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Articles from
October 2006
Alrighty, I'm pretty sure I've got everything in place now for this to become the new place for Sharky's Trading Diary.
Please update your bookmarks to:
www.thinkingstuff.com/blog.aspx
If you subscribed to the old Atom feed in Blogger, please update your feeds to use the FeedBurner one. All syndication details here.
(I guess my one regret of using DotNetNuke for my blogging engine is the god awful page addresses).
I have split my old blog into two. No longer will readers of Sharky's Trading Diary have to read through the details of new releases of the software. Instead, Sharky's Trading Diary will now be about trading, and the Thinking Stuff KB (knowledge base) will hold all announcements about the software.
Oh sure, there'll still be the odd post into the blog about the software when something major happens. But you'll be spared of hearing of every detail of every release.
So, if you're interested in reading about trading using purely objective trading rules, subscribe to the blog. And if you are interested in the software, also subscribe to the KB.
Incidentally, the KB address is:
www.thinkingstuff.com/kb.aspx
The new survey asks: I'd love to subscribe to this fantastic software, but...It's too expensive I couldn't work out how to use it I'm waiting for v1.0 to be released It doesn't connect to the broker I use After 9 days of constant battle between the 4 options, we have a winner starting to emerge. Out of the 1 person who answered the survey so far, a total of 1 person (100%) said that they couldn't work out how to use it. Now,
if I only had extensive online help files, I could understand that
someone couldn't work it out. If I only had extensive online help
files, plus help sections attached to the more tricky windows, I could
understand that someone couldn't work it out. But if I have extensive online help files, plus help sections attached to the more tricky windows, plus free and unlimited support, I can't understand it. If you're having trouble, ask me a question. Live chat is available. (And if that 1 person is the same 1 person who tried to use the Contact Us page while it was broken - sincere apologies).
Dear anybody who tried to use the Contact Us page during the past week, Although a confirmation message told you that the message was sent, it was not sent. But if you try again now, it will be. Apologies all round.
Gridding is where you believe the price to be moving in one direction, so you set up a whole bunch of limit orders at regular intervals (let's
say every 10 pips) both above and below the current price. It
means you're buying more and more regardless of where the price is
going in the short-term. The theory is that because the price is
eventually going to go in your favour, you want to keep buying more and
more at hopefully cheaper prices. When the big move comes, you rake in
the dough. And just to finish off the gridding explanation, I
think also when one limit order is taken up, you're supposed to place
another one so that you've always got 10 limit orders at any one time.
Or maybe it's 10 limit orders on either side of the current price. Or
whatever. It's a lot like dollar-cost-averaging, which I already
said I don't like. The reason I don't like either of these is because
prices don't always come back. Sure you're buying cheaper than what you
originally got in at, and this is fantastic if the price does rebound,
but it's no help at all if the price never makes it back to these
"cheap" prices. In fact you're just multiplying your losses. Now
when I say "No Gridding" in the title, I don't really mean to say to
you that you shouldn't do gridding. I wouldn't. But then I wouldn't set
up a website for people to post videos and 2 years later rake in $1.5
billion. What I mean by "No Gridding" in this context, is that
the Thinking Stuff software will not be able to support gridding. Sure
you could have made 20 different trading systems which were set to
place their entry orders at "Close Minus 10 Pips", "Close Minus 20
Pips", etc, but even so I made a change in v0.8.3 that just won't allow
it. Gain Capital has a heart attack if you try to put a Long
limit order below the current price. But Oanda allows it, and such a
limit order will be taken up when the price pushes *down* through the
limit order price, rather than pushing up through it as normal. I
had this as a bug - a limit order had been placed, and due to some
latency between retrieving the price and placing the order, the price
had already shot up above where the Long limit order was put. What to
do in this case? The problem is of course, that the algorithm which
works out if we should be in a trade will think that we should be in a
trade - a Long limit order was placed during the previous bar, and the
current price is above where it was placed. "We're in a trade!", the
algorithm will think to itself. And then it will discover that it
should be in a Long trade, but actually there's no trade and still a
Long order. "Huh?" it'll say. So, I decided the best thing to do
would be to cancel the order altogether, and when the current bar
finishes, recalculate where the order should be placed. i.e. No Gridding. I know I didn't have to say all that, because it's in the Change Log. And I know that everyone reads the Change Log because it's so fantastically interesting.
