Man vs. Machine: Forex Robot Trading

Forex trading has grown exponentially in recent years giving rise to a vast and booming new industry including the advent of numerous new banks and brokers, software platforms, trading methods, and other related tools. With the gradual ubiquity of high-speed internet, Forex trading has become ultra-popular due to its flexibility, low cost, high liquidity and long operation hours. In Forex trading, there are primarily two main methods of trading – manual and automated. When you trade manually you open and close market orders yourself. You can still use a variety of functions such as pending orders, stop-loss, take-profit and trailing stops, but the trading decisions are always yours. In automated trading you delegate all your trading decisions to a computer program which is also known as a robot or expert advisor. Surely, you can control it by entering some parameters or changing various settings, but all orders are carried out by an automated system.

In recent years, the rapid development of “robot” or automated trading in the Forex market has received an incredible amount of attention. There is no doubt that the dream of having an investment that creates untold riches on its own with almost no outside interference or interaction from anyone is extremely attractive to most people. A cursory review of major Forex related websites and their associated forums, blogs and ad columns reveals that robot traders are a fast changing, highly active and intensely competitive business. However, what it also reveals is that many of those creating the robot traders are the same authors and supporters that extol the virtues of using them.

On the surface, the advantages of robot trading appear to be many. Today, computing and information technology has developed to a very high level. Computer calculations can be thousands of times faster than humans and can perform without error at incredible speeds with flawless accuracy. Furthermore, robot trading can be more efficient than an average human trader as it is not limited by fatigue nor prone to mismanagement or negligence and can never be affected by the onset of frail human emotions such as greed or fear. In addition, a robot trader can take a high number of trades more frequently and is able to manage multiple, even unrelated, trades simultaneously as well.

While these seem to be very impressive and persuasive arguments for the use of a robot trader in reality the performance is mixed. Surely, there are many robot trader programs that can have amazing performances over relatively short period of time. Many marketeers profess to have found the ‘holy grail’ and promote their products as “easy money” and a way to “earn while sleeping”, but we have found through a great deal of thorough testing a number of various robot traders that claims like these are dubious.

The fact is, most robot traders are very simple. A robot that is designed to take into account long term probabilities, historic support and resistance, master fibonacci levels, market structure, macro-economic fundamental events, volume, systemic disparities (such as ebb and flow of risk appetite and fluctuations in the carry trade, etc..), detecting divergence and setting dynamic (an realistic) stop losses are definitely few and far between. Due to this fact, most robots cannot survive the long run without major draw downs in account equity. Some operate with questionable money management and many remove stop losses altogether (if that is actually a way to prolong or perpetuate success).

Automatic trading appears to have great potential but their ‘intelligence’ is limited to programming. Certainly, while many of the weaknesses of human manual trading are seemingly eliminated with robot traders most robots manufacturers know that robots cannot solve all the problems associated with trading. Discretion and judgment are some advantages that humans may possess over their robot counterparts, although even these can be subject to errors. We have tested numerous robot traders and have yet to find one that can be consistently profitable for any appreciable period of time. All have lost money in the long run. Perhaps, the best automatic system has yet to be developed and that the answer is only a matter of time. Currently, the market is full of empty promises and even emptier computer codes which cannot truly offer a reliable and valuable automatic Forex trading system. Perhaps, the combination of a robot trader and a manual trader could combine the best characteristics of both. In any case, without good money management neither can succeed for very long.

Forex Expert Manager

As we know that foreign currency market can give investors an opportunity to participate in the exciting world of forex trading. With daily average turnover of well over US$1 trillion - 30 times larger than combined volume of all U.S. equity markets - forex market gives unlimited potential profit to forex traders everyday. But without adequate skills, knowledge and experiences, it would be too hard to gain profits from forex market. And statistics says that more than 95% forex traders has lost their money in this jungle market.

