Friday, March 27, 2015

War of attrition at the 200 EMA | How the OmiCronFX Mandelbrot algo routine handles it

Exponential moving averages (EMAs) have an important place in the toolbox of Forex and other traders. The OmiCronFX Mandelbrot algorithmic routine uses moving averages too, among many other things, in order to do its work. Apart from their utility in clarifying price action, and the ability of software to calculate and interpret them, they are also observed and acted upon by other traders, the ones that move the market. It is important to respect this fact.

Here at OmiCronFX , we pay particular attention to the downside of any trade that is taken on. Considerable care is devoted by the software to shepherding the trade through the period between when it is taken on and when it reaches the break-even point, that exchange rate at which the stop-loss is set on the same level, or slightly better, than the entry rate. At that point, at least, we are looking at a trade that will not lose us money. The other, very important consequence of this practice is the fact that, when losses do occur, they are relatively small compared to those trades that are successful. These are optimised for the maximum profit possible.

How the OmiCronFX Mandelbrot algo routine handles it

On march 16 th last, the market in EURUSD behaved as illustrated in the chart at top. From the open of the London session through to the time when the New York traders go to their desks, the battle for the breakthrough of the 200 period Exponential Moving Average (EMA) on the 10 minute chart took place. It was, as described in the headline, a real war of attrition. Time and again the Euro bulls attempted to push the rate through to the upside, and time and again they were repulsed by the Euro bears (and/or the US dollar bulls). Because Mandebrot (or anyone) is unable to tell the future, it cannot be sure that a breakthrough will even happen at all. Price could reverse and the eventual move could be to the downside. In truth, Mandelbrot does not care. It will be there for that eventuality too.

All in all, on that day Mandelbrot took on no less than six trades that were losses, and three that broke even, with one sizeable win. However, the loss reduction techniques it employs were such that the sum total of all these losses was only marginally below the amount in which the successful trade in the afternoon was in profit. The eventual outcome was an average loss per trade for the losers of -0.27% of equity, for a total of -1.61%, while the profitable trade returned 1.54% of equity. Total loss for the day: 0.07%. Miniscule compared to our normal risk tolerance, and an excellent outcome given the terrible trading conditions for most of the day.

No comments:

Post a Comment