Pipzu Unbiased Review Forex Expert Advisor

In my previous post, I reviewed both Robominer and GT-Shadow expert advisors. This review will be focused on another expert advisor I have been asked to review, Pipzu. This expert advisor is advertised as being "The First Expert Advisor To Use State Of The Art Built-in Trend Adapting Technology As Well As A Next Generation Market Timing Algorithm", but becomes very disappointing once you start to look at the "evidence" the authors provide of its performance.

Pipzus authors only provide backtesting information as support which is, by any standard, too little to even consider purchasing an expert advisor. Moreover, Pipzus backtesting reveals a very unfavorable, almost 1 to 5 risk to reward ratio, which means that the ea must win around 5 trades for every loss it takes. Pipzus take profit is also located barely 20 pips away from its market entry, something which means that one minute interpolation errors in backtesting re likely to be influential.

Pipzus "show" trades are also useless since every expert advisor has some profitable trades, which do not give any insights into the profitability of the expert advisor whatsoever. This makes me think that these trades are just there to "impress" forex newbies.

In my opinion, Pipzu fails to provide enough proof of profitability, there is no forward testing evidence, no live testing evidence and no account with investor access to see. This, added to the fact that backtesting evidence suggested that the system has an unfavorable risk to reward ratio and a high probability of being prone to one minute interpolation errors, makes me completely discard this expert advisor as "worth buying". There are people already having a bad experience with it, check it here. I hope this blogs helps you stay away from those bad experiences !

If you would like to learn more about other commercial and free expert advisors I have bought, tested and reviewed with live and demo statements, please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

New Expert Advisor Portfolio and Statements

I have decided to start another expert advisor portfolio test using the following four expert advisors (which seem like good choices).

ADXCROSSAutotrade - This expert advisor is simply an ADX indicator based ea. This means that it is supposed to be able to predict reversals and corrections. (EUR/USD 15min)

Ichimoku5 - This expert was developed by the Japanese and is mainly focused on trend following (JPY/USD 1 Day)

Moneymaker v2 - This ea is different from the one in my reviews (which I purchased from ebay) this one is based on the GBP/USD pair and has a stoploss (also different logic). It seems that this ea follows trends but it also seems capable of managing a little bit of range.

UniversalMAcrossEA - This ea is based on simple moving average crossings, although it has some good money management features. (USD/CHF 1 hour)

I just started it today on a 10,000 demo account. Lets hope that it will perfom in a profitable manner. As usual, I will be posting the Statements in a week. I have also updated the results from my first expert advisor portfolio. As I predicted, the portfolio gave back a lot of its profit but it is getting ground back though ! Check the statement here . I have also uploaded all the experts to my ftp server here in case you want to download them. Last but not least, a small peak of the action happening (artificial intelligence ea, on the first portfolio)
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Trusting An Automated Trading System

Most forex retail traders start their journeys in the market by taking one or several different learning approaches towards trading. Most of these approaches involve either books, seminars or other forms of regular trading education. In my experience, there is a serious gap when it comes to the way in which most traders learn the basics of trading.

For one, it is impossible to learn most important things about the market in theory because the psychological factors that are involved in manual trading systems are never really learned until the trader actually experiences the market with his or her own money. People often think that all psychological factors are eliminate by the use of automated trading systems. This is not true, there are several important, emotional factors that are not experienced in manual trading that become important when using automated trading systems.

The gap comes when people start to try to use blackbox systems in automated trading. When someone uses a system that they do not truly know, even if the system is profitable, they are doomed to fail. This is because when you do not know what you are trading, you are bound to flee when the system goes into temporary draw down. But then, if the system is not really profitable and it goes into draw down and eventually wipes the account, the trader will become afraid of loses and he or she will quickly quit profitable system early later on.

The solution ? The trader should know the system and know if it is profitable by the merits of its logic and the traders knowledge. The trader should understand the robots logic deeply and really know the reasons why this logic has long term profitability. The trader then knows the system, its weaknesses and its strengths, so the trader knows the draw down scenarios and for how long they are bound to last. So no, you cannot be an ignorant trader with no knowledge of the markets and be profitable in forex with an expert advisor. If you do not want to take a long time to learn about trading itself and maybe even programming if automated systems really interest you, then this is not the business for you.

If you want to become profitable using an automated trading you should then take a look at systems with very simple logic you can easily understand (weekly breakout or turtle system) and then start demo trading it and realize how automated systems work. If you also want to learn more about commercial and free trading systems I have used, reviewed or programmed please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Viseu Open 001 One Month Up in Profit !

Many of you may have been following my blog regarding the testing of the Viseu Open 001 expert advisor. As we may have expected from backtesting results, this expert advisor has proven to be profitable for the time being. As I watched the expert trade for the past month, I realized that it trades in a fashion very similar to that of the Shark and Griffin expert advisors. In fact, the experts traded at exactly the same time on a few trades, which means that they have a similar signaling system, although I do consider Shark and Griffins to be more complex.

I like Viseus trading style, it has good entries, never has consecutive losses and does accumulate profit in a very sustainable manner. I am now considering a live trading account with this eas name on it. If I end up a three month trial period with Viseu on the green, I will let it trade live.

I am very happy with this expert advisor, it may prove that we all may share this free alternative as part of our profitable forex portfolios. Just to finish this review I leave you with a picture of Viseus equity curve for the past month.

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China The Next Super Power

In Goldman Sachss 2007 update on the BRICs report, by 2027 China will overtake US to be the world no. 1, if this is true will it surprise you?

For those who know the ancient China history, China was once a very powerful nation interms of military and prosperity during the beginning of the Qing dynasty, under the guidance of Kang Xi (reigned 1662-1722), Yong Zheng (reigned 1723-1735) and Qian Long (reigned 1736-1795) emperors.

The divergence between China and the western countries started during the 1800s where the European countries led by Britain were gaining power through the industrial revolution. Since then the divergence became bigger and bigger until 1978 when Deng Xiao Ping decided to open up its door to the world.

From 1978 - 2000, Chinas economy was rising due to its capitalism. Later when China joined the World Trade Organisation (WTO), its growth has been accelerated and now, China has become the world 3rd largest economy in terms of GDP (lagging behind USA and Japan).

After hundreds of years of lagging behind the western world, China is now closing this gap in less than 50 years. There are a lot of hard work behind. Let me share with you my personal thaughts.

All these boil down to a simple word - "Vision". In the 1950s they shared a vision with Russia to have their countries run in the communism way whereby they believe socialism and communism will benefit their people most. Indeed, they will able to eliminate the internal wars within their own country and bring peace. However the prices these communists have to pay were huge. As everything was state owned, there were lack of initiative, labour productivity was low and the people were having low levels of standard of living.

The death of Mao Tze Tung in 1976 signifies the end of communism in China. After Mao Tze Tung era, it was Deng Xiao Ping who had contributed China the most. Have you heard of the Dengs cat theory - "whether its a black cat or white cat, as long as the cat catches mice, its a good cat". So China has a vision, the vision of an "efficient" country which lead to prosperity in China now.

There is also a little story about Deng. In the 1990s he once said that Singapore was a role model for China. He admired Singapore, a country that is so rich and efficient and yet there are law and order in placed. So China developed its Guang Dong province to be like Singapore.

Another reason for Chinas success is education! They realised the main driver for economic growth is really its people - the human resource. Look at Singapore, its world class education sector has successfully transformed Singapore from a manufacturing based economy to high skill service based economy. Likewise, over the years, Chinas education sector has been developing steadily with primary school children equiped with computer knowledge.

Having look at how others become so successful, we should also look at ourselves. Why arent the foreign investors coming to Malaysia? Not only the foreign talents not coming, the local talents are leaving, why? Our politicians should know the answers!

Happy investing,

Pauline Yong

The Diversification Myth

It is very popular in the world of finance and economics to advise people to diversify. The usual phrase "dont put all your eggs in one basket" is usually cited as a great exemplification of the diversification principle.

