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Flat and happy

June 24, 2016 by Shaun Overton Leave a Comment

This is the first financial event since 2008 that’s hit the mainstream public. Even my friends from college are talking about the Brexit on Facebook.

My Dominari system only trades during the UK evening, so I felt comfortable leaving my system on overnight. When I woke up, however, I didn’t feel the same. Did you see the GBPUSD chart? Holy cow! 1,300 pips in an hour.

Brexit

GBPUSD lost more than 1,790 pips in a day from top to bottom on the Brexit.

This is the first time I’ve intervened in a trading system since April of last year. What makes me very happy, though, is that this intervention is all about protecting profits. I’m up 6.69% since I began trading the finalized version of Dominari on April 15.

Dominari equity curve

My equity curve as of June 24, 2016.

myfxbook.com/members/QuantBar/dominari-pepperstone/1591822 – my results at Pepperstone

Dominari isn’t intended to trade these types of markets. So, instead of deciding to “see what happens”, I’m flat and happy until we see how the markets open after the weekend. I expect big gaps. I don’t feel like gambling which way the gaps may go.

If you clicked the original link, you noticed that the equity curve is marching straight up. That’s what’s supposed to happen. But like any good system trader, I wanted to see it working in the real world before I upped the capital commitment.

Earlier this month, I decided to trade a second account at FXCM, this time in USD. That brings my total accounts to €8,500 and $5,100. That’s about $14,600 in USD terms between the two accounts.

The FXCM account started live trading on June 6. Before then, I made sure to test it on an FXCM demo account to confirm that my edge wasn’t completely dependent upon broker selection. I’m happy to report that the FXCM results are closely mirroring those at Pepperstone.

myfxbook.com/members/QuantBar/dominari-fxcm-mt4/1679763 – my results at FXCM.

Filed Under: Dominari Tagged With: Brexit, FXCM, GBPUSD, Pepperstone

Resetting my demo testing

December 1, 2015 by Shaun Overton 6 Comments

I mentioned in my new strategy post that live demo testing would last for two weeks unless bugs popped up. Bugs did pop up… but only in my rush to get ready for Thanksgiving!

I sat in my office frantically trying to wrap up code before business hours ran out on the day before Thanksgiving. The plan was to unplug for the long weekend. And, I did. Emails went on autoresponder and, aside from one night binging on Netflix, I didn’t see a screen for 4 days.

Rushing while problem solving, and especially programming, almost never ends well. I would never push untested code changes onto on a live account. But since I figured the change was simple and it’s only a demo account, it’s not a big deal if I mess it up. There went 4 days of live market testing down the drain.

The bug

I’m testing my live demo on FXCM US. As most US traders are aware, the FIFO rules imposed on FX brokers can get pretty annoying. I noticed that a small handful of my orders were being rejected in a special circumstance.

Say that I’m in a long trade and place my take profit at 1.0550. Now say that the signal is so strong that not only should I exit long, but I should also go short at 1.0550.

Anyone in a normal market would place a limit order to sell double the open position at 1.0550. That would cause the long trade to exit and a new trade to open in the opposite direction.

FIFO rules prohibit this because I’m already long. My intended bug fix was to place a take profit order to exit. The order to go short would then remain hidden in the code until the long trade exits. Doing the order logic this way follows my original intent, but also complies with FIFO.

The buggy bug fix

Using my long and then going short example, my long sets a take profit and then the code was intended to send 1 limit order to go short. I forgot to tell the code that it had already sent that one order. Instead, the code sent duplicate orders on every single tick.

Position sizes of 1 microlot mushroomed into several standard lots. Needless to say, the profit and loss began to swing wildly. The massive jump in size also swamped the statistics that I was hoping to measure with the data gathered so far.

It’s easier to start a new demo account, which is what I’ve done as of 5 minutes ago. One upside to using a new demo account is that I can run the code on an account size that matches my intended live testing balance. I plan to test with $2,000 instead of the $50,000 in the first demo.

The first few days of trading

equity curve

This was the first 3 days of trading

The first few days continued much in the same vein as in my original post. I’m looking forward to collecting data from the new demo account. You can expect to stay up to date on my progress if you’re a subscriber to my free newsletter.

How I picked my brokers

Using limit orders is extremely price sensitive. If you place a limit order to buy EURUSD at 1.0550, the price must exactly hit 1.0550 in order for that trade to execute.

One danger of trading on marked up spreads is that you don’t know whether the broker is widening the bid or the ask. If the interbank market quotes a 0.3 pip spread on EURUSD at 1.05480 x 1.05483 and the broker usually charges a 1.3 pip spread, then the broker can mark up the spread in several different ways.

  • Add the 1 pip markup entirely to the ask. The price on your screen appears as 1.05480 x 1.05493
  • Add the 1 pip markup entirely to the bid. The price on your screen appears as 1.05470 x 1.05483
  • Split the 1 pip markup across the bid and the ask. The price on your screen might be as 1.05475 x 1.05488

I of course have no idea which way the broker marks up the spread. If they’re smart, they will price shade in order to earn extra income from the easy order flow. There’s always the risk that the markup could cause one of my orders to not get filled, even though the real interbank market actually touched that price.

