Tuesday, August 15, 2017

Is the US dollar’s decline since January 2017 a ‘Black Swan’ event?

The OmicronFX algorithmic Forex trading system is proving its reliability by being consistently profitable throughout 2017. It was able to ride out a long-term extreme global economic event, and still show profits.

The US dollar decline as an extreme economic event

The US dollar has been in a prolonged fall since the start of the year. On July 23rd last, Morgan Stanley said that “Our MS positioning indicator shows the most extreme USD bearishness since its inception in 2009”. According to The Wall Street Journal on Aug 7th, the US dollar has been “… suffering through one of its worst stretches in years”. The reasons for this fall have to do with political events in Washington as much as with economic announcements from the Federal Reserve - specifically, the belief by the markets that Donald Trump will not now be able to carry out his tax reforms because of the difficulties he is having with the US Congress, and even the Republican Party, for which is supposed to hold the presidency. It is now also understood that the Trump administration has come around to the belief that a weak dollar is good for the US. However, there are real signs now that the Greenback has reached a significant low, and is starting to rise again. Fundamentals, including payrolls, retail sales and even GDP in the US are showing increasingly valid signs of what could be termed robust good health.

The factors for success

The success of the OmicrFX system in coming through this event was a combination of (1) the capital retention policies we have always used, (2) the price action experience gained over the long development period of the software, (3) as much diversification as was possible (bearing in mind that ALL currencies ultimately respond to what is happening with the US dollar), (4) the fundamental principle that the system incorporates of always playing both sides of a move, so that there will be hedges in place for much of the time, and (5) last, but not least, patience and perseverance during drawdowns. This last was made possible by careful monitoring of the key indicators of leverage used and drawdown size, to ensure that positions were never in danger from elevated gearing.

The system is now well developed

It is important to state that this is not a solicitation for investment. We cannot do that until such time as we are regulated. However, through our professional advisors, we have engaged with the Central Bank of Ireland with a view to becoming regulated under MiFID, the Markets in Financial Instruments Directive of the European Union, to allow for trading on behalf of clients throughout the countries of the European Economic Area (EEA). This process is both expensive and time-consuming.

If you would like to receive regular updates on the performance of the various Forex trading accounts that we operate, as well as our progress towards regulation, please send an email to the following address: seamus.mckenna@omicronforex.com, or sign up to receive occasional emails by clicking here: http://ethicalhft.com/Managed.html

Monday, April 3, 2017

OmicronFX / EthicalHFT Algorithmic Forex trading report Q1 2017


Last Friday, March 31st, was the last day of Quarter One 2017. The outcome of Algorithmic trading for the quarter is shown on the graph. We traded two pairs from the start of the year, moving up to three pairs towards the end of February and four pairs from March 1st on. Position sizes remained the same as the number of trading pairs increased.

The graph shows a number of draw-downs, or reductions in account balance, over the period. Draw-down size increased as each step up in the number of pairs occurred. This is because there is a requirement for funding for open positions as they are built up under our system. However, these open positions are expected to revert to their take-profit target, when all of the investment in them will be returned, along with a profit.

The maximum draw-down during quarter one was 5.65% of equity, while the profit for the period was 13.78% of equity. In addition, there was a number of open positions in existence at the time of the report, which are not shown here. What is shown here is the marked-to-market value of all positions.

To protect positions from risk it was necessary to make use of a hedge on two occasions during Quarter One. In each case the hedge was closed at break-even, after which no further hedging was required.

Sunday, March 26, 2017

Forex can seem easy, but consider that an amateur has never won the US Masters

Two amateurs are invited to take part in the US Masters golf tournament in Augusta every year. They are the winner and runner-up of the United States Amateur Championship, known as the U.S. Amateur for short.

Although there are many well known names among these invitees, those who went on to turn professional and carve out a niche in golfing history for themselves after they did so, such as Jack Nicklaus and Tiger Woods, none of them managed to win the Masters while they were still holding amateur status.

There is a good reason for this. Professional golf requires extreme reserves of mental strength and stamina, as well as a total dedication to practice and training.

It is the same with succesful Forex trading. For a newcomer, Forex can seem disarmingly simple. How hard can it be? After all, currency pairs can only go up or down, and you do not have to be correct all of the time. But people quickly find out that nothing could be further from the truth. For the unwary, the market is getting ready to chew up these newbies and then spit them out again, minus their equity.

But Forex can be very profitable. For those who have served their time putting in the training, and who have studied how best to give themselves an edge, that is. And that is what we have done here at EthicalHFT. Please feel free to browse our site and find out how we operate. Do not forget to read the pages about the risks that are involved.

Sunday, March 12, 2017

Most retail traders lose money: regulators


The Central Bank of Ireland, the financial regulatory authority for the Irish Republic, has issued a consultation paper on some topics that concern retail investors, mainly as they relate to trading Contracts of Difference (CFDs). The regulators have put forward the possibility of banning trading in CFDs altogether, although it is probably more likely that they will stop short of that and put in place safeguards for retail investors in Ireland that are more stringent than at present.

One of the things that bothers the Central Bank is the use of leverage. They make the very valid point that allowing clients to purchase instruments with a total value approaching 50 times their initial deposit is setting those clients up for failure in most cases. That some brokers allow leverage of up to 400 times the initial deposit means that customers who take anything close to maximum advantage of this are almost certain to lose.