In short, diversification implies the investment on not only one, but several financial instruments in order to reduce risk. This may, or may not reduce profit, depending on the level of correlation between said instruments. Generally however, diversification does carry the partial hedging of the different means of profit. If one financial instrument profits the other loses somehow and this effectively reduces the risks produced by having all your "eggs in one basket".

For me, diversification is protection, protection from ignorance. When one is not completely aware and confident of what one is doing, diversification is needed as protection, because the outcome seems blurry and unpredictable. If a person knows exactly what he or she is investing in, I mean, know it a hundred percent, then there is no need for diversification, because this will only negatively affect the profits of the first investment.

Since non of us can predict the future, we all need a certain degree of diversification. To what degree ? To what degree are you ignorant ?

Linear Equity Growth Which one is Good and Which one is NOT

Automated trading systems have several ways in which they increment the traders equity (if that is the case). The way an equity curve looks like can give you a great deal of information about a systems profitability, in particular, it can give you a lot of information about the systems risk to reward ratio, the possibility of account wipe out and the general way in which the system trades and uses your money. The objective of this post is to show you different equity curves, in particular equity curves which grow linearly, so that you can see what you should and what you should not look for in a forex expert advisor.

In general, a linear equity curve is an equity curve which when regressed using statistical analysis returns a high correlation coefficient against the equation that represents a straight line. This does NOT necessarily mean that the equity curve is a straight line, it means that equity tends to grow in a geometrical fashion.

Linear Equity Curves - What NOT to look for

The most common equity curves you should find, and the ones that are most commonly attractive to forex traders new to the world of forex expert advisor and automated trading is the straight line linear equity curve. These equity curves consist of a straight line with no pitfalls or loses. This curves are very characteristic of systems with huge risk to reward ratios, progressive money management systems (such as martingales) and systems that never close losing open positions. The Robominer ea equity curve shown below is a very good example of this, see how it fits perfectly over the red line I drew.

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Seeing no loses, is a BAD thing, loses are a vital part of a forex system and they always exist. When you see and equity curve with apparently no loses, it does not mean that the system does not lose, it just means that for some reason you are not seeing that. The next picture shows you a little bit how this works. The picture you see on your left is what is typically shown to the investor, an expert advisor that for some reason does not show any loses. With further testing, the ea shows loses, which generally overcome the winners by a lot. Sometimes a single loss in some systems with high risk to reward ratios can wipe out ten or more winners. So What you should be thinking when you see this equity curves is that you are NOT looking at the whole picture, you are being shown what they want you to see.

Linear Equity Curves - What to look for

So now that we know which types of equity curves are inherently either much likely unprofitable or deliberately hiding something about the automated trading system we now need to see the equity curves which are the mark of profitable expert advisor. What do we want to see ? First, we need to see a long period of testing, (nine years works best) and an expert advisor which is not prone to large back testing errors. We want an ea that is NOT a scalper.

Our idea is to see the whole picture, we want to see the experts profits, loses and others and then see how equity grows in time amongst the very different market conditions that have happened in the past. A very good example of this is the last version of Gods Gift I have been talking about which is adjusted to market volatility. As you can see, the equity curve can generally fit the description of a straight line (statistically) which means that equity growth is linear. However, as you can see, the expert does have loses, but loses are much smaller than profitable trades. What this shows us is that the ea is tackling a vital characteristic of the market which lets it profit amongst all the different market conditions during the past 9 years (back testing was done from Jan 2000 to Jan 2009 at 90% modeling quality). The expert does have loses, but profits are greater.
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As you can see, the experts testing has sections that would "look" like straight lines by themselves and have no loses, but if the expert is globally profitable then it is much more important to see the entire picture to get a real image of how much you can expect to get as profit against how much you are risking as expected draw down.

If you would like to learn more about the Gods Gift expert advisor and other profitable free and commercial expert advisor please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Oil Price

Everyone is talking about the oil price as this is the crucial factor that determine the direction of the stock market now. So I asked a group of audience recently at what price they think the oil price will create a panic selling for stock investors. I told them to think carefully before giving the answer as this is a good way to train their “psychic power” in predicting the direction of the market. Many say around US$100 – US$140 should create havoc selling.

I asked them again: “So you think when the oil price is near the historical high of US$147, investors will get panic and cause the stock market crash?”

In fact, in my personal view, the oil price should reach US$200 and beyond before investors get jittered. Then the audience grasp in disbelieve – too high!

Let me explained further, according to the behavioural finance this phenomenon is known as the “anchoring effect” whereby people usually refer to one reference point and make judgment from there.

When the oil price is near historical high level, the market participants may not feel the shock because they have seen this price level before and it’s within their expectation. What usually cause a stock market crash is that things happened in an unexpected way, which is beyond people’s expectation!

So to me, the oil price must be significantly higher than the previous high level, in order to stir some emotional reactions from the market participants.

Moreover, whether the oil price will go higher largely depends on the development in the Middle East war. If we think the war will end in the near term, then the market will be bullish. However, if this event progress like the wild fire causing widespread of upheavals, then I think we should start to take profits now.

For now, my strategy is short term play. And remember to take some profit along the way because we want to minimize our risk exposure in an uncertain market.


Happy investing,
Pauline Yong

Forex Expert Advisors VipFX an unbiased review

The VipFX expert advisor is yet another automated trading system designed for the mt4 trading platform that claims to give outrageous profits in short time spans with moderate risk levels. My objective with todays post is to evaluate the authors claims in comparison with the evidence he provides and to give my honest unbiased opinion about this trading system taking this into account.

Now this expert advisor is a special case I had not seen in a while. The VipFX author actually makes up a decent website that shows significant amounts of evidence supporting his claims. I would have to say that according to what he says and the evidence he has, there seems to be a complete backup of his claims. He actually has 6 months of trading evidence coupled with live tests that show how the average profit per month is actually superior to 25% and he also has backtests that seem to be consistent with his live testing evidence. Well, everything looks good until you really start to analyze his trading system.

Of course, for people who have been trading the forex market for a longer time, the identity of the trading system this guy is using should seem obvious just because of the look of his equity curve. This guy is trading a Martingale ! Of course, a system that uses incremental money management gets consistent profits by means of an expotential market exposure. It is the sort of system that works perfectly until it does NOT. A perfect example of this is the simple daily system I tested earlier this year which showed a profit of more than 150% during the first six months of trading, that would average more than 20% of trading, however, it is obvious that eventually this money management system will blow up your account. This can take a while ! (even two years!)

It is also worth saying that martingales do NOT have significant draw downs until they come up to or actually wipe out an account. Be extremely careful about systems like this. NEVER trade a martingale. Maybe you think you can just withdraw profits ? Well, Martingales defend from this strategy by wiping out accounts in unpredictable cycles so it may wipe out an account 20 times in 2 months, then once 6 months after that, then 5 times one month. Trust me, martingales CANNOT be traded profitably in the long run (this has been tested time and time again, as I explained with the simple daily system example) so you definitely stay away from them. Of course, this system is NOT worth buying and you should stay away from anything that resembles it.

If you would like to learn more about reliable trading strategies and how you too can use one to become profitable in the long run using automated trading please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

When the Expected Draw Downs Come Dealing With Loses When you Live from Trading

Perhaps the most difficult aspect of forex trading is the fact that loses happen and they constitute a vital and necessary aspect of the trading experience. During various posts I have talked about the nature of loses in forex trading, their origin and their need as limiting factors of the massive exploitation of mechanical trading strategies. Today I want to talk to you about a more personal aspect of loses and the way in which I deal with draw downs as a vital part of my career as a trader who lives from the performance of his trading strategies. I will talk about the ways in which I have dealt with draw down in the past, the plan I have laid out and how this plan comes to life in reality when that creepy monster known as a deep-long draw down period shows his sharp teeth around the corner.

