Back in October 2011 I stopped trading Forex with real money after more than a year with mixed results and a lot of frustration by the end, which I described in the I have lost my ass article. This blog originally started as a Forex blog. That was the root. That was the essence. That was the only thing I talked about.
Believe it or not, in retrospective I'm glad the Forex fiasco happened as it forced me to follow other paths and learn about other markets. My Forex debacle led me to study and understand Options, develop a system, be profitable. Now that's a weapon on my side for the rest of my life. Changing from one trading vehicle to another inevitably made me wonder: "Why not another one?". And that's how I ventured into Dividend Growth Investing, a strategy with great merits in my opinion. As a result, today this site is about Options, Dividend Growth Investing and Forex, all that thanks to my initial Forex disaster, which in the end made me a more complete trader who understands different markets and sees how everything is interconnected.
In my years studying the markets, I can honestly say that the amount of garbage out there is abysmal. Useless Tutorials, Trading Systems, Signal providers, scams. There's an entire industry filled with junk on the Internet that makes it really hard, if not impossible for most, to achieve sustainable long term profitability. Which you will never achieve without good education and a solid understanding of the mechanics of the markets. But in particular, the Forex industry is by far the dirtiest of all. Going from the amounts of garbage sold out there, the misinformation on the Internet, to the nature of Forex itself being a non-centralized market place (basically every broker or bank has its own quote for each currency pair, which differs from the quotes of other institutions without this being illegal). Also the fact that in many countries regulation is not a most to become a Forex Broker and you get to hear all the horror stories of prices manipulation, stop loss hunting etc. Forex, my friends, was and is the real jungle.
But I didn't want to totally quit. There were opportunities there. As any market, it is victim of panics, euphoria, extreme sentiments, politics and there is a real chance of being long term profitable as evidenced by the Barclay Currency Traders Index. With almost three decades collecting data, a 6.73% compound growth rate leaves little doubt about whether being profitable in Forex could be a random event or not and the number (curiously) is remarkably similar to the average long term returns of the S&P500.
I simply needed a better understanding. I needed to design my own trading system, extensively test it, and put it under real stressful conditions. I needed to find a good reputable and regulated Forex broker. I needed time for all this. I stepped out of the game, but I knew I would be back at some point.
Today is the day where I'm back into the Forex arena. I chose OANDA as my broker. After months of research I have no concerns with this broker. This was a very challenging task when you take into account all the negative comments possibly posted by other brokers that represent the competition (Sigh...the beauty of anonymity on the Internet).
I opened a small account with OANDA Canada (2,018.69 USD to be exact) and I will be using the LT Trend Sniper Strategy, which I designed in 2012 and described on this article. The strategy was optimized with data from 2000 to 2009. The 2010 - 2012 period was used as out of sample testing. In addition to that I have had the opportunity to follow it on paper money in 2013 and 2014. So, that's 5 years total of Out of sample testing + Live testing. 5 years of unknown data for the strategy to work. It's not the most spectacular strategy or anything like that, but it is robust in my opinion. It has simplicity on its side. I've done my best to not curve-fit and it has good chances of being a long term sustainable and profitable robot.
The goals
With 3% portfolio allocation per trade, the 15 year back test shows a 9% average yearly return with a 17% worst draw-down. A close to 0.5 ratio of Average Return to Max Draw-Down, pretty in line with the professional systems out there. Notice the same ratio is around 0.44 for the data published on the Barclay Currency Traders Index (6.73% yearly return vs 15.26% worst draw-down as of this writing). Also take into account that a simple strategy such as following the S&P500 Index, which most retail and professional traders fail to beat, has a ratio of only around 0.2 depending on the period you analyze. That would be for example 7% long term average yearly returns against a 35% worst draw-down during the evaluation period.
Of course I could try and aim for 15% yearly returns by increasing the trade size, but then I would be exposed to a potential 30% draw-down. You can't really stretch profitability without inevitably assuming more risks.
I will add 2,000 USD to this account at the beginning of every year going forward. Assuming a 9% compound annual return, plus my out of pocket addition of $2,000 per year the portfolio should reach $100,000 in 19 years, and I will be 51 by then.
Will The Lazy Trader blog be still active by then? Will I be alive to celebrate this little accomplishment?
I don't know if I'll be alive, but if I am, and if this blog is not shut down due to a law sue, you bet I will write an article on December 18, 2033. Hopefully with a 100,000 USD portfolio out of which 64,000 USD will be pure speculative gains.
