Came across the title of a book today called "A Mechanical Trading System..."

Cool!

"...Using Simplified Elliot Wave Analysis"

DELETE! DELETE! DELETE!

Elliot Wave Analysis is hardly mechanical. Or maybe I'm just judgemental.

Here's my test for mechanical-ness:

#1. Will the today me, in this mood, think that a rule is met, and will the tomorrow me, in another mood, agree that the same rule is met?

#2. Will I think that a rule is met, and every other person in the world agree that the same rule is met?

I say "Bah!" to Elliot Waves fitting either of those 2 rules.

This is actually a question for someone out there to answer. I've seen a few jobs for an Algorithmic Trading Developer.

For my resume purposes, does TS do algorithmic trading? Is this a buzzword that I can legitimately put on my resume?

Help me out here.

The "Trading Systems For Free" page became "Real-life Examples".

I've just added a new system to that page which I have not tested one little bit!

Here's what I wrote:

I haven't tested this system out at all, I just wanted to give an example using the Chandelier stop. As you will see, I'm about to mix my 5-Minute %b System #1 with a stop loss technique which is supposed to be used on Hourly bars. Therefore please backtest and modify before use! (Should go without saying).

I've heard of the Chandelier stop before somewhere, but I'm not sure where (if there's an originating source I should reference, please let me know). I came across it again in the Oanda forums, specifically this post.

Here's what a fella (?) called EZCurrency said:

For a trailing stop for a long, I use HHV(H,24)-3.5*ATR(24) on an hourly chart. This is the highest high value of the past 24 hrs, then subtract 3.5 times the average range of the past 24 hrs. This accounts for the volatility. Plot it and you will see it is an excellent trailing stop for most pairs!

Another person, Gouranga, then came up with a possible improvement:

One can combine this with a LLV(n) (eg. Long Trade) and take the higher trailer of the two. LLV(n) trailer locks in profit when market consolidates. While (HHV - ATR) locks in profit when market trends. So, you get the best of both mkt conditions.

The basic theory of using a number of ATRs in order to calculate the stop loss, is that it's adaptive to the current market conditions - during volatile periods the stop will be placed further away, and during less volatile periods the stop will be brought closer to the current price.

All Bollinger settings used a period of 720, with 2 standard deviations above and below. The period for the ATR is 24.

I'm not going to use the Highest High minus the ATRs. Instead, I'm just going to use the High of the current bar minus the ATRs.

Rule Type	Description
Long - Entry Rules	Value of %b Is Below X (0.1)
Long - Entry Values	Price Where %b Would Equal X (0.1)
Long - Init. S/L Values	[OHLC] (using the High) Minus X (3.5) Average True Range(s)
Long S/L Mgmt Rules	Every Bar
Long S/L Mgmt Values	[OHLC] (using the High) Minus X (3.5) Average True Range(s)
Long S/L Mgmt Rules #2	Every Bar
Long S/L Mgmt Values #2	Low Of Previous X (24) Bars

And for shorts:

Rule Type	Description
Short - Entry Rules	Value of %b Is Above X (0.8)
Short - Entry Values	Price Where %b Would Equal X (0.8)
Short - Init. S/L Values	[OHLC] (using the Low) Plus X (3.5) Average True Range(s)
Short S/L Mgmt Rules	Every Bar
Short S/L Mgmt Values	[OHLC] (using the Low) Plus X (3.5) Average True Range(s)
Short S/L Mgmt Rules #2	Every Bar
Short S/L Mgmt Values #2	High Of Previous X (24) Bars

Note that TS automatically works out which is, in the case of the Long trades, the higher of the two Long S/L Mgmt Values (and the lower of the two Short S/L Mgmt Values). Also note that stop losses never move to a position of increased risk.

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.

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.