Truth be told, I have never been good at dealing with loses. Perhaps it is because I am an emotional man or because I sometimes view my success through my trades but I have always dreaded and hated losing periods. Of course, I am just a human being and losing is not easy for anyone and it especially didnt feel easy for me. When I began trading I used to take a serious emotional blow every time I faced a draw down period. I didnt react by getting angry, I actually got depressed and frustrated as I saw how my money started to evaporate from previously profitable accounts. The emotion filled trading that followed only led to deeper draw downs and to even deeper feelings of anguish as more and bigger loses appeared.
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After developing my core knowledge about the market and going through the extensive process detailed through a good portion of this blog, I became much more conscious about the nature of draw down periods and I realized that they are THERE and that they are necessary for the trading of profitable systems. It actually comes down to a very simple concept, without the draw downs there simply wouldnt be long term profitable systems because the market wouldnt be able to discourage their trading through the cycle I detailed a few posts ago.

However one thing is to know that you will face a 250 day long 20% deep draw down period and another thing is to take your account ( or even emotionally worse, your managed accounts) through this psychological journey. The first time I faced the draw down monster I almost had a heart attack. I traded the Gods Gift ATR through a break-even/losing period of several months before a new equity high was reached. I was happy that I followed my plan and that I reached my profit target and I was even more happy about having defeated my own inner challenge of draw down survival. Understanding played an ESSENTIAL role here as I would have never done this without fully knowing what I was getting into. Definitely this is one of the main reasons why I consider understanding an absolute requirement for success in automated trading, at least for me it was.

Now after some time of achieving this ideal status where living from automated trading is a reality (and hopefully it will remain this way :o) !!) , I have a clear plan to deal with draw down periods and with my profit levels so that I can sustain the expected and worst-case scenarios of all the accounts I trade and manage without risking my living style. My plan has the following simple outline :

• Keep enough savings to live at least for 1 year without ANY income
• Always respect the worst case draw down scenario
  
• Always evaluate the extent and depth of draw down periods against the historical standards
• Keep living standards at 50% of expected profit level
• On every month, spend at most 50% of income, invest 25% (forex), invest 25% (other)
  

As you see my plan attempts to attack possible bad scenarios by making sure that I spend less than what I make, reinvest part of my income and diversify my investments. I always apply the Asirikuy mantra (understand, expect and evaluate) and I keep in mind that past performance does not guarantee future results and that certainly the worst case - even if unlikely - may develop. It is clear that every long or deep (or both !!) draw down period on any system is a challenge and the success or failure of a trader depends on how this challenge is tackled. If you tackle it with emotions and improvisation you will get financial ruin while if you tackle it with understanding and planning you will be able to make it to the other side.

As a person who is fully dedicated to the field of automated trading I can tell you that - for me - the hardest part of trading Asirikuy systems is the psychological pressure that draw down periods bring, a pressure that is always existent but that I become better at handling as I develop a better understanding of my automated trading systems, their draw down periods and the foreign exchange market.

If you would like to know more about my journey in automated trading and how you too can design your own likely long term profitable automated trading strategies please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Deepest Pocket Wins Argumenting for Once and for ALL why Martingales CANNOT be traded Profitably in the Long Term

I have to say that I become a little bit irritated each time I go online and have a conversation with someone who argues in favor of martingale trading systems or when I see an EA seller selling this wonderful martingale expert that gives a 100% monthly profit. For this reason I decided to write this post today, this post will give all the arguments, once and for ALL that clearly show why Martingale trading IS unprofitable and CANNOT be traded profitably in ANY possible way. This analysis will also apply to any type of system with a similar progressive money management scheme. Before continuing, this post is not meant to be rude or mean against people who trade Martingale systems, this is merely to show you that it is not reliable and will eventually lead to the loss of all your trading capital.

As you all know, the Martingale system, developed in the 19th century, is a trading system in which a trader will double his stake when he loses a trade resetting the count after he wins a single trade. What is the problem with this ? Well, the first problem with this is the exponential increase in risk which make the system eventually risk very large amounts of money for very small profit amounts. I will now try to argument against each one of the points put forward by people who trade martingales :

• If my account size is big enough it will not be wiped out. This is an awful mistake. Martingale systems will always wipe an account because the increase in risk is exponential while your increase in equity is liner. That is, increasing your capital from 1000 USD to 10,000 USD does not buy you 10 more losing trades, it just means 2 or 3 more losing trades. However, you will not lose 1000 you will lose 10,000 USD.
• But if my system has X maximum consecutive loses then increasing my capital by Y will make the system safe. Wrong again. The fact that your system has X consecutive loses in historical testing or live testing does not mean it cannot have more. All trading systems may face a very large number of consecutive loses. In practice, you will never be able to sustain more than 10 consecutive loses, something which is likely to occur with almost any trading system. You are playing the deepest pocket game. In gambling, when two players are going for martingale strategies the one with the most money wins. Who has the deepest pockets, you or the market ?
• Ok, I accept that my account will eventually be wiped out, however if I withdraw my profits I will still win in the end. This is a very naive argument in favor of Martingales. If wipeouts will always happen, which is the case, the frequency in which these wipeouts happen is unknown, so for example, you may get a wipeout in a month, then one next year then 8 the year after. In the end, a series of wipeouts will remove all profits from the previous runs in which the trader was lucky.

Can money be made from Martingale trading ? Of course, and money can also be made in Vegas. When you trade a Martingale system which is statistically shown to wipe any account and eliminate any accumulated profit either through succesive wipeouts of opened accounts or through the wipeout of a single account with all the profit you are simply betting on its success. Gambling is something that should not be done in trading. You know that there is a saying in trading. If you are going to gamble go to Vegas, at least the drinks are free. If you are considering or trading a Martingale take all the above points into account, they are based on sound and proved arguments.

If you would like to learn more about automated trading systems that use sound money management systems geared towards market adaptation and capital preservation please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Ten Reason why using Scalping systems is NOT a Good Idea

There has always been something very attractive about scalping systems for most forex traders. Profits are never given back, trades are executed and left quickly and profits seem to have the opportunity to compound frequently and with great success and returns for the trader. However, people often dont realize the true characteristics of scalping systems and specially why the existence of a long term profitable scalping system is terribly unlikely. By scalping systems I mean strategies which have very small TP or exit values (below 6 times the spread). Today I am going to dedicate this post to give you the ten chief reasons why I believe scalping systems CANNOT be successful in the long term and why you shouldnt use them as part of your long term trading portfolio.

However I want to make it clear that I do know a few traders who use scalping during their day trading quiet successfuly but their strategies are methods, not systems, and they are adapted by their experience as market conditions change (note that this adaptation is not codeable due to the fact that it is extremely discretionary). They are NOT systems with strict logic-based rules which is what I will be discussing in this post. So why cant scalping systems be called long term profitable ?

Reason One. The nature of the short term movements in the market. It is true that markets do behave in a somewhat "predictable" manner in the longer time frames. Movements in the longer timeframes are the consequence of fundamental reasons and they obey mass market behavior. There are tradable market inefficiencies in the longer time frames which appear to remain constant as market conditions fluctuate because mass behavior remains fairly constant. However, the nature of the short term movements does NOT obey mass behavior, a movement of a few pips on a given currency pair can happen for many reasons. There is simply no long term tradable inefficiency associated with this because it would be like predicting when someone is going to exchange a few million dollars of one currency for another. It could be an import/export payment, a bank fund transfer, etc.

Reason Two. Any inefficiency is bound to dissappear. I have talked to several traders about this and those who use scalping totally agree with this statement. If you find any tradable inefficiency in the lower time frames which can be exploited mechanically, it will change simply because the nature of the transactions in the lower time frames is very variable. It becomes then extremely hard to find and inefficiency which remains constant during long term periods because the transaction sin the lower time frames simply do NOT remain constant, they are ever changing and they change drastically when market conditions change. Something which does not happen with wider movements.