And now I encourage myself to offer you Forex Managed Account service on investor’s trading account behalf. I will trade professionally on your trading account and only charge you 30% from your monthly total net profit. You don’t have to pay anything unless you see profit in your account balance.

A forex managed account is also ideal for those investors who prefer to have their capital managed by professionals. This is a viable solution for individuals who are looking to diversify into Forex without hands-on involvement. It is an effective way for retail nvestors to benefit from the knowledge of professional traders.

If you are interested to join this Managed Account service, you could register from one of following brokers under our referral:

• Master Forex
• Insta Forex
  

( More brokers will be announce as soon as they are available ).

Before you join this Managed Account Services, please be noticed that I use Martingale System which is considerable as a high risk system. We may gain high profit, but also can wipe out our trading account as well. This system may not be suitable to every investor. So please let me know if you are ready to take your risk.

Please make sure you confirm whether you registered under my referral or not, as I will not trade for account which is not my referrals. Minimum deposit is $1,000 and will be traded in mini dollar account. You can make deposit to the broker you choose after you get my confirmation.

Detailed steps to join this Managed Account services :

1. Register your trading account from link : Insta Forex or Master Forex.
2. Send your account number and trader password to me via email, so I can check if you are registered under my referrals.
3. After we confirm, then you can make deposit at least $1,000 into your trading account in the forex broker you choose.
4. I will trade your account starting from the first week of the month.
5. When your account is in profit next month, you have to withdraw your profit from your forex broker and send me 30% from your net profit for my performance fee. Performance Fee Payment will be made using Liberty Reserve, Webmoney or Paypal.

I hope this would be clear to you. Shall you have more questions, please feel free to contact me. Thank you.

News trading

I certainly came across enough of the news trading marketing from the trading marketing wizards to have my curiosity peaked. I did my own investigation into how things are in the world of news trading as compared to how it was done when I first got into the forex business a few years ago. My first purchase was the ‘Forex Bootcamp Papers’ ebook by Tom Yeomans, which goes over the general method (of trading expected versus actual news data releases), as well as some background of the various data releases and what they they mean to the economy of that country.

I trialed the Trade The News audio broadcast service for a week. I can see how this would be useful in keeping abreast of relevant news items as they break during the trading day but it definitely did not seem adequate to the task of allowing you to the trade the economic data releases the second they are released. It obviously takes the presenter time to read out the relevant numbers, which can often take up to a minute or so, depending on how many numbers are being released at the same time.

I then investigating some other services being offered to help the cash strapped trader make the big money trading news releases. The fastest way to get the news data is either by subscribing to Bloomberg or Reuters; unforunately, signing up for these can be rather expense. Bloomberg is $1700 per month and you have to pay for the first three months up front, as well as signing up for a minimum contract period. The latest batch of forex news trading services use these more expensive data feeds, and then can pass on buy or sell recommendations if the actual data release is sufficiently different from the expected figure. Bloomberg does not let these services forward on the actual data release figure, but does allow them to forward on the deviation amount between the actual and the expected numbers.

I signed up for a month with ForexMasterMaker (which is a terrible name I think), as they offered the generic service of being hooked up to Bloomberg at their end, and passing on the deviation figure to their clients, via an online chatroom setup in Omnovia. While this basic service seems to be no more or less than what is offered by several other competitors, I was intrigued in that they were soon to release an application that each client could have installed on their own PC that would receive the deviation information and auto trade the news release, thus hopefully bypassing the time lag in even having to comprehend if the news release was tradeable or not. Set up your deviation parameters in the application and let it decide on whether a buy or sell trade is warranted. Unfortunately, this auto trade application has yet to make an appearance, so I can’t comment on how useful or successful it might be.

I have sat in on enough data releases now to have a fair idea if it is an approach that will work for me. At this stage I think I have to side with pretty much everything that Dirk says in this latest newsletter.

