What are we to do with Sharpe ratio - forex trading strategies today

What are we to do with Sharpe ratio ~ forex trading strategies today

I wrote several times before how useless Sharpe ratio is for certain types of strategies: see here and here. Not only is a high Sharpe ratio quite useless in telling you what damage extreme events can do to your equity, a low Sharpe ratio is also quite useless in telling you what spectacular gain your strategy might enjoy in the event of a catastrophe. I came across another brilliant example of the latter category in the best-selling book "The Big Short", where the author tells of the story of the fund manager Mike Burry.

Mike Burry started buying credit default swaps in 2005, essentially an insurance policy on mortgage-backed securities, betting that there will be widespread defaults on mortgages. Of course, we now know how this story would turn out: Mike Burry made $750 million in 2007 alone.  But there was nothing but pain for the fund manager and his investors in 2005-2006, since they had to pay an annual premium of 8% of the portfolio.  Investors who measured the performance of this strategy using Sharpe ratio, without knowing the details of the strategy itself, would be quite justified to think that it was an utter disaster prior to 2007. And indeed, many of them lost no time in trying to pull out their investments.

So what are we to do with Sharpe ratio, with its inherent reliance on Gaussian distributions? Clearly, it is useful for measuring high frequency strategies which you can count on to generate consistent returns every day, but which has limited catastrophic risks. But it is less useful for measuring statistical arbitrage strategies that hold positions over multiple days, since there may well be substantial hidden catastrophic risks in these strategies that would not be revealed by their track record and standard deviation of returns alone. As for strategies that are designed to benefit from catastrophes, such as Mike Burrys CDS purchases or Nassim Talebs options purchases, it is completely useless. If I were to allocate my assets over different hedge funds, I would be sure to include some funds in the first category to generate cash flows for my daily needs, as well as funds in the last category to benefit from the infrequent black-swan events. As for the funds in the middle category, I am increasingly losing my enthusiasm.
More info for What are we to do with Sharpe ratio ~ forex trading strategies today:

Read More..

THOSE PESKY FALSE BREAKOUTS WHAT DO WE DO - forex trading system system

THOSE PESKY FALSE BREAKOUTS WHAT DO WE DO ~ forex trading system system

False breakouts are one of the necessary evils of the Forex market. Signals that appear to indicate the start of large gains for the trader often turn out to be broken promises that lead to unexpected losses. Spotting the signs that actually give a heads-up as to the potential for these reversals helps to avoid these scenarios that arise during long periods of market indecision and low liquidity.

Take the recent movements of the EURO NZD and the GBP AUD as examples. These both gave bearish signals that broke the Support of their respective Consolidations that had formed below larger Pennants setups. Given that these smaller Consolidations represented a test of the Support of these broken Pennants, gains of several hundred pips would have been expected.

EURO NZD - DAILY CHART

Source: FXCM Marketscope

DAILY CHART- GBP CAD

Source: FXCM Marketscope

Nevertheless, the candles that broke these setups were not strong enough to justify entry. Whenever this happens, you will either have a stronger candle that appears a few days later to continue the breakout, or an opposing candle that starts a False Breakout reversal. In this case, the latter was the result for both pairs.

DAILY CHART- EURO NZD

Source: FXCM Marketscope

DAILY CHART- GBP CAD

Source: FXCM Marketscope

From this point, we could have one of two scenarios unfolding in the next few days. We could see the market move sideways for awhile before providing another set of bearish signals that start their respective downtrends. On the other hand, the reversals could indicate that start of uptrends that take them back inside of their Pennants, possibly breaking out above the Resistance. But how can we know in advance that what seems like perfectly normal signals will actually lead to these types of reversals?

Practice, practice, practice. With Candlestick Patterns, one has to review several examples of breakouts to be able to quickly distinguish between the ones that lead to breakouts and those that will only cause unnecessary headaches for traders. This will allow you to confidently enter and trade those that will actually break and provide strong gains over a very short period.

