How to Turn Your Trading Robot into Your Servant, Rather Than Your Master

Boris Schlossberg

One of the most entertaining and thought-provoking interviews I listened to recently was a Two Blokes Trading podcast that featured Will Hunting who is really a kindred spirit of mine.

Will, who is a discretionary trader, rips apart all the conventional data driven platitudes that pass for “modern trading advice” for the retail trader. Namely, he takes issue with the idea that you need thousands and thousands of data points in order to prove your strategy “right.” Specifically, Will makes the counterintuitive point that the more data you have -- the less valuable your signals will be. Something that worked in 2011-2013 is very unlikely to work today even if the overall equity curve of the strategy is positive.

When I was a young trader I remember that like every newbie, I was enamored with rising equity curves -- the longer the better. Until one day I took a closer look at a system that was wildly positive over the past decade only to realize that it made equity highs 18 months ago and was actually slowly losing money ever since.

This death by a thousand cuts, or a lobster slow boil is the most common problem that trips up systematic traders. They do all the right things only to wind up with all the wrong results, or as Will put it in the interview, tongue firmly planted in cheek, “I have a lot of respect for professional system traders who keep going until they go broke.”

The point being that all systematic trading is the application of a static model to dynamic price action and while the model is important -- critical even -- to consistent trading success, it needs human oversight. Discretionary trading in the true professional sense is not just random placing of trades by “feel”, but the rather judicious use of your model under live market conditions. In short, good discretionary trading looks to minimize the selection of “bad” trades in your model.

Now I know that this is much harder to do than it sounds -- and it certainly requires experience and judgment, but in the end, I think it is the best way to trade.

Which got me thinking. In retail FX, we have the great benefit of encoding our trading models into MT4 EAs which do all the clerical drudgery of culling through price data to find the trades but then take every signal indiscriminately.

So one way to improve that is to run the EA on a demo account and then have the signals sent directly to your smartphone. If you like the setup you can place the trade on your real account. If not, you can pass it up. You are still using your trading model but you act as the human filter and this “pause” provides you with more control and more accuracy. It’s no panacea, but it is an intelligent way of introducing discretion into a formal trade model.

CADJPY – A Turn for the Making?

CADJPY – A Turn for the Making?

Chart Of The Day

No pair has been more beaten up by tariff talk than CADJPY. The cross got it from both sides as it suffered declines from risk aversion flows and from the idiosyncratic risk facing Canada which on the sharp end of the stick in both Nafta negotiations and general global tariff threats.

Today, however, was the first bright day for the pair in days as Trump’s tariff threats are universally opposed by those within his own party as well trading partners from abroad. Although its too early to tell, Trump may indeed back off or water down his initial proposals which will provide further relief to the market and to the cross.

Tomorrow the market will also hear from BOC, and while no one expects the central bank to raise rates, there is little evidence for BOC to be overtly dovish as growth up North remains positive and further policy tightening will have to come. So if BOC simply stays neutral and tariff threat begins to fade, CADJPY has a chance to recover further.

Has EURUSD Made a Turn?

Has EURUSD Made a Turn?

Chart Of The Day

After a massive 400 pip rally over the past week, the euro finally ran into a wall at the 1.2300 level. The pair sold off all night long in Europe and early North American trade on news that the Merkel-SPD coalition talks have hit a snag. As we noted earlier, “So far only the Berlin and Saxony-Anhalt regions have voted against the deal. With opposition coming mainly from East German locales SPD leader Schultz has until Sunday to line up the votes and get the deal done. If the coalition talks fail, EURUSD will no doubt see a gap down open on Sunday, but it hard to say whether the political turmoil will have any long-term impact on the euro itself.

The German economy has been operating very well this year and Ms. Merkel could presumably govern in a minority rule if need be.”

Still, with ECB getting worried about the quick pace of euro appreciation the single currency may have trouble forging ahead, but for now, the trend remains up and unless the pair gives up the 1.2200 figure on a closing basis it may be premature to call the top in the move.