Reason Three. The Risk to Reward Ratio. Often you will find that scalping systems try to remedy the above by using very unfavorable risk to reward ratios. It is quiet common for scalping systems to risk a lot for a little profit with a simple streak of 5 consecutive loses wiping 2 years of profitable trades in some cases. High risk to reward is the dumb way to fix a trading strategy, you are increasing your probability to be right by increasing your risk when your wrong. When the system loses its positive mathematical expectancy -due to the reasons outlined above - the system will fail, big time.

Reason Four. Live Execution Variables. Due to the fact that scalping systems work on very small exit parameters market variables related with execution become extremely important for these trading systems. Requotes and slippage become terribly important as they may account for a very significant percentage of the profit of the trading system. For example, a trading system may seem very tradable and profitable on a demo account but live trading will reveal a lot of requotes and slippage which will remove most or even all of the profitability gained by the trading system.

Reason Five. The importance of the spread. Scalping trading systems will have a hard time when dealing with market spreads due to the fact that the spread may be a very important part of the systems profits. Since demo trading and simulations do not cover the effect of spread widening it is very likely that the profitability of a scalping trading system will be GREATLY over estimated by either forward testing on demo accounts or simulations.

Reason Six. No accurate simulations. Since scalping systems take low profits they are VERY affected by one minute interpolation errors of the metatrader backtester, add to that the fact that spread widening and live execution problems are not taken into account and you will find that simulations GREATLY underestimate draw down and overestimate profitability. Of special concern is the fact that this differences will NOT be noticeable in the shor term since the winning percentage of these systems is usually high. It is common for these differences to become apparent once the system is live traded for a long period and the number of consecutive loses or the maximum draw downs starts to be seen out of proportion. Usually this underestimation of draw down is VERY important, with real draw down being 5 or even 10 times higher than that predicted by simulations and forward testing.

Reason Seven. Profits are VERY sensitive to loses. Due to the fact that the risk to reward ratio of most scalpers is so high and the fact that demo and simulations greatly over estimate the profitability of this systems it is VERY likely that the maximum draw down will increase when live trading. In most scalping systems, if the number of consecutive loses just increases by a mere 2 or 3, the system will face a wipeout. Long term profitable systems with favorable risk to reward ratios dont suffer from these problems leaving room for underestimation of loses within simulations without significantly affecting their profitability.

Reason Eight. Broker Dependency. Scalping systems act on price variations on the lower timeframes and on these timeframes the differences between broker feeds are the most prominent. Just if there is a 2 second difference between the closing of candles on each broker, results are bound to be completely different. Even more, the mere fact that the bank feed of each broker is different is likely to cause very different results between them. Add to that the fact that each broker has different live execution and spread widening and you will find that the results of scalpers are rarely reproducible and extremely broker dependant.

Reason Nine. Scalpers pay a LOT of comissions. For me one of the gratest problems of frequent trading and getting a small profit is that mainly your trading system is working FOR the broker. For example, if a trading system executes 10 positions each day, you are paying the broker 10 times the spread each day, which means that the broker is getting a great cut of your profits. Even if trading frequency is reduced, the percentage of your profits which is equivalent to spreads will be great, often 10-50% of your total profitability. Trading like this has never been sound in my opinion in the sense that the payment of comissions is maximized. If you use an ECN broker for better execution, the problem only becomes bigger due to the higher cost of ECN trading.

Reason Ten. There are NO long term profitable scalpers. The chief reason why I do not use scalpers and why I sustain that all the above reasons are perfectly valid is that there is NO long term profitable scalping system. There has been no scalping system that for the past 5 years has been able to generate profits consistently. While I have seen many scalpers come out, reach a few months or even a year or so of profitable results only to go down in flames as market conditions change or any of the above reasons appears to be true. Many people have worked on scalping systems, and yet no long term profitable system has come out. People always get excited with simulations and live trading results without taking into account ALL the above problems and this eventually leads to account wipeouts due the underestimation of loses and the use of excessive risk.

I hope that all the above reasons are convincing enough. These are the reasons why I do NOT develop scalping systems and why I dont consider them reliable systems to reach long term profitability. If you would like to learn more about the systems I develop and how I plan to reach long term profitability in forex trading using automated trading systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Short verus Long Term Profit Expectations Why Expert Advisors are So Deceitful

One of the most common critiques made towards me and my website by several people is that I often make evaluations of expert advisors that contradict what people experience during short term periods. Le me explain myself a little bit better, sometimes I say that an expert advisor is not likely to be profitable or is not worth buying and then I get some comments telling me "oh, I have made money with this ea, you are not right". Well, to err is human, and I would be very happy if one of the expert advisors I have reviewed that I first said was not profitable turns out to be an incredibly profitable trading system but those are not the odds.

The objective of this post is to tell my readers and future visitors why I will most of the time receive these comments and why they do not contradict or invalidate my opinions about the different expert advisors. This situation arises mainly because most commercial expert advisor systems are designed to give short term satisfaction. That is, most of the people who buy commercial systems such as robominer, fabturbo, megadroid, etc, are looking to be rewarded almost as soon as they put their expert advisors to the test.

The consequence is that the ea market has adjusted to this demand and created a lot of expert advisors that trade very frequently and take profits very easily. That is, they are aimed at taking advantage of the market on low time frames to give the trader instant gratification. Since the probability of losing is small, most ea customers will start to trade the system and will feel very good about their new strategy to make money. This also has the advantage of creating a very high customer satisfaction on a very low time scale. Therefore, most of the people who buy the ea will make some money from it in the short run and will not ask for refunds since they are satisfied by their expert.

The problem comes when you look at the systems that are long term profitable and the ones that are not. Systems that tend to exploit short market movements with a low probability to lose tend to have very large risk to reward ratios and are, all the time (in my experience), unprofitabe in the long run. So yes, people buy the system, they get maybe 3, even 6 months of profitable results, then their accounts are wiped out by the ea starting to cash on its market exposure.

This is logical and sound, no succesful trader I know has ever done so with a strategy that has an unfavorable risk to reward ratio. All of the good traders I know that have been making money for a long time do so with long term strategies based on reliable market logic, not on short term movements with huge risk to reward ratios. The appearence of this unprofitable long term experts is mainly a consequence of the people who buy them, the market just offers what people want, and this is what people buy right now, unprofitable trading systems that offer short term rewards.

So it is your decision, I will not try to sell a long term profitable expert advisor, no one would buy it since no one wants to experience the reality of profitable trading which most of the time includes a low winning percentage, a very favorable risk to reward ratio, opening very few positions each week, or even each month. I interpret these facts as the way the market preserves the 90:10 rules in a system were people are using automated trading systems. Ninety percent of the people focus on the commercial, short term solutions while only ten percent focus on the long term trading strategies that offer realistic returns with adequate risks and the rule remains true, 90% of retail forex traders using automated trading systems lose their money.

If you would like to learn more about commercial and free expert advisors I have reviewed please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Forex Expert Advisor RED FLAGS

Given the extraordinary number of forex expert advisors available online, it is very easy for someone to buy something that does not work.

Lets face it. We all want to believe the things that the creators of most expert advisors tell us. We are usually attracted by the simple idea of an ea, therefore vulnerable to the trap. We are dazzled by their back and forward tests, by their profits, their small drawdowns, simply, by the promess of success.

The objective of this small article is to tell you a few things that should instantaneously raise a RED FLAG inside your brains when buying an expert advisor.

1. The Holy Grail. This one is the biggest red flag. If the webpage or author states that the ea has 100% winning trades with absolutely no losses. Come on, I can show you scalpers that perform with no losses for 4 months in a row, then give everything back (the whole account) to the market in just one or two trades. Dont be fooled by any backtests or forward tests. If it is a holy grail... You aint buying it !

2. The Instant Millionaire.Profits are too high. You see backtesting and forward testing that shows that the ea has a 20% monthly profit. Well, it is there in FORWARD TESTING. That does not mean a thing unless you have at least a year or two of testing. An ea can perform amazingly well giving the right market conditions (this may change in the next few months). 20% profit or more with less than a year of forward testing... Safer to wait a year ! You aint buying it !

