Monday, June 8, 2015

The OmiCronFX attitude to risk | The importance of work rate in research

In 1987 Larry Williams won the World Cup Premiership of Futures Trading. According to his entry on Wikipedia, he “turned €10,000 of real money into over €1,100,000”, for a profit on equity employed of 10,900%, over a 12-month period.

One wonders if such a story is a benefit or a curse to aspiring traders. The record clearly shows us that well over 90% of new traders lose money, and a great number of those get totally wiped out.

Here at OmiCronFX we do not aim for such performances. Our aim is consistent, sustainable profitability, with drawdowns (which measure the magnitude of loss making activity) that are tiny relevant to total account size.

While we agree with “Black Swan” author, Nicholas Taleb, when he says that the Normal Distribution curve, also known and the “Bell Curve” and so beloved of statisticians, does not reflect real life, nevertheless the terminology used by statistics practitioners can be of assistance in describing what goes on.

The use of straightforward, tried and tested risk reduction techniques has the effect of reducing variance in the distribution of results. This would tend to narrow the bell curve, meaning an absence of exhilarating extreme wins, but also none of the debilitating losses that precede and / or follow them.

The importance of work rate in research

And once that is made to happen a lot more can be done. Detailed and careful historical analysis, the results of which are built into our trading algorithms, can alter the shape of the bell curve so that losses in general are diminished while wins are increased and enhanced. In addition to a policy of robust risk management, this can be achieved by the strange notion of indulging in work: the work of research on the fundamentals, gaining familiarity with technical indicators, especially support & resistance and moving averages, extensive study of price action patterns on historical data, and in getting to know the characteristics of the different currency pairs - becoming familiar with their personalities, so to speak. The results of all of this are then built into our algorithmic routines that allow price to be monitored and trade entry signals to be recognised and acted upon, and the all-important profit retention and loss reduction actions applied automatically.

We do have an inspirational figure, but it is not the winner of the 1987 World Cup Premiership of Futures Trading. It is Ed Thorpe, founder and operator of Princeton Newport Partners. In his book, “Fortune’s Formula”, William Poundstone tells in detail the story of how Thorpe’s fund, through the agency of ultra-careful selection and management of investments, combined with early algorithmic techniques, was able to  achieve annualised returns of over 15% after fees for an extended period of years, using a market neutral strategy. Market neutral means it was able to be profitable even in those years when the economy was in decline and / or the stock market was crashing.

OmiCronFX is also market neutral. This is because it is the algorithmic routine that decides on the direction a currency pair is likely to go, and algorithms are not prey to the emotions and whims that can blindside even the most experienced manual trader.

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