According to the consultation paper, the Central Bank of Ireland, the Autorité  des Marchés Financier (AMF, the French regulator) and the Financial Conduct Authority in the UK have all done research that shows that anything between 80% and 89% of retail investors lost money in 2014, 2015 and 2016.

Here at EthicaHFT, we are very careful about the use of leverage. The absolute maximum we can go to during the week the 100 times equity. At weekends this reduces to 30 times so, as we hold positions over the weekend, our maximum is 30 at all times. In practice, we rarely make use of more than 15% to 20% of that lower leverage allowance.

Among other things, the Central Bank of Ireland is considering making it a compulsory requirement that traders cannot have more than 25 time their initial deposit as leverage. That is fine with us.

Monday, March 6, 2017

Most retail Forex traders lose money, so you need a managed account

Ethical HFT is the managed trading account arm of OmicronFX Limited, whose principals are Ronan Harbison and Seamus McKenna. Between them they have a lifetime of investment and trading experience, in all asset classes, as well as many years of total immersion in the use of computers and algorithms for generating profit and mitigating risk. Seamus McKenna is the author of "The Omicron Forex Trading Manual".

We use algorithmic trading software to trade in Forex markets. 
The software routines decide when to put on positions, how to manage them, and closes them out when it is time to take profits. The system makes use of extensive risk mitigation methods, which include diversification and hedging. While the software takes care of the minute-to-minute trading functions, there is constant human oversight, with the ability to intervene should this be required. 
Software development is a continuous effort, and is carried out by OmicronFX Limited. It is only when algorithmic routines have been tested to the limit that they are allowed to participate in live trading.  

Because it can place and close trades very quickly, as everything is controlled by our computers, EthicalHFT's operation can be classified as High Frequency Trading (HFT). However, unlike some HFT traders, EthicalHFT does not engage in front-running, spoofing, or any other illicit practices such as those, for example, that are described in Michael Lewis's famous book, Flash Boys.

EthicalHFT does have a trading edge, however. 
The edge gives it an above-average chance of making profits. It is derived (1) from the fact that computer trading software never gets tired or bored, and can indulge in repetitive actions that are profitable for weeks, months and even years on end; (2) from the vast amount of research that we carry out into historical price action and the trading characteristics of the Forex pairs we work with; and (3) from the continuous effort we put into the design and testing of our trading software.

We have been guided and inspired by the work that has been done in Chaos Theory by such as Edward N. Lorenz (2017 - 2008), and in Fractal Studies by Benoit Mandelbrot (1924 - 2010), as well as all the other great practitioners of mathematics, physics and engineering that have paved the way in the use of logic and systems. It is accepted now that those subjects, and all matters that have to do with attempting to benefit from what might or might not happen in the future are, at bottom, concerned with probability. Our work in profiting from Foreign Exchange trading is devoted to getting probability on our side, and of making use of computer power as an enabler in this endeavour.

Tuesday, February 28, 2017

The power of compounding

When people trade Forex they often forget about the power of compounding. Some brokers even inadvertently make it difficult to get the benefit of this very powerful force, by insisting that all trade sizes have to be in ‘lots’ or ‘micro lots’. This means that position sizes can only be incremented in large amounts, so that compounding can only be done on long time scales, such as every month or so, if it can be done at all.

The compound interest formula is one of the simplest there is. To make it work, it is only necessary to know the starting amount (which we designate to be ‘P’, which stands for Principal), the number of compounding periods, which we call ‘t’, for time, and the interest rate to be applied on each occasion the amount is compounded. This means, for example, that if we compounded each week for a year, we would have 52 compounding periods, but if we compounded each month the number of periods would be 12. The interest rate in the first instance would be the profit rate achievable per week, and in the second case it would be rate we could reach every month.

Here is the formula (‘A’ is the amount we will arrive at when the compounding is complete):
In plain English: Amount equals principal, multiplied by one plus the rate, to the power of the number of compounding periods.

The more often compounding can be carried out, the more the effect will be seen. That is not all. Compounding also has a beneficial effect on the downside. On those occasions when a drawdown takes place in the account (and they will occur), our software reduces the amount of the position size using the same principle as when compounding on the upside. This has the effect of reducing the amount of drawdown during those periods when it happens. 

Monday, February 20, 2017

High Frequency Trading had a bad name

High Frequency Trading (HFT) has been given a bad name by the activities of certain users of the technique who have been guilty of obtaining an unfair advantage through the use of secretive, high-tech methodologies that remove the risk from their operations, to the detriment of others.

When a company can trade any commodity, especially currency pairs, and boast that it never made a daily loss in years of activity, one can be sure that its "traders" are bending the rules. Many of the nefarious practices that have come to light are detailed in Michael Lewis’s famous book, “Flash Boys”. The good news is that the regulators have now woken up to what was happening, and have used their powers to create a more level playing field for all.

The use of computers and computer software to interact with the market, often known as “algorithmic trading”, is of course legitimate. Here, the edge is provided by the experience and skill of the practitioners, and by their willingness to put in the effort to use all the resources at their disposal to learn about the price action of currency pairs, and their reaction to fundamental events.

That is what we do here at Ethical HFT (www.ethicalhft.com), the managed Forex account arm of OmicronFX Limited. We call it ethical because we do not indulge in practices that are illicit in order to get our results, while at the same time we make the very best use of modern technologies and systems.