3. The Trainwreck. No Stoploss. An ea seems to have wonderful records but has no stoploss. But hey, it has this witty mechanism to exit the market or this 99.9% profitable trade record. It does not matter. It is only a matter of time before the market kills that witty mechanism or gives you that 0.1% of loosing trades towards your margin call. Trust me it will happen, sooner or later, it will. Sorry, but your better off in a train with brakes. You aint buying it !

4. The Alien. You find this amazing expert advisor, everything seems absolutely correct. Tests, stoploss, all the things that God knows an expert advisor must have. But hey, where are the humans ? Nobody has ever heard of this ea. In reality, there are bad people out there and you cannot risk your money to someone that is faking results. If there are absolutely no independentun biased reviews of the ea. Sorry, you prefer a human opinion ! You aint buying it !

Yes, I know, this three little red flags will be raised for more than half of all the expert advisors available on the market (90% would be my best guess!). But hey, the will, almost for sure, keep you safe from the dishonest people out there trying to snatch your money for that money eating machine they call an expert advisor. Remember, if it is too good to be true...

Five Reasons NOT to Use a Trading System

Yes, it is true. We all want to find a profitable trading system that produces money in the long term and we get easily excited with anything that might look promising. This is especially dangerous for new traders as most of them still dont have the ability to recognize the potential of a trading strategy or the actual defects that will make it very hard to trade or simply impossible to succeed with in the long term. Some people new to forex trading are easily convinced with a few trading setups and a week of results while others venture into using systems that dont even offer clear entry and exit setups that have been proved to succeed in trading. On todays post I will give you some advice regarding this subject, I will talk about the characteristics you should look for in a system and the five main reasons why you should NOT use a given trading strategy.

If you go into any of the currently available forums with a section on forex trading systems you will find people using some trading setups that experienced traders would never use. Often these threads will continue until the system faces a draw down period, time after which the rules are changed and the cycle is repeated. This often continues until the general users loose interest and the thread dies, moving onto the next "new technique". How could you know which systems have the possibility to succeed and which ones dont ? Keep reading if you want to learn the FIVE main reasons why you should run AWAY from a trading system.

1. Lack of Statistically meaningful testing. Any system worth using must be evaluated through a statistically meaningful period. The length of this period - if you want a system that has a fighting chance against future market conditions - is of AT LEAST 5 years. This doesnt mean that the system has to be automated and backtested but that the system needs to be evaluated, even if only visually and a record of these simulations MUST be kept. I have seen HUNDREDS of systems on forums that have just been evaluated for a few months or a year and the result is obvious, they simply fail as the market changes.

2. Lack of risk and profit targets. This is perhaps one of the main reasons why I consider people fail with the thousands of systems proposed in forums. There is simply NO clear idea of what the risk and profit targets of the strategy are. What is the longest expected draw down period ? What is the average yearly profitability ? If you go to any forum and ask these questions about a system you will - most of the time - get no answer. This makes people use a system whose risk characteristics they dont understand, usually leading them to failure. If you want to succeed with ANY system, you need to know its risk and profit targets and these targets must be inferred from periods of at LEAST 5 years.

3. Lack of adequate money management. This aspect is very important as money management includes both the exit criteria plus the lot sizing technique. Money management is not simply "only risk x% per trade" it is the lot sizing plus its complex interaction with exit logic mechanisms that allows you to achieve a profitable outcome over long periods of time. If the system you are trading does not have CLEAR exit rules and CLEAR evaluation that shows over a period of at least 5 years of simulations how the closing logic benefits the system and how the overall money management reduces risk then you are not going to succeed with this strategy. Generally systems on the internet developed my inexperienced traders are filled with very complex entries and a vague and unevaluated money management concept. A weak money management strategy that has not been evaluated adequately is definitely something you should RUN away from.

4. Lack of reproducibility. A trading system cannot succeed for everyone who uses it if it cannot be reproduced accurately. Often you will see that systems proposed or shared online fail to have clear exit and entry rules that allow you to follow or evaluate them accurately. It is fairly common to find very vague descriptions of exits like "exit at the next significant support or resistance or Fibonacci level". What does the author interpret as significant ? How does he plot the Fibonacci levels ? This excessive level of discretion is very bad and it usually leads to systems that are extremely hard to evaluate or use successfully. If the systems lack reproducibility it is a definitive signal to run away.

5. Changes every 5 minutes. Perhaps the thing I dont like the most about many forums where systems are shared is the fact that changes are suggested and made very frequently. You will often find that the first post suggests a 50 pip TP only to find 30 posts later that they changed it to a 20 pip TL and then 50 posts later to a 100 pip TP. This is usually the consequence of LACK of confidence, lack of adequate evaluation, lack of adaptability and a general lack of understanding of draw down periods. Every time some loses come by the users build up a correction of the logic based on a few trades without a statistically meaningful evaluation. If you find that the systems characteristics are changed every now and then, you should move on.

I hope that the above information will be useful if you have been looking for a reliable system to use on some of the forums available online or on the internet in general. It is easy to see why the above criteria isnt met by most of the systems found online. It takes a long time to do 5 year evaluations, figure out profit and draw down targets come up with a robust money management system and a robust overall logic, however by doing this you ensure that you KNOW and understand how the system performs and this will be your ONLY weapons against the draw down periods that will certainly come. Having an understanding that bring confidence into your trading is what separates most successful traders from those who fail.

If you would like to learn about automated trading systems and how you can develop your own with a true understanding of their logic and their risk and profit characteristics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Why Scalping and Scalpers Do NOT Work

I am really amazed at the amount of people out there trying to make themselves rich by using scalping trading systems. Scalping is one of the trading techniques I dislike the most and this is because scalping is based on very odd and unsound trading concepts. There are many reasons why scalping and specially scalping expert advisors will not work in the long run but Ill try to explain the most important factors that definitely hinder a scalpers profitability and make it long term unprofitable.

First of all, what is scalper ? A scalping strategy is defined by most brokers as a strategy that either takes a profit of less than 5 times the spread of a given currency or a strategy that closes positions in less than 5 minutes. This definition is quiet wide and in general includes trading strategies that try to catch very small profits in the market (hence the word scalping). Most traders think that it is easier to catch a very small profit in the market than a large one because the market tends to move in random directions on small time frames.

So what are the problems of scalping strategies ? Well, I´ll write a small list and discuss each point so that you can see why any scalping ea or strategy is finally doomed to fail.

• In order to get that small profit, you usually need to risk much more. This of course is a consequence of the movement being random. You want to take a profit but if you place your stoploss at the same distance then the same randomness might as well take you out with a losing trade. The solution is simply to make the stoploss higher than the randomness, that usually means risk to reward ratios high, usually from4:1 to 400:1.
• There is no way to predict that randomness consistently. This is because the things that rule that randomness are not predictable, they are of course, random factors which cannot be accounted for. This translates in indicator signals becoming completely useless form one time period to another. So for example, a scalper may be profitable from 2000 to 2001, then it is not anymore. It is impossible to make sense of the randomness (do it and youll get a Nobel price in economy) and it is even more difficult to write a set of rules for it that work long time. Hence, your scalper will fail and you can take that to the bank.
• Spreads affect scalpers a lot. Because the take profit is so low, changes in the spread have a drammatic effect on the systems profitability. So the system maybe working and then the broker widens the spreads a little and you are absolutely doomed to fail.
  
• Your very high risk to reward ratio makes the system very vulnerable to losing trades. In fact a few consecutive loses are enough to wipe out an entire account in some cases and in other cases the loses take months to recover because of this same factor.
• Your trading cost is too high ! You trade for 100 times a day or for 10 times a day, you are working for your broker. This is because you are just paying at least 200 pips a day in spreads to be on the market. This is extremely high !
• Finally (this is not a valid reason for unprofitability but it is something I want you to take into account) none of the people I know who have made significant amounts of money in the forex or futures market has ever done it by using a scalper strategy. Scalping is a fools strategy (for all the above reasons).

