While
it is important to be aware of fundamental matters when trading, and in
particular anything that would impact the timing of a high-probability trade,
the Mandelbrot software is designed to respond primarily to price action. This
means that it “decides” which direction price is likely to move in, and then
takes on a position.
Much
work has gone into the behavior of the routine in the event that we find
ourselves in the market on a day when the exchange rate does not move in the
strong directional manner of the trade in the chart above. Because of our
policy of taking off some profit at the earliest practicable opportunity (when
it is worthwhile to do so) and moving
the stop loss order to break-even, the trade will be profitable if it goes into
profit to any appreciable extent.
It
is those trades that turn around and go in the wrong direction quickly that we
have to deal with. Then we have to give the trade enough space to become
successful but also to ensure that, if this is ultimately not to be the case,
the loss will be the smallest that it is possible for it to be. At the time
that we take on the trade, we are unable to tell the future, as always. This
also means that we have to be able, psychologically, to take a loss. The
confidence in the strategy, and in the operation of the software in accordance
with this strategy, must be such that a loss is regarded as something that
hastens the arrival of the next win. This philosophy is in accordance with that
of Dr. Alexander Elder, who provided much of the early inspiration for this
writer. Dr. Elder also has much to say on the correct level of risk, i.e.
position sizing.
The
trading day shown above is a case in point. Here the price movement is
sideways, which, while technically a direction, is not the kind of one we are
desirous to have. Mandelbrot must ensure that it loses the smallest amount in
these cases, so that it can capitalise on the days that have the
characteristics of the one at the top of this article. We also have to bear in
mind that direction may be lacking for part of the day, and then attain it
later.
Risk control
The
trading parameters, which are keyed into the program’s user interface, must the
optimized to ensure that we (1) eliminate the danger of taking on too much
risk, (2) trade only at those times when the market is buoyant and liquid (3)
Lock in profit at all possible occasions and (3) be ready to react in the event
that the market reverses, even if that means taking on a position in the
opposite direction. We always have to be open to the possibility of trend
change.
To
be continued…
Coming
soon:
An acceptable level
of drawdown; drawdown defined; the high water mark principle
Coding and debugging
the strategy
·
Some programmable platforms are better than others, but algorithmic trading is
still a new industry outside of the major banks and hedge funds
Optimising the
parameters
·
Historical research on the price action of different currency pairs
·
Simulated trading with historical data, and real-time trading
·
The place of Fundamental and Technical Analysis
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