know of no other business that has the ability to deliver RAW cash the way that Trading Forex does. There is no stock to warehouse, no invoicing, and no wait for payment. You do not need employees, or premises. You don’t need to get up early, or wear a suit. You don’t need to commute either……. I personally would not contemplate any other business. Why FOREX? If you want to sell a product such as fruit, you need a good supply chain. This supply chain has to have the ability to supply quality goods quickly for you to sell. You need to be able to get your goods in front of customers for them to see, and once sold you need to get the goods to them quickly. The products you sell have to be at the right price, and you need to make sure that you have enough of them to satisfy demand. There is no point selling a rare fruit, if all you can get is 3 of them, and no one wants them. The Stock and Forex markets are the same. You need to deal in Stocks or Commodities or Currencies that people want. You also want to buy and sell quickly as close to the advertised price as you can get. Trading Forex Automated Systems Website: http://dtcoach2.robovore.hop.clickbank.net/ Page 7 of 43 Forex (short for FOReign EXchange) is the largest market in town. On some days this market can Trade upwards of $3.21 Trillion. What this means is that when you want to buy currency, it will be sold to you almost instantly. When you want to sell currency, it will be bought almost instantly. What’s more, competition to buy and sell is so strong, that in normal transactions, the spread (the extra bit the broker adds and subtracts to make money) and slippage (the movement in price away from when you asked to buy or sell) is kept to an absolute minimum. On the most liquid currencies, the spread can be as low as 1-2 pips, where a pip is as low as 100th of a US cent. On most liquid currencies, the slippage is also low, typically being less than 5 pips. I have traded just about every market there is from Stocks, commodities and their underlying futures and derivatives, and FOREX beats them all into a cocked hat. Forex is highly liquid, with some of the largest transaction volumes, and more importantly, once you understand the basics, transacting in forex is easily understood. For me, FOREX is the only game in town….! Assessing a System So, having decided to trade FOREX, and having discovered several FOREX systems, how do you assess how good they are? Measuring the return of a system is not just about profit. It is about how this profit is delivered. Why is this important? Firstly, Psychology. It is about being confident, that even if the system loses, over time you are going to make money. Secondly, and more importantly, it is also about just how much time is it going to take to make money versus the amount risked each Trade, and the quantity and frequency of Trading. So how do you know which system is better? To compare different, disparate systems, you need a standard methodology for measuring the likelihood of success. I have figured out how to do this ….. using pretty simple maths too! Trading Forex Automated Systems Website: http://dtcoach2.robovore.hop.clickbank.net/ Page 8 of 43 Calculating the Likely return of a system You need to know what the likely return of a system actually is. To do this you need to know what the return is for every $ risked. The maths for this is actually quite simple. “How do we know which one to pick”? If you have access to historical trading, you can calculate the following. Remember that the more trading history you have access to, the more accurate an assessment of a system becomes :- AW = average win in value (if each of the winning trades made $12.34, $32.14, $2.67, $7.54, $8.55, $9.32 respectively, then the average win would be the total of all profits divided by the number of trades totalled, in this case 6, which would give an average win amount of $72.56 / 6 = $12.09) Trading Forex Automated Systems Website: http://dtcoach2.robovore.hop.clickbank.net/ Page 9 of 43 PW = probability of winning (if your system made a profit 6 time out of 10 then this would be 60% or 0.6) AL = average Loss in value (if each of the losing trades lost $3.11, $8.67, $3.55, $7.12 respectively, then the average loss would be the total of all losses divided by the number of trades totalled, in this case 4, which would give an average loss amount of $22.45 / 4 = $5.61) PL = probability of losing (if your system made a loss 4 time out of ten, then the probability of losing is 40% or 0.4) With this information you can calculate your Likely return :- Likely return = (AW x PW) + (AL x PL) ---------------------------- AL Therefore in the above example the Likely return is :- (12.09 x 0.6) + ( 5.61 x 0.4) -------------------------------- 5.61 Which is $1.69. There fore the above system has a likely return of $1.69 for every $1 risked. (Note that this return is on top of the $1 risked, and therefore the actual return is $1 + $1.69 giving $2.69 in real terms. That said, we only use the likely return of $1.69 in any calculations) Knowing the average frequency with which a system places trades is also important. Why? Because the more often a system trades (assuming it has a positive Likely return) the less you have to risk on each Trade to achieve a similar profit as a system that trades less frequently. That said you do need to standardize the way you measure frequency. I tend to look at the number of Trades a system places per Year as the frequency standard. Example 1 :- A system places 45 Trades in 1 Calendar Month. There are 31 Days in this month. Therefore this system has an average Trading frequency of 45/31 = 1.45 Trades per Day, which is 1.45 x 365 = 529.8 Trades per Year. 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