When it comes to trading news data releases there are basically three strategies that can be applied:

1. Trade the spike.
2. Fade the spike
3. Trade the aftermath of the spike in the minutes that follow the news release

Let’s take a quick look at each of these in turn. To trade the spike you need to know which direction the market is going to go immediately, and then get in your order before everyone else. All the forex news services that purport to help you trade the news that are hooked up to Bloomberg are trying to do just this. They have their ‘trigger’ values set up, that if the actual data release is sufficiently different from the expected data then the market is guaranteed to go in a certain direction.

As Dirk mentions in his newsletter most of the big players will sit on the sidelines of these news releases, which means that the amount of liquidity that will be available at the time of the news release could be anything. The other two enemies of the news trader trying to make money on the spike is time and their broker’s spread (assuming that their broker even allows them to trade the news in the first place). To make money on the spike you have to get your order in before anyone else. It takes time for the deviation amount to make its way from your news trading service to your PC. It takes time for you to process that information and make a judgement as to whether you want to make a trade or not, and if that trade should be a buy or a sell. It then takes time for your order to go from your PC to your broker’s server. Having an application on your PC that makes that split second decision for you (such as the one that ForexMasterMaker.com are supposedly working on) can definitely cut down on the time here, but how can you guarantee that you’ll be able to beat everyone else who is doing the same thing? Someone with more money can have their setup to be faster; they could have their computer physically located closer to Bloomberg (which is in New York), to cut down on the time it takes the Bloomberg data release to arrive at their computer, as well as using a broker that is also physically located in close vacinity too. They could pay to use dedicated internet lines to make sure they have the least amount of latency possible. This is a battle that the small retail trader will never win.

The second major impediment to trading the spike is your broker’s spread. The broker mentioned in Dirk’s newsletter that he says that recently started to widen their spread around news releases can only be Oanda. Brokers need to be able to make money to stay in business. A deal desk broker will generally be losing money on news releases if you’re making money. To dissuade traders from placing orders around news releases times they will widen the spread, thus making the chance of a quick profit on a sudden market move relatively unattractive to the trader. More often than not, the spread will widen dramatically just after the news release. I witnessed multiple instances where even if you had gotten in with your order before the spike occured, the spread would widen to such an extent that it was almost equal to the amount of the spike. Exitting for a quick profit is then next to impossible. Your only chance to evade the spread conumdrum is to use a broker that does not use a dealing desk, and uses an ECN. If nothing else, my investigation into news trading has resulted in my evaluation of forex brokers as they stand today. Things certainly move at pace in the world of forex brokers, and there have been some nice new features that brokers offer that were not available a few years ago. I have opened up back up brokerage accounts with Oanda and EFX as a result of this latest broker appraisal.

A third reason that spike trading won’t get you very far in the long run goes back to the liquidity issue. If you are trading a small amount of money then getting a fill on your order should generally not be a big deal (if you are quick enough to get in before the spike). Things are a world apart if you have a lot more money and are trying to get a fill on an order for a huge position. You will more than likely not be able to get a fill for your order all at one price, and who knows how much of a gap there will be between ticks. You could find yourself with part of your order filled at the bottom of the spike, and the rest of it filled right at the top of the spike. Not exactly an ideal situation in which to find yourself. Of course, most people trading the news don’t have such large accounts, so it’s not exactly something they have to worry about!

Let’s move on to the second possible news trading strategy: fading the spike.

This one is tricky in that there is no real way of knowing beforehand if the spike is going to fade at all. At least when trying to trade the spike you can use some quantifiable data (the news release itself) to determine if you have a valid trigger to enter a trade. The most popular entry technique for fading the spike is to fade if the actual news release is pretty much in line with the expected data value; if a spike happened anyway, then the reasoning goes that the expected data number was already factored into the market, so it should return to that price level given that the actual news release is in-line with what was expected. I have no statistical analysis to back up if this reasoning is an edge or not, but to me it seems to be more of a crap shoot than anything else. I think it equates to attempting for a quick scaple move.

