TIPS

Tweet

Automated & Manual Strategy Backtesting

Strategy backtesting is an essential process for perfecting trading performance. This is a fact when implementing any manual or automated trade strategy.

What is Strategy Backtesting?

Strategy backtesting involves testing the historical performance of a trading strategy over a specific period and according to a particular set of rules.

Backtesting can be applied manually or automatically. For example, manual backtesting can be done as simple as using an Excel spreadsheet. On the other hand, automated backtesting requires a trading platform and an Expert Advisor (EA).

Benefits of Strategy Backtesting

There are a lot of benefits, such as:

□ Gaining a statistical edge after testing any trade strategy

□ Detecting the weak points of a trading strategy and making all the appropriate improvements

□ Determining past performance in real market conditions

□ Improving the efficiency of a system without risking your capital

□ Testing a wide range of different parameters and setups

□ Identifying the frequency of winners versus losers

□ Calculating the drawdown rate of different trade setups

Read more ...

Tweet

Automated and Algorithmic Trading Tutorial

The Foreign Exchange is a fully-decentralized market where international currencies are traded over-the-counter. As there is no specific center that controls the raw of currency transactions, there is no single exchange rate for every pair. Nonetheless, due to currency arbitrage, exchange rates tend to trade very close to one another. Moreover, the Foreign Exchange market is extremely liquid with daily volumes exceeding 4 trillion US dollars. This combination of a decentralized market structure and enormous liquidity creates the perfect environment for the development of automated trading systems.

Automated and Systematic Trading

Automated trading refers to the process of trading the global financial markets without any human intervention. Automated trading is a branch of systematic trading and consequently, all automated trading systems are systematic systems.  Systematic trading assumes:

1. A rules-driven trading strategy that is based on objectively computable inputs
2. The implementation of the strategy by eliminating the human emotional factor

General Categories of Automated Trading

According to Mitra, di Bartolomeo, and Banerjee (2011), automated trading can be classified into five main categories:

(i) Algorithmic Executions (The category that interests us the most)

(ii) Statistical Arbitrage (Exploiting trade opportunities deriving from market inefficiencies)

(iii) Predatory Trading (The practice of entering thousands of orders while expecting to execute only a tiny fraction of them)

(iv) Crossing Transactions (transacting with another entity without exposing the orders to other market participants)

(v) Electronic Liquidity Provision

Read more ...

Tweet

Managing a Trading Portfolio

Managing a trading portfolio starts with measuring and controlling trading risk. There are quite a few tools that can help traders to measure and control their risk. However, before presenting a number of significant portfolio management ratios, it is useful to mention three fundamental investment concepts for managing any portfolio:

• Risk-Free Rate

The 'Risk-Free Rate' is the annual return that an investor can secure without taking any market risk. It is usually determined by the 3-month treasury bill.

• Standard Deviation (SD)

A standard deviation is a statistical tool that estimates the amount of variation in a set of values.

• MaxDrawdown

'MaxDrawdown' calculates the maximum historical loss of a trading portfolio compared to its maximum dollar value.

Read more ...

Tweet

Combining Technical Analysis with Fundamental Analysis

‘If fundamentals create the brains of the Market, technicals create a spirit and a soul’

Fundamental analysis studies the cause of a market movement while technical analysis studies the effect. These two major methods of analysis are used in order to explain the behavior of any financial market, but also in order to forecast future market conditions.

There are three general approaches when trading any financial market:

1. the technical approach
2. the fundamental approach
3. the combination of technicals and fundamentals

As Warren Buffett said: “Price is what you pay and value is what you get”.

A fundamentalist will focus on the real value, while a technician will focus on the price movement. A wise analyst will always focus on both.

(1) Fundamental Analysis

“Nowadays people know the price of everything and the value of nothing.” -Oscar Wilde, The Picture of Dorian Gray

Read more ...