So, all these points should have made it quiet clear. Scalping strategies will not work for the long term because they are based on something that is random and the rules that predict where that randomness is going change (you guessed?) randomly. So, if you really want to be a profitable forex trader (in the long run) look for long term stable profitable strategies that are based on what determines long term trends (these rules, on the contrary, do not change because the long term trends of the market are based on fundamental aspects of the currencies).

If you would like to learn more about this type of strategies as well as other commercial and free expert advisors I have reviewed please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Forex Expert Advisors Forex Conqueror an Unbiased Review

Todays post will be focused on the review of yet another automated trading system which was pointed out to me by a fellow trader a few weeks ago. This system is called forex conqueror and is said by the creators that it is a Consistent, profitable forex automated trading system. In the following few paragraphs I will try to give you my opinion on this expert advisor based on the evidence and descriptions provided by the author.

First of all, let me say that this expert advisors sale page suffers from some very serious problems. The website starts by giving out some very misleading information relating to profits. It says you can make certain quantities of money in several periods of time but no mention of account size requirements is given. That is, making 18K in a week with 10 million is a small win while with 1K is extremely unrealistic so talking about profit targets without mentioning account equity is just meaningless.

Then it has the boldness to say "Performance guarantee - Indisputable proof below". Well, it seems extremely unlikely that a PhD in computer science (as he says his business partner is) would agree to put such a bold statement in a front page when he should note that the evidence given is extremely subject to dispute. For example, backtesting statements are not given in a complete fashion (only shots of parts of the statements are shown) and absolutely no long term statements or statements that can be compared to backtesting are shown. Sure, anyone can make 5000 with two trades, how many can keep that after a year of trading ? The forex market is not about that at all, it is about keeping your profits, anyone can just make that much money in two or three trades out of luck.

The forex conqueror EA is just a dissappointment. There is no evidence at all to prove the authors claims since the extremely little evidence he gives a) cannot be confirmed b) is not complete and c) does not support all the claims. For example, he says his system can trade under any market condition (again, a very bold statement) but there is no live trading information that can confirm this. I have to say, this system is absolutely NOT worth buying. The evidence to support the authors claims simply does NOT exist. For all we know, the system could be curve fitted to give good results in backtests and it could be failing astronomically right now in live testing. Again, buying this system would be, in my opinion, a huge mistake with the current state of proof provided by the author. As always, I would be glad to change this if long term live testing (which he actually says he HAS on the webpage) is included on the sales page and access to the live account with an investor access password is given. Meanwhile, in my opinion, thi is just part of the ton of low tested, useless expert advisors out there.

If you would like to learn more about realistic profit and draw down targets in the forex market and how you too can use automated trading systems to achieve profitable real results please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed this article !

Gods Gift ATR Towards the Best Documented Expert Advisor

For the past year I have been developing and testing the gods gift ATR expert advisor, a modification I wrote of the original ea written by Matt Edmonds called gods gift 7c. Throughout all of my posts you may have seen how this expert advisor behaves on the market and how it performs under very varied market conditions. With each passing day I become more and more convinced of the large potential of this automated trading system on the real forex market.

Now, I dont want this ea to be the same as all the other expert advisors out there offered by the different commercial ea sellers. My compromise is with the retail traders out there who really want to be profitable using an automated trading system with real expectations and profits. For this reason what I intend to do is to slowly turn my forex automated trading ebook into a guide for profitable expert advisor trading using freely available systems. What I want to do, is to turn the gods gift expert advisor into the most documented and reliable expert advisor out there.

For this reason I wrote the gods gift manual a few days ago (included with my ebook or newsletter subscription) to start showing people exactly how the logic works and how the ea trades the market. I am also developing an extensive footage of simulated and live taken trades which show exactly how this ea both wins and loses in the forex market. I want people to know why this expert advisor trades and when and why its logic can be really trusted.

For this same reason I have decided to trade this ea on 4 live accounts which can be seen with my newsletter subscription (along with the one year previously done forward test which accumulated more than 100% in profit). I want all the back and forward testing that has been done to be validates by the experts trading in real, live accounts. Moreover, I will start to test this ea on several brokers once the testing of the current accounts reaches the first year of live testing in March 2010. Hopefully, gods gift will become the most documented, reliable and trusted expert advisor out there to make achievable amounts of profit in the foreign exchange market.

If you want to learn more about the gods gift ATR expert, including new versions, tests and the gods gift ATR manual please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

New Chat on the Blog !

I wanted to tell you that I have just installed a new chat service accessible through the left navigational panel. You can leave messages or speak with me if I am online. It is a secure way to leave your email address or other contact information in case you want to speak or discuss anything with me personally.

I hope we all enjoy this great service and continue our hopefully profitable and long trading careers !

Think Like Warren Buffett

Think Like Warren Buffett
by Glenn Curtis

Back in 1999, Robert G. Hagstrom wrote a book about the legendary investor Warren Buffett, entitled "The Warren Buffett Portfolio". Whats so great about the book, and what makes it different from the countless other books and articles written about the "Oracle of Omaha" is that it offers the reader valuable insight into how Buffett actually thinks about investments. In other words, the book delves into the psychological mindset that has made Buffett so fabulously wealthy.

Although investors could benefit from reading the entire book, weve selected a bite-sized sampling of the tips and suggestions regarding the investor mindset and ways that an investor can improve their stock selection that will help you get inside Buffetts head.

1. Think of Stocks as a Business
Many investors think of stocks and the stock market in general as nothing more than little pieces of paper being traded back and forth among investors, which might help prevent investors from becoming too emotional over a given position but it doesnt necessarily allow them to make the best possible investment decisions.Thats why Buffett has stated he believes stockholders should think of themselves as "part owners" of the business in which they are investing. By thinking that way, both Hagstrom and Buffett argue that investors will tend to avoid making off-the-cuff investment decisions, and become more focused on the longer term. Furthermore, longer-term "owners" also tend to analyze situations in greater detail and then put a great eal of thought into buy and sell decisions. Hagstrom says this increased thought and analysis tends to lead to improved investment returns.

2. Increase the Size of Your Investment
While it rarely - if ever - makes sense for investors to "put all of their eggs in one basket," putting all your eggs in too many baskets may not be a good thing either. Buffett contends that over-diversification can hamper returns as much as a lack of diversification. Thats why he doesnt invest in mutual funds. Its also why he prefers to make significant investments in just a handful of companies.

Buffett is a firm believer that an investor must first do his or her homework before investing in any security. But after that due deligence process is completed, an investor should feel comfortable enough to dedicate a sizable portion of assets to that stock. They should also feel comfortable in winnowing down their overall investment portfolio to a handful of good companies with excellent growth prospects.Buffetts stance on taking time to properly allocate your funds is furthered with his comment that its not just about the best company, but how you feel about the company. If the best business you own presents the least financial risk and has the most favorable long-term prospects, why would you put money into your 20th favorite business rather than add money to the top choices?

3. Reduce Portfolio Turnover
Rapidly trading in and out of stocks can potentially make an individual a lot of money, but according to Buffett this trader is actually hampering his or her investment returns. Thats because portfolio turnover increases the amount of taxes that must be paid on capital gains and boosts the total amount of commission dollars that must be paid in a given year.The "Oracle" contends that what makes sense in business also makes sense in stocks: An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.Investors must think long term. By having that mindset, they can avoid paying huge commission fees and lofty short-term capital gains taxes. Theyll also be more apt to ride out any short-term fluctuations in the business, and to ultimately reap the rewards of increased earnings and/or dividends over time.