Just putting some surveys to bed. Thanks to all those many people who contributed. What else do you want Thinking Stuff to do?0% - Auto-trading of shares. 29% - Auto-trading of futures. 29% - Add more trading rules for us to choose from 43% - Just fix the bugs that are there now - then do new stuff Thinking Stuff currently connects to Gain Capital and Oanda. If you had to choose, which other company should it connect to?50% - Interactive Brokers 25% - FXCM 25% - InterbankFX Total
number of respondents was 7 for the first question, and a whopping 8
for the second. Yes siree, obviously a hot topic for discussion around
the ol' water cooler. To respond, yes, I've drawn a line in the
sand for what will be included in v1.0, and that is not much else
besides fixing the remaining bugs. No saying I don't listen to the
voices of the 7 survey contributors. If you would like more
trading rules to choose from, I guess the next step is to tell me what
they are. Now that I've incorporated TA-Lib, it will be very easy to create rules based on any of the indicators listed here. And
gosh, I'd love to have it connect with Interactive Brokers, but it's
not so simple. IB offers shares and futures and options and currencies,
whereas the entire framework of my software deals solely in currency at
the moment. There's a set number of currencies, they work in pips, and
have no volume. Shares have volume, work in cents, and there's
thousands of different stocks, being added to and subtracted from all
the time. So to offer auto-trading in the other financial instruments
would mean a major overhaul taking many months. But that's my
problem, not yours. There are 4 people who might be very unhappy right
about now. Apologies. Make that 8, because FXCM doesn't have a suitable
API, and InterbankFX doesn't have examples in VB.Net. The next survey ( available here) asks: I'd love to subscribe to this fantastic software, but...It's too expensive I couldn't work out how to use it I'm waiting for v1.0 to be released It doesn't connect to the broker I use p.s. None of those answers are acceptable - go buy it :-)
Carry Trading is where you buy and hold a currency in order to accrue interest payments. For example, and this and all figures are taken from the Excel file produced at ElectricSavant.com, which in turn takes its figures from Oanda, if you buy 10,000 units of AUD/JPY at 1:50 margin, you get paid interest at 250% p.a. 250%!! That's
if the price of AUD/JPY remained static for that year. If AUD/JPY went
higher, you make even more. If AUD/JPY goes lower, you might still make
money if the interest payments are more than the amount you lose in
terms of pips. From that Excel file, the top ten are: AUDJPY, Long: 250% GBPJPY, Long: 208% USDJPY, Long: 200% GBPCHF, Long: 168% USDCHF, Long: 161% CADJPY, Long: 153% EURAUD, Short: 130% NZDUSD, Long: 122% EURJPY, Long: 100% EURGBP, Short: 87% So
I set about finding if there was some kind of fool-proof way to rake in
the interest, and hedge against any potential drop in price. The
thing to note is that if you do a perfect hedge - that is you go long
10,000 units of AUD/JPY in one account, and go short 10,000 units of
AUD/JPY in another, then you'll be paying your broker interest. Because
here's the reverse of the top ten above: AUDJPY, Short: -286% GBPJPY, Short: -237% USDJPY, Short: -239% GBPCHF, Short: -192% USDCHF, Short: -195% CADJPY, Short: -189% EURAUD, Long: -168% NZDUSD, Short: -170% EURJPY, Short: -137% EURGBP, Long: -119% The 250% interest from your long AUDJPY trade is wiped out by the -286% interest from your short. So,
what some people do is create a "Carry Basket" - a group of currencies
that combined pay a high amount of interest, but the price is as flat
as possible. Every day or week or so, the Carry Trader shifts money
around so that the ratio of currencies owned remains fairly constant. One such basket I read about was: EURCHF, Long: 61% GBPCHF, Long: 168% EURGBP, Short: 87% EURAUD, Short: 130% (Actually the ratio was to buy 2x EURAUD than the others, but let's keep things simple). What
I did was, using Daily bars back to the start of 2005, worked out for
each day how much interest was accrued, and how much money was
gained/lost due to the fluctuations in price. Then I added those
figures together to see how much money would have been made in a buy
and hold strategy. Note that I did not use compounding. Everyday the same 10,000 units of each was kept. The
end result is quite fantastic - $4500 in profit, when the margin
required to buy those 40,000 units (20K in CHF, 10K in GBP, 10K in AUD)
at 1:50 was about $1200. As with all these images, click on it to see
the full-size version. 
The interest received was around $1500. Meaning $3000 came from price movement. You
can see from these charts, that the big moves in profit all come from
the big moves of price in our favour (that's the yellow sections): EURCHF: 
GBPCHF: 
EURGBP: 
EURAUD: 
Let's
instead start everything at exactly the worst time - 22-June-05.
Markets do change personality, and I assume it's going to happen as
soon as I place my first trade using a new system that backtested well.
The cosmos might want me to succeed, but it also has a sense of humour. Now the chart is not so good: 
While
the interest certainly does lessen the impact of the price going in the
wrong direction, it doesn't make up for it altogether. It would have
been great to earn all that interest, but the only good part about it
for more than a year was that without it, you would have been losing
more than you were. If you add compounding to the mix, I'm not
sure the results would be much different. Buying 2x more EURAUD than
the others didn't change the shape of the chart either. So what does this mean? What's the conclusion? I
think that for some currencies, the interest is too much to ignore.
However I also think that price fluctuations will always outweigh the
amount of interest earned. Interest would be the icing on the cake for
trades that went well, and take the bite out of trades that don't. So...
if you want to trade long-term in currency and rake in some interest,
how about developing a trading system that only trades in the direction
that pays out interest, and base that system on Daily or Weekly bars. Following
the normal strategy - you backtest over historical data, taking into
consideration the amount of pips earned and the number of days in the
trade. More is better for both. Then instead of buying and holding, and
adjusting once per week, you just trade your system - place order, set
stop loss. Repeat. Simple. When I read about Carry Trading in
forums, I see the words "sell when you make money", "buy more when the
price is going down", "dollar-cost average". None of these make sense
to me. These tactics assume the price is always going to rebound, so
you're buying while it's "cheap". I don't like that kind of assumption.
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