I’m doing my demo test at FXCM for three reasons.

  1. Commission only trading. It’s a pure interbank feed, so I don’t have to worry about how spread markups affect my execution.
  2. The commissions are very fair for a retail trader. It works out to $60 per side per million, which is only double the commission that a small institutional trader would pay. Retail rading costs have fallen dramatically in the past few years.
  3. Seer is already plugged into FXCM

When it comes to trade live, I’m planning to trade a personal account at FXCM US and a second account denominated in euros for my Irish company, Dominari (the same one that owns QB Pro). Dominari’s trading will go through Pepperstone, which offers the same commission only setup but 1) charges even lower commissions in euros and 2) offers much higher leverage.

Filed Under: Trading strategy ideas Tagged With: FXCM, limit order, Pepperstone, price shading, programming

Did your broker go bankrupt this morning?

January 16, 2015 by Shaun Overton 6 Comments

It’s an absolute bloodbath in the FX markets. The tide’s gone out and it’s now very apparent who has good risk management systems in place and who was reckless safeguarding your deposits.

Is your broker on this list?

  • Alpari – bankrupt! 
  • FXCM – took an enormous $225,000,000 loss on clients with negative balances. It’s desperately seeking a bailout.
  • EXCEL Markets – bankrupt!
FX brokers get slaughtered

FX brokers are led to the slaughterhouse.

One of first articles that I send traders on the free EAs list is how to protect yourself from a forex broker bankruptcy. It’s absolutely, critically important where you decide to trade.

I trade at Peppertsone and I strongly recommend that you trade at Pepperstone, too. They made it through this crisis unscathed. They’re well regulated. They’re in a safe and stable banking jurisdiction. And… they’re still running a thriving business.

PS: QB Pro made it through the CHF chaos unscathed. We closed out with a nice profit yesterday.

Filed Under: What's happening in the current markets? Tagged With: Alpari, bankrupt, EXCEL Markets, forex, forex broker, FXCM, Pepperstone

Shaun’s Recommended Forex Brokers

October 21, 2014 by Shaun Overton 99 Comments

There are only three questions you need to ask when you’re looking for a forex broker:

  1. Are you going to give me excellent execution with low commissions and spreads?
  2. Are you going to send my money back within 24 hours?
  3. Are you likely to go bankrupt in the near future?

If a broker ticks those boxes, then picking a broker is really just a commodity. I don’t need market analysis or the latest trendy tool. The only reason I’m trading forex is to make as much money as quickly as possible (and to keep it) .

Too many brokers have gone belly up. I put together this guide to help you make an informed decision about who to trust and who offers the best deals.

Shaun’s broker recommendations

Pepperstone Metatrader 4 Forex Broker

Pepperstone is where I trade my live accounts, which says everything. My money is sitting at this broker right now. I’ve met Owen Kerr, the CEO, in person and have a friend in their Dallas office. I’m very comfortable with their banking relationships. They also offer extremely competitive pricing.

ILQ

ILQ caters to large retail customers (people that trade 100mm in monthly volume or more) or CTAs and independent money managers. The upper echelon audience means they do those three important things right. ILQ has a solid reputation in the industy, and based on the endorsement of a colleague that trades with them, I’m comfortable recommending them to my readers.

MB Trading is a US firm that offers the only true ECN available to retail traders. When you post a limit order and it’s better than the best bid or offer, your price shows up in the terminal window. They also offer liquidity rebates, which I’m a big fan of. I’ve known Justin LeBlang for several years and held live account with MB Trading for two years. They’re support is best in class and the technology and pricing is excellent.

Are you concerned about broker shenanigans? Learn how to protect yourself against forex broker bankruptcies.

Filed Under: How does the forex market work? Tagged With: broker, forex, ILQ, Pepperstone

Retail trader disadvantage

October 28, 2013 by Shaun Overton Leave a Comment

Michael Halls-Moore invited a reply to one of my tweets last week, “Retail traders have an advantage over the pros? Me thinks not.” He wrote a great overview of why the institutional traders look longingly at the retail crowd and all the hoops that they don’t have to jump through.

His points are all valid, but he overlooked the big picture. Pricing is everything to a trader. Retail traders get the short end of the stick when it comes to the cost of doing business.

The cost of trading is massively disproportionate

Let’s say that you’re a would be quantitative trader and that you’re looking for opportunities. Let’s say you trade mini lots in the forex market with 60% accuracy and 1:1 risk reward ratios. If you’re not familiar with what a typical trading system looks like, those numbers means that you have an enormous edge.

Some of the less reputable forex brokers out there charge 3 pip fixed spreads. If you’re trading with a broker offering fixed spreads, I urge you to start price shopping. Fixed spreads are wildly overrated. You pay a huge premium for the certainty of a fixed spread. I can’t think of anything remotely plausible to justify them.