4. Develop Alternative Benchmarks
While stock prices may be the ultimate barometer of the success or failure of a given investment choice, Buffett does not focus on this metric. Instead, he analyzes and pores over the underlying economics of a given business or group of businesses. If a company is doing what it takes to grow itself on a profitable basis, then the share price will ultimately take care of itself.Successful investors must look at the companies they own and study their true earnings potential. If the fundamentals are solid and the company is enhancing shareholder value by generating consistent bottom-line growth, the share price, in the long term, should reflect that.

5. Learn to Think in Probabilities
Bridge is a card game in which the most successful players are able to judge mathematical probabilities to beat their opponents. Perhaps not surprisingly, Buffett loves and actively plays the game, and he takes the strategies beyond the game into the investing world. Buffett suggests that investors focus on the economics of the companies they own (in other words the underlying businesses), and then try to weigh the probability that certain events will or will not transpire, much like a Bridge player checking the probabilities of his opponents hands. He adds that by focusing on the economic aspect of the equation and not the stock price, an investor will be more accurate in his or her ability to judge probability.Thinking in probabilities has its advantages. For example, an investor that ponders the probability that a company will report a certain rate of earnings growth over a period of five or 10 years is much more apt to ride out short-term fluctuations in the share price. By extension, this means that his investment returns are likely to be superior and that he will also realize fewer transaction and/or capital gains costs.

6. Recognize the Psychological Aspects of Investing
Very simply, this means that individuals must understand that there is a psychological mindset that the successful investor tends to have. More specifically, the successful investor will focus on probabilities and economic issues and let decisions be ruled by rational, as opposed to emotional, thinking.More than anything, investors own emotions can be their worst enemy. Buffett contends that the key to overcoming emotions is being able to "retain your belief in the real fundamentals of the business and to not get too concerned about the stock market."Investors should realize that there is a certain psychological mindset that they should have if they want to be successful and try to implement that mindset.

7. Ignore Market Forecasts
There is an old saying that the Dow "climbs a wall of worry". In other words, in spite of the negativity in the marketplace, and those who perpetually contend that a recession is "just around the corner", the markets have fared quite well over time. Therefore, doomsayers should be ignored.On the other side of the coin, there are just as many eternal optimists who argue that the stock market is headed perpetually higher. These should be ignored as well.In all this confusion, Buffett suggests that investors should focus their efforts of isolating and investing in shares that are not currently being accurately valued by the market. The logic here is that as the stock market begins to realize the companys intrinsic value (through higher prices and greater demand), the investor will stand to make a lot of money.

8. Wait for the Fat Pitch
Hagstroms book uses the model of legendary baseball player Ted Williams as an example of a wise investor. Williams would wait for a specific pitch (in an area of the plate where he knew he had a high probability of making contact with the ball) before swinging. It is said that this discipline enabled Williams to have a higher lifetime batting average than the average player. Buffett, in the same way, suggests that all investors act as if they owned a lifetime decision card with only 20 investment choice punches in it. The logic is that this should prevent them from making mediocre investment choices and hopefully, by extension, enhance the overall returns of their respective portfolios.

Hence, "The Warren Buffett Portfolio" is a timeless book that offers valuable insight into the psychological mindset of the legendary investor Warren Buffett. Of course, if learning how to invest like Warren Buffett were as easy as reading a book, everyone would be rich! But if you take that time and effort to implement some of Buffetts proven strategies, you could be on your way to better stock selection and greater returns.

Indicator Series The Fractal Indicator

Today by a customers request, I decided to continue my indicator series of posts with the fractal indicator instead of the MACD indicator which I had said I would continue with last time. The fractal indicator, which was developed by Bill Williams as part of his trading system, is a very interesting tool in trading and will be the focus of my post today.

What is the fractal indicator ? How is it calculated ? The fractal indicator is based on the formation of "arrow like" formations or "fractals" caused by a high or low being reached within a specific pattern within a certain candlestick formation. What the fractal indicators looks for to draw a fractal is a series of continuous highs or lows leading to a major high or low which is then retraced from by a series of higher highs (in case of a low) or lower lows (in case of a high). For example the following patterns would cause the formation of fractals :

Each line represents a bar of price movement :
As you can see, the goal of the fractal indicator is to show "tops" and "bottoms" defined by the above close price patterns. However, also as you can see, the fractal indicator needs several bars to accurately show the pattern and no position should be entered before the fractal indicator has been drawn. The actual indicator in the metatrader 4 platform does not wait for the close of the last bar to show the fractal pattern so the indicator may show signals than then "disappear" if the last bar goes out of the fractal pattern when closing. This is solved by this fractal indicator which does not repaint and does wait for the appropriate closes before drawing the fractal.

Fractal indicators are useful in many aspects. They are commonly used as a way to look for support/resistance levels (several fractals are needed in order to confirmate this assumption) and they are also used to gauge a trend strength as the actual number of fractals broken by price gives a sense of "momentum". However, fractals should never be used by themselves as they often give too many fake signals and no systematic way to trade "bounces" or "breakouts" can be formulated. Often a computer attempting to elucidate support and resistance levels with fractals will see a lot more than what a human trader would see, leading to further complications of trading methodologies involving this approach.

However, fractals may be useful in automated trading as a means to define a "ranging market" when the market fails to "break" above up and down fractals and therefore remains in a sort of "channel". In my personal experience, the use of fractals in automated system is, to say the least, complicated since particularly volatile time periods usually generate a rather high number of "less meaningful" fractals which become a big problem when dealing with an automated system. However, combinations of the fractal and alligator indicators as used in Bill Williams system, coupled with an adequate dynamic adaptive money management system may generate a profitable system from fractal trading. Any willing to give this a shot would be welcome !

If you would like to learn more about automated trading system design and evaluation, particularly how these systems can in fact be traded profitably with adequate risk and profit targets please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

The Break even Dilemma

Today I wanted to write a post about an aspect of trading which has always sprung a discussion between traders. This option of money management, the setting of a break even move, has been both praised and bashed by traders as a way to control the inherent risk on trades. Is it good to move your stops to break-even ? is it bad ? This post will try to go through both the advantages and disadvantages of the use of a move to break-even highlighting the importance of this choice in the particular money management strategy used.

So what is a move to break-even ? A move to break-even is when a trader decides to move his SL to a price level which is usually the entry price plus or minus the spread (depending on trade direction) to ensure that if price pulls back the trader will, in a worst case scenario, exit the trade with no loss. The move to break-even counts on price moving a given favorable number of pips before the actual move is done. Usually this move must be in the order of a minimum 10-15 pips depending on the broker.

As you may have already thought, the controversy of using a move to break-even arises when one considers that moving the SL to break-even cuts the "breathing room" from the trade. Traders will argue that many times the move to break-even makes the trades go back to take out the trade and then continue in what would have originally been a winning trade. However, moving to break-even does limit the loses in those trades which move in favor and then move back to move way beyond the break-even price and into the stop loss.

So is using a move to break-even good or bad ? This question is certainly not answered in an easy way. First of all, a very well statistical analysis of your system is needed. What percentage of the time does your system retrace to the SL after taking X profit ? Is this amount significant ? What percentage of the time does your system go to X and then return to levels below the entry only to go to the TP ? Taking a look at the chart of a 10 year backtest of your system may help you answer these questions as on very varied market conditions these are bound to change.

Some systems like the gods gift ATR in which the most profitable trades dont test levels below 70% of the ATR benefit from this approach (which is the first move of a trailing stop) while systems that usually oscillate before arriving at the final profit may not (systems like the turtle trading system). In my experience, the move to break-even is the "lazy" approach towards cutting loses short. It is a far more efficient approach to use an intelligent closing logic that matches your strategy rather than a break-even approach. A closing logic makes sure that trades are closed when there is a reason to do so and trades can usually be closed with a profit rather than with no profit at all.

Finally, the best way to know if a move to break-even is the way to go is simple. Implement it and see if it improves your profit in a 10 year simulation. Adjusting the amount of profit before break-even against the ATR may also be a good idea in order to adjust the moves according to market volatility. When manual trading, remember that moving to break-even should be a regular practice when you are trying to play moves in which there is a high probability of the market evolving against you (trading the news for example) or when your analysis tells you that the probability of the trade going against you is high but a good possibility of profit exists (like trying to trade a retracement on a trend).