DAILY CHART- CHF JPY

Source: FXCM Marketscope

DAILY CHART- USD CAD

Source: FXCM Marketscope

The concept of the average Daily Range of a currency pair is also important. Most breakout candles that lead to trends are usually the same size of the Daily Range of that pair. This range also varies among currencies such that a normal candle that is acceptable to be traded for one currency pair may not be strong enough for another. One must also be able to determine if the candle and the start of a potential breakout would also coincide with the Weekly Range of that pair. This would significantly increase the possibility of a reversal such as that which is now taking place on the EURO USD.

DAILY CHART - EURO USD

Source: FXCM Marketscope

_RECENT EMAIL FROM CLIENT

____________________________________________________

SUBSCRIBE TODAY

____________________________________________________

US$120.00

Free 

 ___________________________________________

Duane Shepherd 

(M.Sc. Economics, B.Sc. Management and Economics)

Currency Analyst/Trader

Contact: shepherdduane@gmail.com

Twitter: @WorldWide876

Facebook: DRFXTRADING 

More info for THOSE PESKY FALSE BREAKOUTS WHAT DO WE DO ~ forex trading system system:

Read More..

MAJOR TREND CHANGE EURO JPY EASY 250 PIPS - mathematical forex trading system review

MAJOR TREND CHANGE EURO JPY EASY 250 PIPS ~ mathematical forex trading system review

The bearish pattern now seen on the EURO JPY as part of a major trend change, could either be one of the largest Bear Crowns you will see in the Forex or a setup for a very large Pennant Consolidation. A small Pennant has just been broken on the Daily Chart that could provide 250- 280 Pips of potential trading gains. However, given the uncertainty of the larger formation taking shape, this might actually be a very risky trade.

The Pennant broken can be seen here along with the potential take profit areas if the breakout takes place. The Breakout Equivalent is the expected target to be hit based on the size of the Pennant, while the Weekly Range is the average distance that this pair moves when it is trending.

DAILY CHART - PENNANT BREAKOUT

DAILY CHART - BREAKOUT TARGETS

On the face of it, this looks like a very straightforward Consolidation Breakout setup with a strong bearish candle signal. If this breakout materializes, the targets would be hit within 3-6 days to give traders a good profit in a market offering very few opportunities. This may even be supported by a very large, though awkward-looking Bear Crown Setup and a movement towards the major Outer Uptrend Line.

DAILY CHART - BEAR CROWN

DAILY CHART - INNER & OUTER TREND LINES

Breaks of Trend Lines that follow the end of a major trend usually lead to movement towards an Outer Trend Line if this exits. However, another look at the setup also gives us the impression that this awkward pattern may actually be a very large Pennant that is being formed. This would mean that a Reversal and False Breakout will actually be the pattern that we actually see that leads to the 2nd Support of this Pennant being formed.

DAILY CHART - CONSOLIDATION ?

This setup actually looks to be the more likely outcome given the unusual pattern of this currency pair. Such large Consolidations also tend to appear when the market is transitioning from the end of a major trend to the start of another.

DAILY CHART- EURO USD

DAILY CHART-  AUD USD

Aggressive traders could take the chance to trade this breakout in case we are wrong about this large Pennant. But given the examples of similar setups across the market, it may be better to forgo this one and wait for another, clearer trade setup.

RECENT EMAIL FROM CLIENT

____________________________________________________

SUBSCRIBE TODAY

____________________________________________________

US$120.00

Free 

 ___________________________________________

Duane Shepherd 

(M.Sc. Economics, B.Sc. Management and Economics)

Currency Analyst/Trader

Contact: shepherdduane@gmail.com

Twitter: @WorldWide876

Facebook: DRFXTRADING 

More info for MAJOR TREND CHANGE EURO JPY EASY 250 PIPS ~ mathematical forex trading system review:

Read More..

