The Path

Having outlined The Goal, this page will explain The Path to get there.

But first, let me outline the path I took to get where I am right now.

The Path To Here

I've been to two seminars about trading. One was about trading options on the ASX. The other was about trading currency on the forex markets.

Both were very informative, although attending them has not made me a successful trader. Following the rules I bought from these people only seemed to make me do exactly the wrong thing.

Many of you are scoffing now - of course the rules don't work, because if they did, those guys wouldn't need to give seminars. They'd be rich already.

I decided the reason I could not get these rules to work for me, was the inherent subjectiveness in some of the rules. (The 2nd seminar was far more objective than the first, but there was still some subjectiveness in there). I have big problems with trend lines, and support-resistance (SR) lines. I have problems trying to work out if an indicator is "diverging". Oh sure, on a chart of historical data it's as clear as day. But during real-time?

Anyway, I needed to find a trading system (bunch of rules which tell me when to buy and sell) which is completely, 100% objective. IF such-and-such a condition is true THEN buy. IF the price is near an SR line THEN don't buy looks on the face of it as objective, but because the placement of that SR line is subjective, the rule becomes subjective.

So my new requirement for a trading system is that it must be so objective that a computer could do it. No emotion. Just rule says yes, so do it. By the way, both of the seminar dudes recommended trading diaries - to keep track of how you were feeling while trading. Did you buy because the rules said to, or because you just really wanted to trade something? Then at the end of the month, read through your diary and try to remove the emotion from your trading. My take on it is that if the rules were 100% objective, there is no need for such a diary.

And I thought, well, if my requirement is that a computer could trade the system, then a computer should trade the system. There's no need for me to sit and stare at the computer screen all day. And that's something I did glean from the 2nd seminar - he said he had a business partner who had made a trading-bot based on his rules. Before hearing that, I didn't think such a thing was possible. As soon as I heard it was, my mind kicked into gear on how to go about making my own.

So for the past... forever... I've been working pretty hard on my software which will interact with the forex broker, and automatically trade on its own based on the system that I've given it. So I could be getting a suntan at the beach (unlikely - more like drinking at the pub), and yet making money at the same time. Well, trading at least, making money if I'm lucky.

I guess a quick and nasty version would have been up by now. But I wanted to make it special. It does backtesting now, so I can test my systems before making them "live". And the way I've set it up is so that rules can be added to a system by a few clicks of the mouse.

There is similar software available, but they are generally in the thousands of dollars range, and all require the learning of a cut-down version of computer programming language. You code your system, each system, and plug it into the software. It doesn't appeal to me. Where there is coding there is chance of bugs. And if you want to change/add/delete a rule from the system, there is modification of code. And with modification of code there is chance of bugs.

So my software is all mouse clicks. Want a system based on the Directional Movement System (based on the interplay between three calculated lines)? Click click click. Done. A couple more clicks and it's backtested. Ok, it didn't work. Want to change it from buying when +D is above -D, to buying when ADX is below +D and also below -D? Click click click. A couple more clicks and it's backtested. Ah, much better. But let's change the period from 20 to 30. Click click click... You get the picture.

You can set up different accounts to trade with. You can use a different company's data feed to make trading decisions with. You can tell each system how much money it has to trade with, and what percent of that money to risk on each trade. You can even tell it to stop trading until the last X number of trades have a certain Profit Factor.

And, to be honest, making that software kind of made me lose my way. The goal, after all, is to make money from trading. Now I'm spending all my time making software.

The Path From Here

The first step is to complete the circle, and use the software for its originally intended purpose - to find a purely objective trading system that I could trade profitably.

To experiment with different trading rules, first I need historical data to backtest with. So, I've downloaded all the files freely available from ratedata.gaincapital.com. And they are being loaded into my Thinking Stuff database.

Millions of rows of tick data take a very long time to load...

Once that's finished, I create trading systems and backtest them. And use the power of my software to experiment with adding new rules, and removing, or changing settings on existing rules. If those changes provide better results, they stay. If not, revert back to how it was before.

And when I say "the power of my software to experiment", I really mean that. Once you get set up, you will be amazed how fantastically simple experimentation is.

So I have my seemingly profitable trading system or systems, and then I use the instructions in "How Should I Decrease Risk?" to go from there.

With regard the automated trading, I am going to use my free Gain Capital demo API account initially. When I have proved to myself that the trading system(s) are genuinely good, I am going to purchase the Oanda API for US$600, and use that instead.

All credit to Gain Capital for providing their API and historical data for free. This is going to help a lot of people get started with very little, if any, start-up costs. And should translate into brokerage fees going to Gain Capital when people go live.

However, I'm all about decreasing risk. And unfortunately, sticking with Gain Capital to do live trading would not be decreasing my risk (in my humble opinion, but please, please decide this for yourself).

The "Gain Capital Quirks" article outlines why I believe this. In particular, the live API is slightly different to the demo. And, most importantly, they do not allow API trading in their mini accounts. They made this decision consciously and deliberately, as this is a feature that they used to offer, but took away.

Further, the Oanda API seems to be a little better (from a coding standpoint), and being able to trade any number of units is a great feature. Ok, sure, it's US$600 to get started, but I'm guessing the tech support team at Oanda actually answer emails.

That's the plan.