Monday, August 27, 2007

Forex Trading Systems: Mechanical Vs. Discretionary Systems

There are basically two types of Forex trading systems, mechanical and discretionary systems. The trading signals that come out of mechanical systems are mainly based off technical analysis applied in a systematic way. On the other hand, discretionary systems use experience, intuition or judgment on entries and exits. But which one produces better results? Or more importantly, which one fits better your trading style? These are the answers we will try to answer on this article.

We will first analyze the pros and cons about each system approach.

Mechanical systems

Advantages This kind of system can be automated and backtested efficiently. It has very rigid rules. Either, there is a trade or there isnt. Mechanical traders are less susceptible to emotions than discretionary traders.

Disadvantages Most traders backtest Forex trading systems incorrectly. In order to produce accurate results you need tick data. The Forex market is always changing. The Forex market (and all markets) has a random component. The market conditions may look similar, but they are never the same. A system that worked successfully the past year doesnt necessary mean it will work this year.

Discretionary systems

Advantages Discretionary systems are easily adaptable to new market conditions. Trading decisions are based on experience. Traders learn to see which trading signals have higher probability of success.

Disadvantages They cannot be backtested or automated, since there is always a thought decision to be made. It takes time to develop the experience required to trade successfully and track trades in a discretionary way. At early stages this can be dangerous.

Now, which approach is better for Forex traders? The one that fits better your personality. For instance, if you are a trader that finds it hard to follow your trading signals, then you are better off using a mechanical system, where your judgment wont play an important role in your system. You only take the trades that your system signals.

If the psychological barriers that affect every trader (fear, greed, anger, etc.) puts you in unwanted scenarios, you are also better off trading mechanical systems, because you only need to follow what your system is telling you, go short, go long, close a trade. No other decision has to be made.

On the other hand, if you are a disciplined trader, then you are better off using a discretionary system, because discretionary systems adapt to the market conditions and you are able to change your trading conditions as the market changes. For instance, you have a target of 60 pips on a long trade. But the market suddenly starts trending up pretty strongly, then you could move your target to say 100 pips.

Does it mean that trading a discretionary system has no rules? This is absolutely incorrect. Trading discretionary systems means that once a trader finds his/her setup, the trader then decides what to do. But every trader still needs certain rules that need to be followed, such as the size of the position, conditions that have to be met before thinking to get in the market, and so on.

I am a discretionary trader. The main reason I chose a discretionary system is that my trades are based on price behavior, and as you already know, the price behaves similar to the past, but it is never identical, therefore the outcome of every trade is unknown. However, I do have rigid rules on my system, certain conditions have to be met before I even think in getting in a trade. This keeps me out of trouble, once my setup is present and in accordance with the rules I have set, then I closely watch the price behavior and finally decide whether it is a good opportunity or not.

Whether you choose to be a discretionary or a mechanical trader there are some important points you should take in consideration:

1. You need to make sure the Forex trading system you are using totally fits your personality. Otherwise you will find yourself outguessing your system.

2. You also need to have some rules and most importantly have the discipline to follow them.

3. Take your time to build the perfect system for you. Its not easy and requires time and hard work, but at the end, if done correctly, it will give you consistent profitable results.

4. Before going live, try it on a demo account or even on a small account (I will go for the second option, since psychological barriers will be present.)

Raul Lopez is a full time Forex trader and founder of a high quality Forex training company.

The Fickle Finger of Fate - A Cautionary Tale

After the feast, the famine... Having enjoyed such a tremendous weekend courtesy of a certain racehorse named after a tree, winners have been somewhat more difficult to come by this week.

For followers of TrainerFlatStats or TrainerTrackStats, yesterday exemplified the current frustrating run, with second placed horses at 9/1 and 17/2 both looking like winners before being beaten a neck and half a length respectively.

Which got me to thinking about the margins by which we define success and failure. It is a thought which recurs to me on a regular basis, and is one of the main reasons why I love (and hate) this fantastic sport.

The thing is that we are paid out in a binary system. Its black and white, with no grey. You win. Or you don't win. Simple as that. Trying to win consistently is an exacting discipline, and it doesn't suit all temperaments.

As regular readers will know, mine is generally a systematic and statistical approach to betting.

I don't really believe in collateral form. The notion that Horse A beat Horse B by two lengths, and Horse B beat Horse C by two lengths, therefore Horse A must beat Horse C by four lengths, is - frankly - pseudo-science at its worst.

There are always so many imponderables that its nigh on impossible to conclude with any degree of certainty that Horse A will beat Horse C. Added to this is the undeniable truth that within any horse race a form selection will run inexplicably badly, and another will run inexplicably well. Inexplicable in terms of collateral form, that is.

To use the Silver Birch example, I made this horse about a 14/1 chance. I didn't bet on the day as I was already on. The first I learnt of his huge SP of 33/1 was when it flashed up on screen after he'd passed the post in front.

On collateral form, in all probability, he was more akin to a 20/1 or 25/1 short, but in terms of the statistics he had a much greater chance than that.

This brings me nicely on to my point (and not before time, I hear you cry!). Because not one of us has ever had just one bet, we should not be looking to win every time. Rather, the nature of the game is to stay ahead in the long run. So even if the extremely brave and slightly unlucky McKelvey had bettered Silver Birch in the shadow of the post, I would have remained convinced that my selection policy is correct, and that the fickle finger of fate was raised firmly in the vertical, presenting me with the one (fickle) finger salute.

I would have won no money for my vindication. Indeed, I would have lost money. But I remain convinced that - in the grander scheme of things - I will come out in front.