The final strategy involves digesting the news release, waiting for the spike to do its thing and then making a decision if there is a trade to be made. In Tom Yeomans’ words: ‘Using your brain’. If your trigger value is conservative enough, then after a spike and fade there should be a good chance that the market will move in the direction as dictated by the trigger. The market should move over the coming minutes in that direction. An entry is made if the spike fades, or else at market if no fade appears. A predetermined profit objective level is used to know when to exit the market (generally some previously identified support or resistance level). If anything this is a microcosm of the relation analysis advocated by Dirk. The danger here comes from the random nature of the market as such short time frames. I don’t have enough experience of using this sort of trading method to comment further on it. This final strategy seems to be the methodology used by Tom Yeomans, as he uses the Trade The News audio broadcast to receive his news data, and is thus not attempting to trade the spike at all. He is also very conservative in the trigger values he looks for; far more conservative then most of the other news trading services that are currently out there.

And that is news trading in a nutshell, as it stands today.

Not quite the walk in the park that all the forex marketing wizards would have you believe.

Trade carefully.

Don’t trust your broker, but trust your forex counter party

Because the forex market is not a centralized exchange regulated by exchange rules which assure participants that their transaction will be honoured, you have to trust your counter party. What makes this dynamic so interesting is that your counter party also has to trust you and that if this mutual trust is violated someone is going to come short.

Unfortunately retail traders are prone to seek opportunities to exploit the perceived faults in their counter parties’ armour. The moment that this threatens the sustained profitability of the counter party these schemes fall flat – they always have and they always will.

Scalper arbitrage was probably the first of these schemes. As marketing wizards competed to lure more clients, they decreased spreads and margin requirements which opened opportunities for arbitrage pip scalpers to enter the fray using a variety of tricks at the expense of their counter party – the market maker. The pip scalpers had fantastic demo account track records. Things changed the moment the market makers’ (real) money was on the table. This was probably the first fight that the retail traders (the pip scalpers) lost hands down against the market makers, who simply instructed their dealers to identify the pip scalpers who didn’t heed the warnings, and take them out. Problem solved.

The second one was straddling news releases. The thing the retail traders tried to exploit was marketing wizards luring clients with guaranteed fixed spreads and guaranteed stops. It was basically just the US non-farm payrolls that really attracted this group a few years ago. They would place entry orders on both sides of the market just before the data release. Apparently a win-win scenario. So what did the market makers do? They refused to guarantee that they would execute your price on the level you had entered it. As a result they could enter you at a bad price and then take you out on the stop on the retracement and even if you then made money on the other leg of the straddle, it was hardly enough for you to cover your loss on the first stopped-out leg.

However, systemic risk for the market maker remained a problem. If a few hundred or thousand retail traders take 100:1 and 200:1 bets on a data release, the market maker became seriously exposed. Market makers are there to make money, not to run the risk of blowing up on one economic data release.

The problem was that they had to cover themselves against the positions taken by the non-farm payroll straddlers by hedging their exposure at their own clearing houses. Now you try to convince a big bank dealer to take a huge position one minute before non-farm payrolls release. He will send you packing. So the market makers couldn’t off-set their risk and thus had to carry the risk of huge and highly leveraged positions themselves. One bit of bad luck and a whole month’s profits could be wiped out.

The market maker makes the rules

There was a particular non-farm payrolls day a few years ago during which, just before the release, the market was run up about 60 or 70 points and on the data release it was run down about 150 points. Blood flowed on “Forex Street”. The shoot-out was rigged. Rumours abounded that a large futures company caused this outrageous price movement. The market makers had had enough and changed the rules of the game to restore order and prevent news release straddles that could harm them.

