Sunday, February 15, 2015

How Mandelbrot handles Forex market timing | A real live example in GBPUSD

Note: Today is the President’s Day Holiday in the USA. This means that trading will be light, and could also be choppy and unpredictable.

The great Albert Einstein is reported to have said that “Genius is one per cent inspiration and 99 per cent hard work”. We can attest that developing a successful Forex algorithmic trading system is no exception to this.

Among the many things we have discovered in the journey to bringing our Mandelbrot routine to where it is, is the importance of timing. Of course, computerised trading systems are, in theory, ideal for implementing split-second timing, because they “think” in milliseconds (a millisecond is one thousandth of a second). However, they still need to be informed, by the correct setting of parameters, how to implement such timing in practice.

In the Forex world, market moving events such as GDP announcements, retail sales figures, inflation reports and a host of other happenings, including of course our old friends the Non-Farm payroll numbers and the various central banks’ announcements, all have different characteristics as to when it is prudent to go into the market during and after when they take place. Go in too soon and you are likely to have extreme short-term volatility hand you your head on a platter, as our American friends might say. Go in too late and you will simply miss the boat.

And that is where the effort comes in. The only way to identify the likely pattern in these cases is by carrying out extensive research on the historical situation. And that is what we do, here at OmiCronFX. This will be on-going, because the optimum timing now may not always be valid in the future. In addition, different events can have different characteristics depending on, for example, the jurisdiction in which they take place, or their proximity in time with other, otherwise unrelated, market moving events. The good news is we can use the very same software that does the trading (our Mandelbrot algorithmic routine) to carry out the historical analysis.

A real live example in GBPUSD

The chart above shows the outcome of a real live trade that Mandelbrot took and managed on the release of the UK Quarterly Inflation Report from the Bank of England Monetary Policy Committee last week. Our research told us that the best time to look for a trade entry was ten minutes after the announcement. We configured Mandelbrot accordingly, and left it to work out the direction that the trade should take. As usual it also calculated position size, stop-loss levels, profit retention measures and other trade management steps to be taken. The outcome was spot on. (It should be borne in mind that there was considerable volatility immediately after the announcement even within the one-minute bars shown).

Is the process described above guaranteed to work every time? Absolutely not. The very best we can say is that, by putting in the effort, by coding the activities and safeguards into the software, and by setting the software to work on a funded account, we can affect, in a positive manner, the probability that we will have a profitable outcome.

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