This is the central pillar of my statistical approach, and its the reason why I don't necessarily think my approach (and that which I champion in my statistical guides) is for everyone. It takes discipline and a broad overall perspective to ride through the inevitable troughs that will occur.

But 'when the battle's lost and won' (apologies to the Bard), I am confident that my cup will be full of cheer, even if it doth not runneth over.

p.s. A quick mention for my trainer Julia Feilden, who sent out her first juvenile runner of the season 'Spirit of Sharjah' yesterday. Backed in from 16/1 to 10/1, it fairly pis...... hosed up, in a time under a minute (that's 12 sec's per furlong, or very very fast for a 2yo debutante in other words!). She reckons she's a couple of others as good as this one, and I've emailed her to find out their names. I'll endeavour to keep you posted in due course.

p.p.s. Still on the subject of Julia, my (bit of a) horse, Rapid City, runs on Saturday at Newbury in the Spring Cup (25,000 to the winner). He's possibly drawn on the wrong side and its a very hot race, as you'd expect for the money. Also, first UK race on turf. We're hopeful rather than expectant of a good run, but Julia reckons he's been crying out for this decent ground and has been running well on the sand, despite not really liking the surface. We'll see....

p.p.p.s. Teofilo Update: currently trading at between 4/1 and 9/2 with betfair. Or you can have 7/4 with William Hill. (Are they for real?!) My money is still on him sidestepping Newmarket, in favour of a shot at the Curragh in the Irish equivalent. Again, we'll see...

Matt Bisogno is a lifelong horseracing and betting enthusiast, and has published a number of statistical analyses of trainer patterns for horse racing betting purposes.


2000 Guineas 'Preview'

"Wascal Wabbit" on the 2000 Guineas
Hello dear weaders, and welcome to my second attempt to send this post after my computer cwashed on the first attempt... dwat!

You may be wondering why I am witing with no r's today. In case you are, it is because I learnt some intewesting and slightly cuwious news this week. Its been bwought to my attention that therw' is a google language setting forw' Elmer Fudd!

In the spiwwit of the cartoon genius, I will twy to wite this as Mr Fudd... (some of my unkinder weaders may think the similawities don't stop there!)

Onto business, and today lets look at the histowical twends in the 2,000 Guineas with a view to finding the winner.

Firstly, weight and age are constants in the wace. All are thwee yearw' olds and all cawwy nine stone.

However, therw' are some stwong twends elsewhere...

Odds: No horse has won the wace at longer than 11/1 since Mister Baileys in 1994. Indeed, the winner has been in the first five in the betting in each of the last eleven wunnings of the wace, except one, when the winner was sixth in the market.

So lets scwub out all bar those with a chance of being in the first six in the market. This is not tewwibly helpful in finding the winner, but it does weduce our list to:

Teofilo, Adagio, US Wanger, Major Cadeaux, Diamond Tycoon, Dutch Art, Haatef and Stwategic Pwince. Of these, some will likely not fit the bill on the day.

The other point of note with wegards to the betting is that George Washington last year was the first favouwite to win since Zafonic in 1993, and there have been a few supposed 'good things' turned over at odds-on in that list.

So, I'll stwike out Teofilo. My wegular weader will know how keen I am to do that anyway! (Note, the one pwoviso herew' is that I weckon Adagio might start favouwite on the day).

Nine of the past eleven winners of the wace were twained by Stoute, O'Bwien or bin Suwoor. Of this stellar twiumviwate of twaining twiplets, only Stoute's Adagio is likely to be in the cowwect pwice bwacket. This must be a big positive if he is not sent off favouwite on the day.

Pwevious wun this season? Eight of the last eleven winners were first time out wunners. Only Haatef, Stwategic Pwince and Teofilo have that in their favour.

Pwevious form? Nothing too intewesting here (at first glance at least), as four winners had been unbeaten, the same number suffered one defeat, and thwee had had two weverses.

Dwaw? Vewwy vewwy intewesting! On first glance, the dwaw looks iwwelevant with winners coming fwom (seemingly) all parts of the twack. But comparw'ing the winning dwaw with the number of wunners weveals that no fewer than sixteen of the last seventeen winners were dwawn five or fewer stalls from either side. Although this potentially gives you ten horses to follow, if you're not dwawn within five of a wail, I say forget it! (Therew' are alweady sixteen horses jocked up out of a possible thirty, so I'd expect half the field at least to be dwawn out of it.

So there we have it: still a numberw' of impondewables, but I'm looking for a horse in the first five or six in the betting (but not favouwite), dwawn within five of the wails. I'd bet all that pass these tests.

If forced to make a selection, I'd go for Adagio (won despite a twoubled passage last time) and Diamond Tycoon (vewwy fast horse).

Other matters: "Spanish wefs, buy the cards" took a dwubbing last night, as did I, when the pwojected sanguine tub (or bloodbath if you pwefer) failed to matewialise. Although it was a well contested affair (as you'd expect forw' a match of such magnitude), it was also disappointingly well wefereed by the Spanish arbitwator (ok, so I'm just picking words with r's that I can turn into w's now!) Nevertheless, do not lose faith on this one. You will be wichly wewarded if you follow this stwategy.

Well, that's about the size of it for this post. Its actually a lot twickier than it may seem to wite like Jonathon Woss and Elmer Fudd speak. Twy it, and you'll see what I mean!

With warm wegards,

Matt 'Elmer' Bisogno

Matt Bisogno is a lifelong horseracing and betting enthusiast, and has published a number of statistical analyses of trainer patterns for horse racing betting purposes.