Monday, July 27, 2015

How the OmiCronFX Mandelbrot algo trading system works | The importance of moving averages

The OmiCronFX Foreign Exchange trading system operates with the Mandelbrot Forex algorithmic trading software at its core. The software allows for both the historical research which is essential for the configuration of its parameters, so that it can achieve maximum profitability for the least risk, and the actual day-to-day trading that the Mandelbrot program carries out when it has been optimally configured.

Development of the OmiCron Mandelbrot software has been guided by the principles outlined in the OmiCron Forex Trading Manual, which is available from Amazon.

Allowing the software to decide when to place a trade, to determine the size of that trade, how the trade should be managed and when it should eventually be terminated, ensures that trading is always systematic, and therefore disciplined. In the OmiCronFX system, no discretionary trading ever takes place. That is not to say, however, that the system cannot be changed. Results are constantly being monitored and analysed to ensure that initial assumptions remain valid. In the event that changes take place, for example in market volatility, the parameters are open to being changed as appropriate.

The importance of moving averages

Mandelbrot, as with all other trading software, requires a trigger for its trades. A series of Exponential Moving Averages (EMAs) are used for this. The chart above, showing the EURUSD pair  in the hourly time-frame from earlier this month (21st, 22nd and 23rd of July 2015), illustrates how the exchange rate can, on occasion, respect EMAs, in this case the one that uses 200 hours as its period for calculation. We use exponential, as opposed to simple, moving averages, because they give greater weight to more recent exchange rate data. What has happened in the recent past is more relevant than what took place a longer time ago.

With Mandelbrot, much work has gone into the design of the trading trigger. In fact, in the early days of development, the trigger was all that there was, and at that time it was known as the OmiCronFX “Silver Trigger”. Since then, Mandelbrot has evolved to incorporate risk management, profit retention, timing, and other features that greatly enhance its effectiveness.

When price, or in the case of Forex, the exchange rate, moves away from the moving average, it is apparent that something is happening. Something that can be used, in fact, to structure a profitable trade. Only time and effort, however, can allow the trading software designer to provide the knife-edge answers to the questions of how far it can be allowed to go before the software is primed for a trade, when a  trade is best aborted and when it should be allowed to be entered into. Then the whole question of locking in profit (or taking a loss) and eventually closing a profitable trade comes into play. We do not like them, but sometimes a loss is the cost of doing business. We place great emphasis in our research on the idea of having a positive expectation for every trade that the software is likely to enter into.

All of this is based on the idea of probability. While moving averages are often respected by the market, as in the case of the chart at the top, on other occasions price can go through them as a hot knife might go through butter. Only repeated and well constructed trial and error experiments, the results of which are analysed using the most effective statistical processes, can provide the answers to the vital questions related to when and under which circumstances probability is on our side, and when it is not.

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