I went with a small account so that in the future I can perform other, separate experiments. For example, right now I'm optimizing the same strategy for the Sterling Pound, the Swiss Franc and the Australian Dollar. Eventually, it would be nice to have a portfolio where all four instruments (Euro, Pound, Swiss Franc and the Aussi) are traded in one same account and who knows how many other systems I will come up with.
I'll be publishing the account activity on the Results page soon, which will be automatically updated via Myfxbook. I'll also publish a read-only investor password for anyone interested in taking a look at the account. I will also share the binaries of the robot in early 2015.
As seen on the back-test, it is possible for the system to have negative years. So I am not expecting to be immediately profitable or anything like that. This is a long term venture (very long term in fact). There is no guarantee that I will be profitable this time, but I'm definitely way better equipped.
Related Articles:
LT Trend Sniper - a Forex strategy that works
The Turtles Trading system automated (Expert Advisor for download)
50 Day Break Out system with 50/100 crossover confirmation - A System used by professional commodity traders
Design of a EURUSD Donchian break out strategy with a proven statistical edge
Believe it or not, in retrospective I'm glad the Forex fiasco happened as it forced me to follow other paths and learn about other markets. My Forex debacle led me to study and understand Options, develop a system, be profitable. Now that's a weapon on my side for the rest of my life. Changing from one trading vehicle to another inevitably made me wonder: "Why not another one?". And that's how I ventured into Dividend Growth Investing, a strategy with great merits in my opinion. As a result, today this site is about Options, Dividend Growth Investing and Forex, all that thanks to my initial Forex disaster, which in the end made me a more complete trader who understands different markets and sees how everything is interconnected.
In my years studying the markets, I can honestly say that the amount of garbage out there is abysmal. Useless Tutorials, Trading Systems, Signal providers, scams. There's an entire industry filled with junk on the Internet that makes it really hard, if not impossible for most, to achieve sustainable long term profitability. Which you will never achieve without good education and a solid understanding of the mechanics of the markets. But in particular, the Forex industry is by far the dirtiest of all. Going from the amounts of garbage sold out there, the misinformation on the Internet, to the nature of Forex itself being a non-centralized market place (basically every broker or bank has its own quote for each currency pair, which differs from the quotes of other institutions without this being illegal). Also the fact that in many countries regulation is not a most to become a Forex Broker and you get to hear all the horror stories of prices manipulation, stop loss hunting etc. Forex, my friends, was and is the real jungle.
But I didn't want to totally quit. There were opportunities there. As any market, it is victim of panics, euphoria, extreme sentiments, politics and there is a real chance of being long term profitable as evidenced by the Barclay Currency Traders Index. With almost three decades collecting data, a 6.73% compound growth rate leaves little doubt about whether being profitable in Forex could be a random event or not and the number (curiously) is remarkably similar to the average long term returns of the S&P500.
I simply needed a better understanding. I needed to design my own trading system, extensively test it, and put it under real stressful conditions. I needed to find a good reputable and regulated Forex broker. I needed time for all this. I stepped out of the game, but I knew I would be back at some point.
Today is the day where I'm back into the Forex arena. I chose OANDA as my broker. After months of research I have no concerns with this broker. This was a very challenging task when you take into account all the negative comments possibly posted by other brokers that represent the competition (Sigh...the beauty of anonymity on the Internet).
I opened a small account with OANDA Canada (2,018.69 USD to be exact) and I will be using the LT Trend Sniper Strategy, which I designed in 2012 and described on this article. The strategy was optimized with data from 2000 to 2009. The 2010 - 2012 period was used as out of sample testing. In addition to that I have had the opportunity to follow it on paper money in 2013 and 2014. So, that's 5 years total of Out of sample testing + Live testing. 5 years of unknown data for the strategy to work. It's not the most spectacular strategy or anything like that, but it is robust in my opinion. It has simplicity on its side. I've done my best to not curve-fit and it has good chances of being a long term sustainable and profitable robot.
