Still Here & Still Trading After a Wild Year

It's been a while, hasn't it? Sorry about that. Most of the silence has been simply because there wasn't a lot to report, since I stopped trading completely for a stretch of several months. During the financial chaos that was the end of 2008, a lot of my trading signals turned out to be worthless, and those promising results back in September 2008 turned into an ugly string of losses. Finally I just had to pull the plug on trading and sit on the sidelines while I reassessed my whole system. When the market hits the fan, sometimes you just need to watch from a safe place and preserve your capital.

I really should've posted about it here, I know, but at the time I wasn't really in the mood. And I also didn't have much time either, since I simultaneously had to redouble my efforts at my real, paying work [Internet stuff] to ensure I stayed financially afloat...which I have, fortunately. If nothing else, a bad streak in forex can remind you just how important your day job is!

But I also came through the storm that ended 2008 with some valuable data to run through my trading system. Maybe the most valuable data ever. It's not often you're able to forward-test your trading signals through one of the worst economic meltdowns in history. If you have a system that made good trade calls in those tumultuous conditions, and was making good trade calls before those conditions set in...well, you have a great trading system. So if you get nothing else from this post, get this - the forex market data from the past year or so is incredibly valuable.

What the data highlighted for me was that a dangerously large number of my signals made foolish assumptions about market conditions, and fell apart completely when those conditions changed. Another way of putting it is that these signals tracked correlations and assumed they were causations - but they weren't. Here's the most dramatic example: I had a signal that assumed that when Bollinger Bands were X pips apart, the EUR/USD pair would always go up. This looked logical because for a long time the EUR/USD trend was upward, and at the times it was going up, the BB bands were indeed more than X pips apart. Well, it turned out the opposite was true to...in a downward EUR/USD trend, the BB bands were also at least X pips apart...and now my trading signal was making all the wrong calls.

So my focus for the past month or so has been using the painful yet valuable results of this forward testing to identify and eliminate these false assumptions from my trading system. And just a few weeks ago I was confident enough in the new, improved system to take it back into the market with real money. So far results are good...it's made back about 400 pips. But whether that success will last is anyone's guess. Part of me feels like I have a winning set of trading signals. But another part of me feels like I'll be right back at the drawing board in a few months. Only the market has the answer to that conundrum. And even then, the answer may have an expiration date: "Signals Only Good Until __" After all, it's happened before. Hmm...maybe I need to start thinking of my trading system as a carton of milk.

Anyway, it's good to be back. I'll try to post more often now that I'm back in the market. Hope your trading's going well...and if it's not, remember the market is telling you something important, even if you don't want to hear it.

Back in the Market After Some Forward Testing, a Bad Carry Trade, and a Bit of Boredom

Hello again, and apologies for this blog's recent suspended animation. For various reasons hinted at above I decided to give forex a rest for a while - but I'm now back and have just made my first foray into live trading the EUR/USD again.

The principal reasons I took a break were:

I was frankly a little bored and disappointed with the progress of my EUR/USD trading system. Out of impatience with its performance, I'd convinced myself it didn't actually work with real trades, it just looked good in backtesting. In fact, I ended up questioning the entire idea of backtesting since it offers absolutely no guarantee your trading rules will work into the future. So I decided to give it a break, and maybe come back in a few months, plug in the new data, and see if my system would've actually made decent trades in that time.

Around the same time, largely because I was disillusioned with my own trading system, I convinced myself carry trading was by far the best way to trade. So I devised what I thought was a very clever hedging system using the USD/CAD to balance the volatility of the carry trader's beloved GBP/JPY pair. But unfortunately I decided this just before the GBP/JPY carry trade experienced a giant melt-down that demonstrated how little I know about carry trading or hedging. So I got burned. Thanks to my stop-losses I didn't get wiped out, but I did get scorched pretty badly. (Did I mention I also broke my own trading rules by taking on way too much risk? Well, I did. And it was dumb.) In case you're wondering what a carry trade meltdown looks like, here's a picture. Congratulations to all the GPB/JPY shorts out there, it must've been a fun couple of months:


But there is some good news after this tale of burnout and reckless trading. As I mentioned, I've been letting my trading system sit idle for the past few months while new EUR/USD price data piled up. This new data was the raw material I needed to effectively forward test my system and see if it actually produced real, profitable trades, not just pretty pictures of historical backtests. When I plugged in the new data earlier this week, I was very pleasantly surprised: my system had racked up a very steady, consistent, profitable trading record while I was ignoring it. Which is why I'm back trading (and posting) again.

One of the trading risks I've described before is the desire to fiddle compulsively with your system, even when it's doing just fine as it is - the "If it ain't broke, don't fix it" problem. Since I'm a bit of a compulsive fiddler, my challenge now is to find something else I can fiddle with to keep me from breaking what isn't broke. One thing I've been wanting to learn for a long time is how to program Metatrader to trade my system automatically using their MQL programming language. I suspect it'll be quite a challenge transitioning all my trading rules from Excel to Metatrader - but if I can get them automated it'll save a huge amount of time over the long term. So if there are any experienced Metatrader programmers out there, any advice on getting started with MQL would be much appreciated!