USDCAD – Is this a Real Turn?

USDCAD – Is this a Real Turn?

Chart Of The Day

USDCAD – Is this a Real Turn?

In the last 24 hours we’ve seen a dramatic turnaround in USD/CAD. The currency pair bottomed and made its way to a high of 1.2965, now everyone is wondering whether we’ve seen a final bottom. Fundamentally after an extended uptrend, oil is due for a pullback to $45 a barrel and last week’s Canadian economic reports support a bottom in USD/CAD. Retail sales and consumer prices declined, putting pressure on the Bank of Canada to keep monetary policy easy.

Technically however, the outlook is trickier. Having bounced off the 61.8% Fibonacci retracement of the May to July rally, there’s no question that USD/CAD bottomed. However today’s move has taken the pair to 100-day SMA and 38.2% Fib of the same move. We would not be surprised to see a bit of a pullback before an attempt to break the 50-day SMA and 23.6% Fib of this year’s decline at 1.3000. As long as 1.2850 holds, we are confident that we will see 1.30.

GBP/AUD – Turn or Buy?

GBP/AUD – Turn or Buy?

Chart Of The Day

The Aussie staged a vicious 2% rally today after the RBA hinted that the currency had weakened enough. As we noted in morning research, “The central bank has to walk fine line between keeping Aussie low enough to make exports competitive while maintaining its value high enough to avoid making imports a massive burden for the consumer.One possible key factor in its change of stance may have been the soaring costs of petrol. Despite crude being at $45/bbl Australian gasoline prices are actually up 6% since the start of the year and the RBA may have been eager to temper the rising burden to the motorists.”

Thursday’s AU employment report could be the key event risk for the pair as any marked decline in labor demand will make the market bearish the pair once again despite the neutral talk from RBA. Meanwhile in UK all eyes will be on tomorrow’s PMI Services report which is the key data point for that economy. The UK central bank has been making hawkish noises about potentially raising rates, but it won’t act unless the data proves supportive.

So in short, if UK PMI Services continues to show healthy expansion, todays nasty selloff in the pair should be viewed as a chance to buy the dip, as long as 2.0800 level continues to hold.

Turn in AUD?

Turn in AUD?

Chart Of The Day

Turn in AUD?

The Australian dollar is one of the biggest beneficiaries of negative interest rates in Switzerland and the prospect of Quantitative Easing from the ECB. At 2.5%, Australia’s interest rate is one of the highest in the developed world and in the current market environment yield based returns are a premium. We have already begun to see money shift into Australia for its positive carry and last week’s stronger than expected labor market numbers made the currency even more attractive. Tonight we have Chinese GDP, industrial production and retail sales data which is expected to show a further slowdown in China towards year-end. If the data weakens like economists expect, we will look at a decline in AUD as an opportunity to buy at lower levels. If it surprises to the upside, proving that lower oil prices provided support to the economy, AUD/USD could hit 83 cents. Some economists are looking for the RBA to cut interest rates but their rate decision on February 4th is a ways away.

Technically, AUD/USD is attempting to break the top of its ascending triangle and we believe that it will happen in a more convincing way over the next week. When that occurs, a stronger move towards 84 cents is likely. In the meantime, the swing low of 0.8033 is support.

AUD/NZD Big Trade 01.12.2015 +90

Swing

BK AUD/NZD Big Trade Update -- Out for +90

Update 3 AUD/NZD Big Trade -- Move Stop to 1.0544 to lock in +90 pips on trade -- There’s a 23.6% Fib of the Nov to January decline right at 1.0575

BK AUD/NZD Big Trade -- Move Stop to 1.0514 to lock in +60 pips on trade

Update -- BK -- AUD/NZD T1 Hit for +30 Move stop to breakeven (1.0484)

BK AUD/NZD Big Trade Alert – Low Risk Turn Trade

The Trade:

AUD/NZD
Buy AUD/NZD at market (now 1.05)

Sell half of position at xx, move stop on rest to breakeven

Stop for whole position at 1.0420

—--

The Power of Charts

When it comes to identifying trading opportunities, we always evaluate currency pairs from a fundamental and technical perspective. We establish an underlying theme and look for ways to express our view by analyzing charts for attractive price points and supportive chart patterns. However sometimes, there’s a technical pattern that is too attractive to ignore.