Behavioral finance we can all use - forex trading systems revealed

Behavioral finance we can all use ~ forex trading systems revealed

In their new book "Nudge: Improving Decisions About Health, Wealth and Happiness", U of Chicago economist Richard Thaler (of behavioral finance fame) and Harvard law professor Cass Sunstein gave a few pieces of personal finance advice, one of which coincided with my point in a previous post: buy insurance with the largest deductible available. The others are: dont invest much in your employers stock, dont pay points on mortages, and dont pay for extended warranties. The book is reviewed in the NYT Book Review.
More info for Behavioral finance we can all use ~ forex trading systems revealed:

Read More..

What are we hedging here - forex trading system australia

What are we hedging here ~ forex trading system australia

I wrote a blog article last year on why hedging isnt always better. The more I try to practice what I preached, the more I am convinced that most of the time, we are hedging the wrong risks.

Hedging should not be about reducing volatility in our portfolio. If reducing overall volatility is our goal, we should simply reduce leverage, as I have argued in my previous article. If volatility in a particular industry group is too much for us, (banks? brokerages? energy stocks?), just reduce the capital allocation in that group.

Sure, if hedging does increase your overall Sharpe ratio, go ahead and hedge to your hearts content. Kellys formula tells us that the higher the Sharpe ratio, the higher the compounded growth rate of your wealth. The problem is, many of us hedge even when doing so do not clearly increase Sharpe ratio. A further problem is that we can achieve this maximum growth rate only if we use the high leverage recommended by Kellys formula, but this leverage often exceeds what our brokerage would allow us. It is not clear that it is beneficial to waste our buying power on the hedge if we can only operate at sub-optimal leverage.

To me, hedging should be about eliminating the risk of ruin (equity reduced to zero) due to unexpected, catastrophic events. (Many sophisticated hedge fund managers cannot even meet this simple survival criterion, giving lie to the whole notion of "hedge" funds.)

For instance, lets assume that the worst one-day drop in the market index can be 20%. Furthermore, lets assume that you are able to endure a 30% reduction in equity during one trading period. Then you should not be afraid to have a net long exposure of 150% of your equity. In other words, not only should you not hedge, but you should go ahead and leverage your long-only portfolio 1.5 times.

I believe this notion of hedging, or buying insurance, extends to all spheres of our lives. We should avoid ruin, not mere losses. Otherwise, you will be paying too much on the insurance policy over the long term. In other words, max out the deductible on your insurance policy!
More info for What are we hedging here ~ forex trading system australia:

Read More..

DO WE TRADE THIS TEMPTING 70 PIP USD CHF SIGNAL - best forex trading system robot

DO WE TRADE THIS TEMPTING 70 PIP USD CHF SIGNAL ~ best forex trading system robot

Earlier this week, the USD CHF gave us a Bull Candle breakout from the Resistance of its Pennant setup, with the intention of moving towards the Outer Downtrend Line 70 Pips away. While this might appear to be a comfortable trade for those who trade these smaller moves, a closer look at the Daily Chart will reveal why taking this trade may be a risky move.

As you can see from the charts, the currency pair has already broken the Inner Downtrend Line of the strong Downtrend with the aid of a pair of Double Bottoms. With setups such as these, there is always a tendency to move to the Outer Trend Line after a very long trend has ended. 

DAILY CHART - BREAKOUT SIGNAL

DAILY CHART - INNER & OUTER TREND LINES

DAILY CHART- POTENTIAL 70-PIP MOVE

A key aspect of trading Breakouts is that the Candlestick Signal must be strong. This signal provided here is too weak to justify entry and could lead to an unexpected reversal or a very erratic move to that Outer Trend Line. Weak Consolidations and/or Breakout Signals are two notorious reasons that False Breakouts take place. In the chart below, we can see that the candle to the left was a much stronger one and is that type of signal that we look for when trading breakouts.

DAILY CHART- BREAKOUT CANDLES

One possibility that could unfold in these situations is that a stronger Bull Candle appears above this weaker one. In general, when this occurs with Consolidation Breakouts, the trade can be taken at that 2nd candle. However, in this particular situation, the gap with the Outer Trend Line would become smaller, reducing the profitability of the trade even further.  Also, in some cases, the market may actually come close to the Outer Trend Line without actually hitting it. It can then either U-Turn to resume the previous trend or consolidate for a long time. 

