- Exploiting Order Flow for the Discretionary Quant - Part 1
- Exploiting Order Flow for the Discretionary Quant - Part 2
- Simple Mechanical Trend Following in the Forex Market
- Is a Reward to Risk Ratio Inherently Better Than Another?
- Robots Aren’t What They’re Cracked Up To Be
- Creating a Trading System Using Neural Networks
- Function Based Trailing Stop Mechanisms
- The Seven Deadly Sins of Automated Trading
- Exploiting the Volume Profile
- Building Robust FX Trading Systems
- Know Your Currencies
- Automating FX Trading Strategies
- Grammatical evolution
- Identifying an Edge
- Interview with Salvatore Sivieri
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The reason that these systems have proven to be robust is almost certainly because there is a sound rationale behind why they work. The CBO system relies on the fact that markets trend. It has been shown that they often have larger trends than would be expected in a ‘random walk’ or ‘normal distribution’, often displaying ‘fat tails’; examples of which are almost countless, with many ‘Black Swan’ events happening as recently as last year.
The ORB system has worked well in the futures markets, as they have a fixed open, from which to define an opening range, and all futures markets display similar volume characteristics; as illustrated by the following sample of S&P volume on the CME, taken over several months in 2008 (Local Exchange Time).
This has remained constant over time and is something that the legendary Monroe Trout also observed. In Jack Schwager’s book, ‘The New Market Wizards’, first published in 1992, he is quoted, as saying,
‘The most liquid period is the opening. Liquidity starts falling off pretty quickly after the opening. The second most liquid time of day is the close. Trading volume forms a U-shaped curve throughout the day… Generally speaking, this pattern holds in almost every market. It’s actually pretty amazing.’
Foreign Exchange vs. Futures Markets
However, to develop robust FX trading systems, we have to take into account that FX behaves differently to a typical futures market, and unfortunately there is no fixed open or close; Asia is already trading as Europe comes in, followed by London. Similarly with the ‘closes’; New York and Chicago are still trading, while London and Europe are going home.
This is probably why it is considered more challenging to build successful FX trading systems: The opens and closes of futures markets are not random events and have distinct, non-random characteristics.