Monday, May 28, 2018

My Trading Approach and Guidelines

Monday, May 28, 2018

When I did my first live trade in Jan 2012, scalping as portrayed in forums seemed the dependable approach to making infinite returns. The very first trade was accidental. While I was acquainting myself with the trading terminal, I pressed the new order button and before I could learn its contents I did a trade without knowing the volume, pair or the price. Excitement had led me to ignore demo and go straight to live account. The first conscious trade I bought USDCHF and closed the position immediately it started sliding. Looking back I understood the ‘cut your losses’ to literally mean never tolerate floating loss. Believe you me I repeated such similar trades for the next six months till my account hit zero dollars. Of course during the six months and later on I tried all sort of approaches flaunted in the internet. I had progressed from the simple moving averages to the so-said advanced Elliott Wave Analysis. However, after blowing up I realized there was more to this forex market than meets the eye. The colorful Metatrader charts, dogmatic indicators and trading ‘psychology’ related articles presented low quality knowledge about the market. And I still hold this view till to date.

So what is my approach? The belief that quality knowledge about market is not found in promotional articles inspired me to aim for a more research oriented trading approach. My approach emphasizes formulating testable ideas, reading academic literature related to the idea and testing the idea before trading it live. I thought “because I am about to start an economics statistics bachelor’s degree, the approach will be complemented by whatever concepts I learn in class”. Class work helped a bit but mostly it did not turn out as I had expected (why? Story for another day...). However, even after undergrad not meeting my expectations I still stick to the core approach of formulate, test and then trade! 

The hard work and enjoyable part has been learning programming languages and tools that can help test the ideas or replicate academic papers. Started with the MQL5 language, later learned Matlab and now I combine both MQL5 and Matlab to test and automate ideas.

 Below are the main themes and respective rationale that guide trading decisions:

v  Entries And Stops Are Based On Time Rather Than Prices

v  A Low Frequency Of Trading; Usually 12 Main Trade Ideas In One Year

v  Long Positions Only. Rarely Will I Sell

v  Develops Mean Reversion Rather Trend Following Systems

v   Trade positions with positive swaps. Swaps generate a significant portion of the returns

v  Disapprove trade ideas generated by the system using stylized statistical facts collected over time

v  Continuously formulate and test new hypothesis

Thank you for reading 


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