If a move does take place it could still be a very good trade for Day Traders, but perhaps too small for Swing Traders.

Let´s see what unfolds in the days ahead.

RECENT EMAIL FROM CLIENT

____________________________________________________

SUBSCRIBE TODAY

____________________________________________________

US$120.00

Free 

 ___________________________________________

Duane Shepherd 

(M.Sc. Economics, B.Sc. Management and Economics)

Currency Analyst/Trader

Contact: shepherdduane@gmail.com

Twitter: @WorldWide876

Facebook: DRFXTRADING 

More info for DO WE TRADE THIS TEMPTING 70 PIP USD CHF SIGNAL ~ best forex trading system robot:

Read More..

TRADE RESULT AUD USD - automated forex trading signals system

TRADE RESULT AUD USD ~ automated forex trading signals system

Trade Type	Breakout, Medium Consolidation
Signal Needed	Daily Chart
Target	Breakout Equivalent
Result	-100 Pips

________________________________________________________________________

The intention here was to continue to go long in favour of the Aussie in response to the breakout signal provided above the Daily Charts Pennant. The pair had actually formed a smaller Pennant above a larger Pennant before providing the Bull Candle Signal for entry. Instead of breaking higher, however, the currency pair reversed unexpectedly despite having a strong setup and signal. So what could have been the reason for this loss?

Lets first take a look at what the overall picture was on the Daily Chart. As we see in the chart below, the smaller Pennant was essentially testing the broken Resistance before giving the breakout signal.

DAILY CHART

Source: FXCM Marketscope

This was also taking place in an uptrend that added support for the currency pair to continue moving higher. Following the close of this candle, entry took place immediately with the Stop Loss set at the appropriate point on the 4 Hour Chart and the target of the Breakout Equivalent put in place. Within a few days, the market reversed sharply to take out the trade, resulting in the loss of 100 Pips.

DAILY CHART

Source: FXCM Marketscope

The issue at hand now following this loss and trading losses in general, is to ascertain the possible cause especially given the apparent clarity and strength of this setup. Two separate, but related reasons could provide the answer.

SCENARIO 1

It is quite possible that these two Pennants are actually about to give way to the formation of a larger Range Setup. This is something that happens from time to time in the currency market. If this is the case, then we could see a pattern that looks like this.

DAILY CHART

Source: FXCM Marketscope

If this is what will be formed, then we could either see another bullish signal to continue the uptrend or a bearish breakout that starts a downtrend.

SCENARIO 2

The alternate scenario involves taking a wider view of this currency pairs previous patterns. The unexpected reversal that took place could actually be the start of a bearish wave within a much larger Consolidation setup that is being formed.

DAILY CHART

Source: FXCM Marketscope

Confirmation of this will come in the upcoming days or weeks in the form any of these Candlestick Formations below the Uptrend Line;

• ABC Reversal Signal;
• Formation & Break of Small Consolidation;
• Counter Trend Line Setup & Break;

Provided they are strong, any of these signals could lead to a steady downtrend over the next few months until Support is hit, over 500 Pips away.

With any successful Methodology that is applied to the currency market, losses are always expected along the way in between profitable trades. One of the distinguishing advantages of trading with the higher time frames, however, is that it allows the trader a lot more time to calmly analyze the reasons for these losses and make adjustments where necessary. This helps to take the emotions out of trading and avoid the common habit of trying to exact immediate revenge on the market - a habit that inhibits long-run profitability in Day Trading. 

Lets patiently waiting on the next opportunity that this market will provide on this or any other currency pair as we start a new month.

RECENT EMAIL FROM CLIENT

____________________________________________________

SUBSCRIBE TODAY

____________________________________________________

US$120.00

Free 

 ___________________________________________

Duane Shepherd 

(M.Sc. Economics, B.Sc. Management and Economics)

Currency Analyst/Trader

Contact: shepherdduane@gmail.com

Twitter: @WorldWide876

Facebook: DRFXTRADING 

More info for TRADE RESULT AUD USD ~ automated forex trading signals system:

Read More..