How did they do this? Well, they made adjustments to their business practices and their contractual arrangements with clients. Spreads are fixed under normal market conditions and so stops will be honoured under normal market conditions, but not under abnormal market conditions – market makers were free to widen their spreads and thereby pass the risk on to the trader. Sometimes they simply wouldn’t allow traders from entering orders shortly before keenly watched data releases. And the decision as to what constitutes normal and abnormal market conditions rests exclusively with the retail forex market maker. Problem solved.

The Class of 2006 News Traders vs Market Makers

Straddling is no longer an option, so News Traders do the next best thing. They try to beat the gun by guessing the direction of the market’s first move, and then they try to benefit with highly leveraged positions.

There are a few challenges, however:

Being fastest on the draw. This means you need to get a good price close to the pre-release price and before your market maker removes the arbitrage opportunity (initial price spike according to News Trading theory) in an instant.

Being fastest on the draw also means you have to draw faster than the rest of the mob trying the same thing. The risk of them jumping the gun enters the equation.

Before you can actually start drawing to shoot, you have to decide what this data release actually means and how all those who react after you, will react to the data release. What will have the main and immediate affect, the headline or the details?

In other words you must take a guess if this data release will indeed cause a large enough move for you to risk taking the highly leveraged position and secondly, you have to guess correctly the direction of this move vis-à-vis the US dollar.

Opportunists who can see what is going on don’t try to jump the gun but jump in counter the first spike, causing more erratic price movements.

Here is a challenge for anybody who thinks he is going to make a living by consistently beating the odds in a well-publicised shootout with the ever-evolving dynamics I have described above.

Let’s assume you will be able to beat the gun and regularly get an extremely good fill on your news trade. All you will be dependent on then is to analyse the market correctly to understand if the first spike will be up or down (let’s look at it from a USD perspective).

How do you determine that? Well that’s the question, and it doesn’t have a simple answer, despite what the News Trading gurus, analysts and TV talking heads say. There are simply too many factors playing a role: the history of this particular data release, expectations, how far expectations are off or might be off, the actual figures of the data release, the expectations’ reaction to its own expectations, the expectations reaction to the data, it just goes on and on until the final result is just another bout of randomness.

If you don’t believe me try tossing a coin over a period long enough to get a representative sample and then compare your results with that of your guru’s. News Traders – architects of their own demise.



Let’s look at the dynamic the Class of 2006 News Traders cause in the FX market:

They don’t straddle the market beforehand. They jump in the market on the data release mostly in the same direction (there aren’t many gurus promoting this loony method to lose money). What happens? They cause a sudden great demand for a currency, let’s say euro. As a result euro’s price spikes up - I am talking a few seconds. Our news traders’ orders get filled usually at a worse price than they had hoped for but nevertheless they are in the market and then two things happen – this is before most professionals, still looking at the details of the release, even paid attention to the immediate price action. First this sudden demand just vanishes, so there is no upwards momentum to cause the follow-through the news traders hope will give them their measly pip target on their highly leveraged position. Secondly the weak “highly leveraged” hands with a few pips profit decide to get out, and in a wink there is suddenly euro supply and a turnaround materialises.

During all of this you have a market maker trying to make a decent market for decent clients and now having to manage this crazy action in a traditionally illiquid market. It took a very prominent forex market maker specialist - in fact the one currently with the highest net capital according to the CFTC reporting - about two months to figure out that they have a bunch of hooligan traders on their hands that could cause them serious damage. Their response, as I mentioned above, was to start fooling around with the spreads in order to discourage and chase away News Traders.

Fixed and floating spreads are a topic of a future newsletter, but understand this: widening spreads, thus increasing the cost and the risk to deal, is a basic protection mechanism of the forex market. In the week following 9/11 the New York Stock Exchange was closed as a protective measure against market meltdown. The forex market increased the spreads to 30 - 40 pips on the most popular pairs and 80 – 100 pips on the less liquid pairs.