For the first time since October, AUD/NZD is attempting to close above its 20-day Simple Moving Average. Historically, this has been a strong signal for short and medium term reversals in the currency pair. In 2014 AUD/NZD closed above the 20-day SMA on 8 occasions and 8 out of 8 times, which is 100% of the time its move extended for a minimum for anywhere between 40 and 300 pips with an average gain of 170 pips. While we recognize that history may not always repeat itself, the reliability of this trading pattern for AUD/NZD cannot be ignored especially since the risk on this trade is low.

From a fundamental perspective, the Australian dollar performed far better than the New Zealand dollar today as investors start to consider the positive impact that lower oil prices has on China’s economy. Chinese trade numbers are scheduled for release tonight and if they surprise to the upside showing an improvement in exports, AUD will stand to benefit more than NZD.

Low Risk Trade

First and foremost, it is important to establish that this is a low risk trade so given that the range of 20 SMA breaks last year was between 40 to 300 pips, we will be using our classic swing trade parameters on AUD/NZD. This means that we will target +30 for the first half of our position, move our stop to breakeven when the target is reached and trail our stop accordingly. In other words, this is a short Big Trade.

AUD/NZD
Buy AUD/NZD at market (now 1.05)

Sell half of position at xx, move stop on rest to breakeven

Stop for whole position at 1.0420

BK Hot Chart – AUD/NZD Turn

BK Hot Chart – AUD/NZD Turn

Chart Of The Day

For the first time since October, AUD/NZD is attempting to close above its 20-day Simple Moving Average. Historically, this has been a strong signal for short and medium term reversals in the currency pair. In 2014 AUD/NZD closed above the 20-day SMA on 8 occasions and 8 out of 8 times, which is 100% of the time its move extended for a minimum for anywhere between 40 and 300 pips with an average gain of 170 pips.

From a fundamental perspective, the Australian dollar performed far better than the New Zealand dollar today as investors start to consider the positive impact that lower oil prices has on China’s economy. Chinese trade numbers are scheduled for release tonight and if they surprise to the upside showing an improvement in exports, AUD will stand to benefit more than NZD.

Has EUR/GBP Made a Turn?

Has EUR/GBP Made a Turn?

Chart Of The Day

Fundamentals

After rallying for the better part of the month, EUR/GBP appears like it may have topped out at the 8400 level as ECB policymakers are finally starting to become concerned about the strength of the currency. The very latest readings out of Europe suggest that the higher euro is starting to take a toll on German growth and that has finally prodded the notoriously reluctant German monetary officials to entertain the idea of negative interest rates. As we noted earlier, Jens Weidemann the President of Bubba is the most hawkish of ECB members and his evolving position on the issue indicates that German policymakers are becoming concerned with the rising EUR/USD exchange rate. Although all key economic readings in Germany remain near multi month highs, showing that the economy continues to expand, the latest batch of data is clearly signalling a slowdown that is starting to worry the authorities. Meanwhile in UK the economy continues to motor along as the latest UK labor data shows and that means that the BOE may be forced to consider tightening before the year end. The divergence between European and UK monetary policy could spell the end of the EUR/GBP rally with the pair heading for a retest of the 8200 level.

Technicals

Technically EUR/GBP has found resistance at the 8400 level and today’s reversal candle suggests a near term top for the pair. A break below 8300 would target a retest of the 8200 figure while only a move above 8425 would restore the bullish bias.

Will EUR/USD Turn? Forex Daily Technicals 05.02.13

Video


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