If you would like to learn more about designing trading systems that can adapt to changes in market conditions and remain long term profitable please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

THe Effect of Interest Rate

As an investor, very often we run into a situation whereby we do not fully understand certain economic concepts or economic indicators while reading the Business Section of the newspaper. These economic indicators are important source of information that provides investors with insight into the environment in which financial markets operate that may in turn have a significant impact on our stock market.

For example, I read an article this morning, it said: “EU raised interest rate to boost the Euro”. Many investors only know the relationship between interest rate and stock market, but they do not know why interest rate will affect a country’s currency?

While interest rate has an inverse relationship with the stock market; it has a direct relationship with the currency! This is because when a country raises its interest rate, it will attract short term “hot money” or short term capital into the country to take advantage of the higher interest rate. When this happens, it raises the demand for the currency and thus raises its valuation as well.

During the 2006 – 2008 oil crisis, our official inflation once reached more than 5% but unofficial inflation could be much higher, it was not reflected mainly due to the oil subsidies that we were enjoying. Our inflation problem was much better when we compared to other neighbouring countries since they do not have oil subsidies.

So back to the point, to combat high inflation most countries would raise their interest rates to prevent erosion of purchasing power. The effect? If the economy already in recession due to high inflation, it will go deeper into recession further as the cost of borrowing has increased!

Our Bank Negara at that time did raise interest rate but to a lesser extent. It was a brilliant move by Dr. Zeti, our award winning Governor, that we sacrificed the purchasing power temporary, kept the cost of borrowing at reasonable level to protect the business sectors, so that we can all secure our jobs. In addition, the higher interest rate made our currency stronger, so that we can import cheaper to bring down the imported inflation. As for our exports, not a big problem there because the regional countries all experienced currency appreciation so we did not lose our competitive advantage.

Hence, do not underestimate the effect of the interest rate, it can bring impact onto our daily consumption, firms investment, government borrowing, our Ringgit as well as our Malaysia trade patterns.

Besides our local interest rates, we must also know the level of interest rates in other countries as well. So keep reading! The more you read the better investor you are and you are on your way to successful investing!


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Happy investing,
Pauline Yong

Curve Fitting Trading Systems Can it be Avoided

Imagine that you have dedicated several weeks to the development of a profitable trading system. Your simulations are showing you brilliant results, so you decide to test your system on a live account for a few months. Then you discover that performance is nowhere near what you expected. What is wrong ? Well, the most probable explanation is that you have curve-fitted your system to past data and therefore your system is unable to behave similarly on a different data set. On the following paragraphs I will talk to you about what curve-fitting is, how it affects system development and how we can develop systems to avoid this seemingly unavoidable curse.

So what is curve-fitting anyway ? Simply explained, the term is derived from the fact that any given "curve" or data set can be accounted for by a given mathemtical function of arbitrary complexity. That is, you can always find a mathematical function which can predict with absolute accuracy all the items of a data set. However, the function may have absolutely no predictive power. For example, take into account the data set 1,2,3,4. Can you predict the next number ? You can immediately think of a function which can predict all the items of the data set but can it predict the next one ? Well, what if the next one was 12 ? then your function has no predictive capability even though it was able to predict all previous items successfully.

The problem applies to trading because the fact that a given system was able to exploit a market inefficiency in the past does not guarantee that the inefficiency will be present in the future. Usually optimization is great to curve-fit trading systems because what an optimization does is merely to "adjust function parameters" to find a mathematically sound answer to the problem. The better and tighter the optimization, the more curve-fitted the system will become, this is a reason why neural networks - which are excellent at optimization- tend to fail in successful trading systems as they always curve-fit their data excessively.

So how can we make a trading systems with the slightest possible chance of ending up with a useless curve-fitted expert advisor ? The first important measure is to do simulations on periods which are as long as possible. The longer the trading period, the more statistically significant the data set is and the less likely it is to allow the curve fitting of your system. Long time periods introduce a wide variety of market conditions which make curve fitting very difficult. However the number of trades is also very important. Having more trades for a given long trading period is better (against curve-fitting) since it implies a larger number of market conditions in which the EA was able to trade and succeed.

Another important aspect of curve-fitting is to avoid excessively correlated and exhaustive optimization of trading systems. Trading systems should be optimized one variable at a time or using two cross-related variables at a maximum without going into excessive detail. For example if an EA has a parameter which can go from 20 to 50 it is better to optimize it in 2 steps (20,22,24, etc) rather than running a full optimization of all values (20,21,22, etc).

Another great idea is to have very robust profitability, this means that results in an optimization should form "thick clusters" of profitability. For example, if in the above example 24 gives very profitable results but 23 and 25 are unprofitable then it means that in the future the system is bound to be unprofitable if there are slight changes in the optimum criteria (something which will happen). When running an optimization as many results as possible should be profitable and the area around the most profitable result should also be close to that result.

Then finally we also have the matter of adaptability. A system should be able to adapt to changes in market conditions therefore having some flexibility in its entry and exit criteria. If you optimize a system which gives very good results with a TP of 100 pips the system is likely going to be unprofitable in the future as market volatility and conditions fluctuate, invalidating the 100 pip TP. The best thing would be to optimize a dynamic criteria, for example, what percentage of the standard deviation is the ideal TP ? This ensures that the EA can change its exit and entry values in a dynamic way therefore adding another layer of protection against curve fitting.

However, despite all our efforts it is still a mathematical possibility to curve fit a trading system to the past given the fact that the future may have absolutely no relationship with it (like in 1,2,3,4,12). Nonetheless, following the above criteria in the development of a trading system aiming for adaptability, broad optimizations, robust profitability and large periods of testing data guarantees a better chance of suceeding even if there are significant changes in future market behavior. If you would like to learn more about these concepts and how I use them for the development of likely long term profitable systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Forex Expert Advisors Dirty Forex an Unbiased Review

A few weeks ago one of my subscribers asked me to review the Dirty forex system which is offered at dirtyforex.com. Todays post will be dedicated to the evaluation of this trading system which I mainly do based on the evidence provided by the author regarding the experts profitability. With this in mind I then check the EA against my criteria for long term profitability and give my opinion about its trading.

Ok, first of all, I would like to start with a paragraph I found within the dirtyforex website :

"The DirtyForex team is starting a revolution. A secret war to tip back the scales in your favor. Our mission is to arm traders with tools that are proven to work, even if those tools are distasteful to some."

After going through the whole website and reading the whole content I am still wondering. Where is this revolution ? The dirty forex web page seems to be nothing more than a big ball of the same old hype we have come to get used to. Even more, the dirty forex EA is even more hyped than all the rest of them because these people dont even show a single back, forward or live result. I mean, this people do not show anything about their expert advisor.

They do not show any trades we can compare, they dont show backtests, pictures, live trade examples, nothing. This is one of the weirdest web pages I have ever reviewed regarding forex expert advisors. How is it that a seller wants to sell something by saying nothing about it ? There is absolutely no evidence to backup any of the claims on their website. How could we even evaluate an expert advisor when the author shows absolutely no proof of anything ?

For all we know, this people can be selling anything. Buying the dirty forex software is nothing short of a gamble. You would be buying something to which there is no evidence, you are buying something with no idea of what it really is. Is it another EUR/GBP scalper, a EUR/USD trend follower, a AUD/NZD grid trader a GBP/USD martingale, who knows ? For all we know, this EA could be any of the above stuff, it could even be the moving average sample that comes with metatrader. Come on, this people did cross a line trying to sell something with absolutely no evidence. Like if we were retarded, come on !

Of course, this EA is NOT worth buying or testing. I will gladly rewrite this review if ENOUGH evidence is given. If you would like to learn more about the world of forex automated trading including how to program your own long term profitable strategies please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !