Step 5, Part 2

I haven't done much work on this, probably because I forgot what I said I was going to do. But I just read the last post, so I need to figure out what the big moves have in common. First it would help to figure out what qualifies as a "big" move. Its going to be an arbitrary cutoff, so I'm going with the top 50% on a 20 day move. I don't know how many that will be, but I hope for a fairly large sample.

I'll probably need to do some historical research to see what brought these moves about, as well as some graphs to visualize the move, maybe see if it was some kind of technical setup.

Step 5, Part 1

I used my idea of examining 1, 5, 10, and 20 days moves and found that there is a relatively weak correlation between the magnitude of 5 day and 20 day moves, as well as 10 and 20 day moves. This relationship seems to exist for all 3 pairs I examined, which are AUD/USD, EUR/USD and GBP/USD. That being said the correlation is still relatively weak, probably 0.38 to 0.43, but that's considerably higher than the correlation the 1 day moves had with the other ranges, which was less than 0.20.


I'm wondering if my methodology is correct, as I took the absolute value of the moves and ran the correlation between the percentile of the various time ranges. So in the case of the 5 and 20 day ranges, the higher the percentile move of the 5 day, the higher the percentile on the 20 day. So if there is a big move on the 5 day, there is a good chance of a big move on the 20 day as well, or if there is a small move on the 5 day, there is a good chance of a small move on the 20 day as well.


Does this knowledge have any particular value? Seems sort of common sensical, no? The better question is: can this knowledge be used to create a system? Of course I would need to examine some other information, but this could lead to something I could build a system on.


That's all I have at present. I don't think I'm ready to leave step 5 yet since I'm not sure what those big moves have in common. I'll need to do some more research on that.

Step 5?

Well, the truth is that I have not done any work on my system. I think it is partly because I have become occupied with other things and partly because I haven't felt like doing the work. *Sigh*

For some reason the motivation just isn't there right now.

Is this the end?

Step 5... Not Quite There Yet

Step 5 for developing a system is "Determine the best historical moves in that time frame and notice what those moves have in common." Tharp suggests having at least 50 to 100 sample market moves to examine, including both up and down moves. This is a very simple, but time consuming step. I have almost 10 years worth of daily data for the EUR/USD, AUD/USD, and GBP/USD pairs, so I'm certain I have the necessary volume. What I don't have is the time, or more honestly, the patience to inspect the charts to spot the big moves.

While I think the best way to do this step is to visually inspect the charts, I'm going to create a calculation of moves based on 1, 5, 10, and 20 day price changes. My hope is that this will help me find the big moves and some of the action before and after it.

Until next time....

Step 5 is coming... eventually

I've gathered quite a bit of daily info on the GBP/USD pair, and I'm currently trying to work my way through it. I realize that for system testing I'm going to need MT4 to build some expert advisers. Looking at data and even charts on Excel is excruciating!

That's it for now, next time I'll have more info.

Determine Your Time Frame for Trading - Step 4

I've covered this before, perhaps more than once, but I'm probably leading toward a longer-term system. In fact, I'll most likely be trading off of daily data. Given the cost my chosen broker has on automated trading and the fact that I will not be able to sit and watch a trading terminal to enter or exit positions, a long-term system that is relatively low maintenance is best for me.

I like the fact that long-term trading is more hands-off, as well as its potential simplicity and the fact that, according to Tharp, it is least stressful time frame.

The negatives of long-term trading are substantial. The ones that concern me the most are the whipsaws that happen, the low reliability, and the infrequency of trades. It will be psychologically difficult to take a relatively low number of trades and endure the frequent small losses en route to the big gainers. I like to be "right" and only being "right" less than 50% of the time would be a challenge for me. Of course that is where the confidence in my self-tested system will *hopefully* permit me to continue taking trades.

Tharp suggests that, to compensate for the infrequent trading, multiple markets should be traded. In my last post, I touched on the correlation of currency pairs and how that may negate the advantages of trading multiple markets. Its great to be able to have more opportunities in different pairs, but if they're all in the same wrong direction, I've only succeeded in losing money twice as fast. So in order for multiple pairs to work, I'll need to find some pairs with a low correlation to GBP/USD. That will probably lead to the crosses, which may be a bit sophisticated for me, at least at the advent. I'll most likely wait a predetermined amount of time, or trades before I venture into other pairs.

While I know I'm going to be going long term, eventually I'd like to also implement a short-term system. The first 2 advantages Tharp lists are what I like about the idea of short-term trading: lots of opportunities to trade and the stimulation induced thereby. The latter benefit is countered by Tharp, "excitement usually has nothing to do with making money -- it's a psychological need." While I want to believe I can stick to a long-term, patient, and uneventful approach, it will be difficult when looking at intraday charts and seeing all the volatility and potential trades I'm missing out on. However, this is where I hope the confidence in my system will allow me to stay the course.

I think I've reached the point now where I need to start plumbing some data. The next step requires looking at historical data, which should be easy enough to find on a daily basis.

Next time I'll go through Step 5.

Determine Your Objectives - Step 3

I believe I went through this already when I read through Chapter 3 of Trade Your Way... and conducted an interview with myself. Nonetheless its not a bad idea to revisit and maybe expand on my objectives for trading Forex.

I think I have a handle on the more concrete objectives. I want to earn 10% over the course of a year on my capital. I intend to accomplish that with what will most likely be a trend-trading system, designed to be traded on daily data. With automation its hoped that I could go to a smaller time-scale and trade more often, but that would require signing up with a new broker, which is something I'm not yet ready to do. Also I believe its in my advantage at present to work on a system and understand the logic and performance characteristics behind it before I commit the effort into automation.

I intend to trade only the GBP/USD pair to start, while still tweaking and learning the ins and outs of trend-trading. Eventually I'd like to trade multiple pairs, but my concern with that ambition is correlation. It won't do me a great deal of good to trade in a highly correlated pair, like I'm guessing the EUR/USD is. However even a highly correlated pair could give me another opportunity to have a great trade, and in trend-trading, missing one trade could be the difference between a profit and a loss in the long term.

I don't want to risk more than 1% of my capital on a trade. I need to be able to stay in the game for the big trade that could make the year. Not having really looked at any numbers, I think I'll size each trade so that 1% of my capital is based on the ATR. I think one of the Donchian systems mentioned in Way of the Turtle used a 2*ATR stop, so I may do something like that.

On a more personal level, my objectives are to grow through handling the adversity and the success of trading Forex. I think it will be a great experience to understand more about myself. On an educational level I think I will learn more the Forex market, like economics and statistics among other things. I definitely aim to engage in continuously learning throughout this process.

Although I think I've already covered it in this post, I'll write about determining a time frame for trading.