Thursday, August 14, 2014

The Mandelbrot – a risk averse algo routine | Three levels of Stop Loss

Here at OmiCronFX we place great emphasis on risk control and on the retention of account equity. It is our first priority because we believe that by strictly limiting losses, particularly if the means are also in place to maximize the take from those trades that go in the right direction, we will ensure success.

We are not interested in large drawdowns (reductions in account equity), no matter how confident we might feel that these can be made up in the future.

As regular readers will know, we rely heavily on the operation of our algorithmic tools to allow us to achieve our objectives. The one most in current use is called the Mandelbrot. It has an internal algorithm that triggers a trade if the right circumstances occur after it has been initialised against a currency pair, either in the direction that we specify or, occasionally, in either direction. We regard the Mandelbrot and its relations as “power tools” that assist us in the trading that we would otherwise do manually. The Foreign Exchange trading market is far too unpredictable for us to allow Mandelbrot, or any other algorithmic routine, to operate without close supervision at all times.

Of great importance is the ability that we have to carry out very extensive research on price movement patters on historical data, also using Mandelbrot.

Three levels of Stop Loss

Mandelbrot always uses a pending order to enter a trade, as opposed to a market order or a limit order. We believe that this gives an additional level of safety as in a small but significant number of cases price can reverse before the trade is actually entered, for example if the entry signal happens to be premature.

Normally, Mandelbrot uses no less than three levels of Stop Loss. The first, and most basic, is put on when the trade is entered. This is the normal system Stop Loss that any manual user would place at the initiation of a trade. In accordance with our basic principle, this never exceeds 2% of equity per trade. It is a “safety net” and we would not ever expect to reach this level of loss before being stopped out by one of the other methods. It is there fundamentally to cater for such things as the possibility that we might lose the connection to the trading server, and therefore the ability to use Mandelbrot at all. As is normally the case in modern times, this Stop Loss exists on the broker’s server and not on our trading platform (any broker that does not allow for this type of Stop Loss should be avoided like the plague).

The second level of Stop Loss is connected to the criteria that determine the trade trigger. As the trade proceeds, these circumstances advance and we use this fact to lock in profit, when in profit, or to limit losses if the trade goes in the wrong direction right from the start (it does happen sometimes). When the trade is in profit this Stop Loss operates like a trailing stop, but it is, as mentioned, separate from the basic Stop Loss mentioned earlier.

And then we have the trigger event itself. When in a trade, this will, at some stage, go into reverse. A short signal can change to a long one, and vice versa. When this happens we take the view that, if it was a good idea to enter a trade when indicated in one direction, then it is also a good idea to get out of it when that situation is reversed.

No comments:

Post a Comment