News Trading is fundamentally an arbitrage opportunity, but like all arbitrage opportunities it will vanish very quickly if the market catches on. There is already evidence that this is happening and this evidence is clear from the reporting of the sudden change in fortunes of some of the gurus now selling this as a subscription opportunity. Whereas past records are reportedly flawless, recent records are certainly not.

In this case, just as with the initial pip scalpers, the arbitrage is basically a duel between the mob of retail traders and their market maker. There will only be one winner. The death knell for News Trading as a popular strategy



Why do people latch on to News Trading? Because they buy the pitch sold to them by marketing wizards that News Trading is the new way to become a consistent winner. There is no other reason. Unfortunately marketing wizards have already realized that News Trading can make good money for them (but not for you). Here is the proof:

One of the biggest forex marketing wizard companies is behind the popularisation of the 2006 News Trading fad. You must understand that News Trading only makes sense if it is done highly leveraged and very regularly. According to this specific crowd you must push the leverage and you must, wait for this, “place close stops”, because “it will be suicide to use the high leverage without close stops”. (And this is true, but it is only a half-truth, and as with all half-truths it is the other half that kills you.) If this strategy were to be put forward by an individual he would appear foolish. But touted and encouraged by a market maker and their introducing brokers it appears legitimate and savvy.

I downloaded a free report some two years ago from a company. The report gave statistical evidence regarding very short-term price behaviour and supports my contention that it is basically random and that there is no edge to be derived from searching for repetitive linear patterns in these very short-time frames. This company has now changed its view on the randomness of short-term price behaviour. Needless to say they now push News Trading. Unlike some outfits who ask subscription fees for their services (guessing which way the market will go after data releases) everything is free, but you must open a trading account to use their automated News Trading service at the big marketing wizards mentioned above. Even documentation prepared by the big marketing wizards above is provided by this company.

It is pretty clear who sits behind the current popularisation of News Trading. The beneficiaries of regular highly-leveraged-tight-stop trading strategies are the market makers and their marketing agents who promote the viability of this kind of hair-brained trading.

(I again want to point out that while professionals may even play along and have a punt on some data releases it will never be a consistent feature of their professional strategy to expose themselves to any great degree. Yet this is what you are encouraged do: take all your trading capital, gear it up like crazy and take a punt on what is essentially an event with a 50 / 50 probability of satisfying your highly leveraged bet. The placement of a close stop practically ensures that in every instance you do not make money, the market maker gets a nice pay out in addition to whatever he made on the spread.)

And that is why I say you can bet your bottom dollar that most fools who try News Trading will lose. Different game, but the same people are selling it. Here is an example of why you should be very afraid.

A prominent and respected analyst at one of the largest market makers (and marketing wizards) wrote an article on News Trading in which the technical analysis approach to intra-day trading is debunked. Now this should make your ears prick up because they were (and still are) the very ones punting it – to take your money. Ever innovative, they have come up with News Trading as the big new thing, though in this research article news trading in the spot forex market is discouraged. So what is the solution – can retail traders win?



Yes they can win. They can win if they first of all do not fall for the tricks of marketing wizards. In order to be able to do that you must understand the market very well. Secondly you need to have a strategy that is, or has aspects of it, used by professionals.

Thirdly, and this is very important - you must not catch the unwanted attention of a market maker.

Do not violate the trust relationship that is supposed to exist by trying to exploit weaknesses in the system and create a scenario where your market maker can only lose. He holds the aces because he can change the rules of the game. If you have a strategy that offers a winning edge, you will be able to negotiate this market and make money without resorting to any fundamentally flawed concepts and tactics which attract the sort of attention from your counter party that will end up costing you money.
There is more than one way to make money trading any market and there are a myriad of factors playing a role in being successful, including having a scientific edge, being a master of relevant analysis and working through the constant changes in the markets. Success as a trader does not come cheaply, it does not come overnight and it does not come from running after every fad touted by marketing wizards. Success is hard earned, requiring application of, and dedication to, sound trading and business principles.