Sunday, November 23, 2014

Development of the Mandelbrot Forex trading software (Part 1) | Chinese interest rate cut

The OmiCronFX Mandelbrot is a software routine that assists in the trading of Foreign Exchange in conjunction with a programmable trading platform that is supplied by the Forex broker.

The Mandelbrot has algorithms for calculating when a favourable trade should be placed, the position size of the trade, the direction in which the currency pair is most likely to go (long or short trade), the amount of equity that is put at risk in each trade, the locking in of profit as a successful trade progresses, and the eventual closing of the trade when conditions turn against it. As long as it is running, Mandelbrot places the trades, takes off profit, adjusts stop loss levels and closes the trades automatically.

Mandelbrot must be configured before it is run. This is necessary in order to define the currency pair to be traded and the risk tolerance of the user, as well as to incorporate decisions that must be made about profit retention, such as the level of gain at which a proportion of the trade position is taken off. It also allows for the selection of time intervals in which trading can take place. This is important because, for example, trading at a time of significant market moving news events, such as during announcements by the central banks of the country whose currencies are being traded, can involve significantly greater than normal risk (measured by extreme short term volatility) and is best avoided, even as a general principle. Research over a long period of historical price data has also shown that certain times of the day are more favourable than others, depending on the component currencies of the pair being traded.

The timing element alone dictates that Mandelbrot cannot be set up and left running without being monitored and reconfigured from time to time. In this sense it not a “robot”, but rather a tool that responds to the trade entry trigger, serves to automate routine tasks, provides precise calculation of position size and other metrics, which with Mandelbrot are based on well-established optimisation techniques, takes care of risk management, and imposes discipline.

Several instances of Mandelbrot, each involving a different currency pair, can be run simultaneously on the same trading platform and trading account.

Just like all effective trading, Mandelbrot relies on being able to open positions on a continuous basis while minimising its losses, both in terms of the number of losing trades and their magnitude, and maximising its wins.

To be continued. Coming soon - the Mandelbrot fundamentals: Trading strategy, coding and debugging, and parameter optimisation

Chinese interest rate cut

Last Friday, in a surprize announcement, the People's Bank of China, the country's central bank, announced a cut in its base lending rate, from 6% to 5.6%. The news gave a nice fillip to both the Australian and New Zealand dollars, both of which countries have a significant interest in Chinese trade. However, in comparison with other economies, the new Chinese rate is still a high one.

And that is not the whole story. For a start, the Chinese central bank is far from enjoying the kind of independence from government that is common in the West. So the decision will have been made in the context of other agendas being followed by the regime in Beijing.

The property boom in many parts of China has resulted in a nigh net cost of borrowing, ranging from about 18% to as much as 30% per annum. This is brought about by bank charges and loan insurance, which are applied on top of the interest payment. Only property developers can afford these effective rates, so they have led to a real squeeze on credit for smaller, traditional businesses.

Meantime the central government is concerned about the fact that the very high rates of GDP growth in recent years, which are needed in order to ensure that the migrant workers in the large cities are not “forced to return to their villages”, in the words of the Premier, Mr. Xi, have started to diminish.

China might have performed economic miracles in recent years but its centralised government system, its population size and distribution, and its cultural differentiation from that of the Western world will ensure that it will be some time before the kind of economic criteria that apply elsewhere will be directly applicable there.

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