The goals
With 3% portfolio allocation per trade, the 15 year back test shows a 9% average yearly return with a 17% worst draw-down. A close to 0.5 ratio of Average Return to Max Draw-Down, pretty in line with the professional systems out there. Notice the same ratio is around 0.44 for the data published on the Barclay Currency Traders Index (6.73% yearly return vs 15.26% worst draw-down as of this writing). Also take into account that a simple strategy such as following the S&P500 Index, which most retail and professional traders fail to beat, has a ratio of only around 0.2 depending on the period you analyze. That would be for example 7% long term average yearly returns against a 35% worst draw-down during the evaluation period.
Of course I could try and aim for 15% yearly returns by increasing the trade size, but then I would be exposed to a potential 30% draw-down. You can't really stretch profitability without inevitably assuming more risks.
I will add 2,000 USD to this account at the beginning of every year going forward. Assuming a 9% compound annual return, plus my out of pocket addition of $2,000 per year the portfolio should reach $100,000 in 19 years, and I will be 51 by then.
Will The Lazy Trader blog be still active by then? Will I be alive to celebrate this little accomplishment?
I don't know if I'll be alive, but if I am, and if this blog is not shut down due to a law sue, you bet I will write an article on December 18, 2033. Hopefully with a 100,000 USD portfolio out of which 64,000 USD will be pure speculative gains.
I went with a small account so that in the future I can perform other, separate experiments. For example, right now I'm optimizing the same strategy for the Sterling Pound, the Swiss Franc and the Australian Dollar. Eventually, it would be nice to have a portfolio where all four instruments (Euro, Pound, Swiss Franc and the Aussi) are traded in one same account and who knows how many other systems I will come up with.
I'll be publishing the account activity on the Results page soon, which will be automatically updated via Myfxbook. I'll also publish a read-only investor password for anyone interested in taking a look at the account. I will also share the binaries of the robot in early 2015.
As seen on the back-test, it is possible for the system to have negative years. So I am not expecting to be immediately profitable or anything like that. This is a long term venture (very long term in fact). There is no guarantee that I will be profitable this time, but I'm definitely way better equipped.
Related Articles:
LT Trend Sniper - a Forex strategy that works
The Turtles Trading system automated (Expert Advisor for download)
50 Day Break Out system with 50/100 crossover confirmation - A System used by professional commodity traders
Design of a EURUSD Donchian break out strategy with a proven statistical edge
Go to the bottom of this page in order to see the Legal Stuff
Good luck with your new venture. I almost got involved with forex trading a few years ago but I think I would have lost all my money due to my emotional immaturity at that time. In the last 4 or 5 years, I have learned a lot about trading and especially risk management. I am not saying that I am now a master trader as I still make mistakes, break my rules and get into trades that I should not. But I learn that there are 4 core principles to be a successful trader.
ReplyDelete1. You need to have an edge to succeed
2. You need to manage your risk
3. You need to keep it simple
4. You need to be consistent
You can follow me on Twitter @lienjonathan where I tweet my high probability credit spread trades in real-time for free.
I think every trader goes through that initial phase where he becomes really dangerous to his own wealth. I also think I have matured a lot over time and I'm glad for staying in the game. I think the number is around 90% of traders that totally quit in less than a year.
DeleteValid points on principles to be successful as a trader. I think you have made a great summary with 4 simple yet concise points.
Thanks
LT
Hi, I understand that your trading system may hold a position for many weeks: what about the interest rate when holding a forex position for a long time?
ReplyDeleteGood question Thomas.
DeleteThe interest rate does play a role and its definitely a drag to the overall returns in the long run. But it is mitigated by the fact that sometimes you go long , sometimes you go short. For example during the EURUSD sell off of July - September, the system went short EURUSD. Every day the account would get a small credit as the interest rate was positive for those short EURO long Dollar. Obviously this would be negative when going long EURUSD, in which case you would pay a small amount every day.
In the long run it is a drag anyways because what you are given as credit from the broker is smaller than what you are debitted. But overall I think it won't have a drastic impact based on the rates charged/creditted by OANDA. The rates are public and look decently small to me.
Cheers,
LT
There is nothing like a free lunch, my friend. The risk will always be there. Nice to see you chose the more intelligent way here. Besty for the future.
ReplyDeleteWhy not use a swap-free account if you are rolling overnight, thats what i`m planning to do.
ReplyDeleteGlad to hear 2015, was a good start for you also.
Hey Makiavelic,
DeleteAs far as I know the choice of a swap-free is not something up to the trader's will. It's due to religious concerns and most brokers do not offer it. If I'm wrong and you're able to provide more details I would truly appreciate it.
Cheers,
LT