The larger forex brokers charge typical spreads in the neighborhood of 2 pips on the largest majors. Although most seem to find this reasonable, the comparison between a 2 pip average spread and institutional spreads is night and day.

Do you know what the average EURUSD spread looks like on the interbank market? It’s often 0.2-0.5 pips. Retail traders pay an average markup of over 300% on their trades.

retail trader pricing

Retail traders facing the institutions is a bit like David and Goliath.

Retail forex prices have declined in recent years. A few brokers like MB Trading and Pepperstone offer raw spreads with commissions tied to the dollar volume traded. These are, in my opinion, are about the fairest prices available to low balance traders running an expert advisor.

The best deal available to semi-institutional forex traders (CTAs, large balance retail traders, etc) is Interactive Brokers. The customer support is famously poor; they’re cheap for a reason. IB also offers raw spreads with a commission.

My experience with IB has been excellent, but you need to trade size for the economics to work. A 0.5 pip typical spread is great, but the 2 mini-lot minimum trade size and $2.50 minimum commission really adds up. Trading with IB doesn’t approach institutional type pricing until your average trade size approaches 1 standard lot.

So, how does pricing affect the final outcome with our 1:1 risk reward strategy that wins 60%?

  • Free trading: After 100 trades, you’ve earned $600 and lost $400. The hypothetical net profit is $200.
  • Fixed spread: You’ve spent $300 in spread costs to enter 100 trades. The total net profit is -$100 ($200-$300).
  • Average retail: You’ve spent $200. There is no profit because you breakeven ($200 hypothetical profit – $200 in costs). However, your broker loves you for doing that many trades.
  • Good retail pricing: Let’s say the average cost of a trade is 1.3 pips after commissions. You’ve spent ~$130 placing 100 trades. The total profit is $70.

Even with good strategies, the profitability of your algorithm is as simple as choosing the cheapest broker.

Equities pricing

Trading stocks is even more expensive than forex. I remember back in the day when I thought Scottrade was cheap for offering $7 commissions. It gets worse and worse when you go through the list of stock brokers. Most of them try to get away with charging $7-10 per trade. If customer service is important to you, then those are the shops to look at.

If your top priority is trading profitably, then again, broker selection is critical. The only way that a small guy can make it is by chipping away at the costs. Interactive brokers is again a great option, charging fractions of a penny per share traded. If you decide to trade 2 shares of Google (GOOG: $1,017 per share) or 1,000 shares of Fannie Mae (FNMA: $2.35 per share), the transaction costs are tiny. Two ticks in your favor is all it takes to cover the trade.

You might be thinking that I said two ticks in forex is expensive. How can I say that two ticks in equities is reasonable?

Volatility. Two ticks in the stock market is a little hiccup. It’s not at all uncommon to see highly liquid stocks move 2-3% in a single day. Forex is only interesting because of the leverage. The currency pairs themselves rarely move more than 1%, and that’s usually on major news.

Risk Management

Every employee knows that they’re only one mistake away from getting fired. That’s the reason that everyone hates having a boss. There’s a single person with unilateral authority to financially murder you. Who’s going to look upon that as a good thing?

Well, the truth is that bosses exist for a reason. It’s someone that calls you out when you do something stupid. More importantly, the boss has the power and influence to ensure that you stop doing stupid things.

The dream of entrepreneurship is not having a boss. You go on vacation when you can, you don’t have to play office politics, you don’t have to waste time selling good ideas. You just go out and do them.

Even with good strategies, the profitability of your algorithm is as simple as choosing the cheapest broker

I can tell you as a small business owner that the negatives stand out strongly in my mind. When you don’t have someone to hold you accountable, even if it’s a mentor, you make many more dumb mistakes than you should. It takes incredible discipline to hold the line consistently. Knowing that I’m not going to look stupid or have to explain myself to anyone probably gives me a lot more false confidence than I really need.

Self-employed traders working at home experience the same thing. Who calls you out when you’re trading just because you’re bored?

The decline in the trading account points out the obvious, but that’s not enough to necessarily stop the bad behavior. We’re social creatures. Most people need to speak with other people to maintain their sanity. When you’re trading at home alone, it takes a lot of effort to ensure that you’re getting enough social contact. A good boss prevents you from indulging in bad behaviors.

Conclusion

Selecting the right broker is enough to determine whether or not a good strategy will wind up making money or not. It’s expensive to trade. The bigger you are, the better your pricing.

Retail trading prices have reached a point where it’s at least possible to trade profitably. Nonetheless, the number of strategy types out there is limited because the lower, shorter term strategies are prohibitively expensive to trade.

The quantitative traders and hedge funds get the more active strategy space to themselves. Their trading costs are so low that they’re really the only people that can afford to trade actively.

Filed Under: What's happening in the current markets? Tagged With: commission, CTA, equities, expert advisor, forex, hedge fund, insitutional, Interactive Brokers, MB Trading, Michael Halls-Moore, Pepperstone, pip, quantitative strategies, retail, risk management, risk reward ratio, spread, stocks, volatility

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