Profit Target and the Spread

Some online forex brokers now offer 3 to 5 pip spreads in the liquid currencies such as EUR/USD and USD/JPY. These are very competitive prices which a few years ago were unthinkable. As recently as the mid 1990's brokers were quoting 10 pip spreads in the major currencies plus a commission! Thankfully due to the internet, the current boom in Forex trading and the competition between Forex brokers, those days are well and truly over.The excellent value available from trading on tight spreads works very much to the traders advantage. However, some recomend that you avoid overtrading and entering trades for just a 5-10 pip profit or loss. Even trading this way on 3 pip spreads can adversely affect your profitability.

Below are examples of both a winning trade and losing trade when trading for a 10 pip profit or loss:

Winning Trade:
Buy EUR/USD at 1.2020 (price = 17/20)Sell EUR/USD at 1.2030 (price = 30/33)
Market moves 13 pips before taking profit

Losing Trade:
Buy EUR/USD at 1.2020 (price = 17/20)Sell EUR/USD at 1.2010 (price = 10/13)
Market moves 7 pips before taking loss

The above example highlights that the risk/reward of trading for a 10 pip profit or loss is poor. For the same 10 pips P&L, the market must move 13 pips for your winning position, but only 7 pips for your losing position. As a general rule of thumb, Take-Profit or Stop-Loss levels are recommeded by some as at least 10 times the spread you have traded on. This strategy will (should) help avoid overtrading and improve risk/reward. This is being considered in my current system where I aim to take a profit at 10 pips.

Automatic Order Transmission

When the charting software has a signal to buy, it transmits it to the broker software client running on the same computer, your laptop. That software in turn sends the order to the broker office computer for execution. Here the things I have found to be important, to safeguard against things like loss of data connection, or power failure, or anything that could go wrong.

The order is transmitted with a buy order, limit order, and stop order. The buy order has a "Good Until Time" attached to it. I'm going for 10 pips of profit, so once the order is sent, the PC can crash all it wants. I have this portion working.

The next issue is loss of data feed. When the data starts up again, a buy order could be sent, but it might not be current, that’s a problem, and I haven't solved it yet. I haven't actually tried yet.

Right now I'm using 6 pairs to work out the bugs, and while I'm doing this, I'm tracking all the trades in excel and summarizing the trades and pips per pair, and the number of minutes I'm in trades. Once I get enough data I'm going to look at the daily charts and see what the correlation is between good performers and bad performers. I'll look deeper into trading times as well. The plan so far is to trade 2 pairs on the 15 minute time frame. I will try the 1 hour to see results I get too. The comparison of 15 minute time frame to 1 hour can probably be done by back testing. My issue here is most data is dirty, such as FINAM. I see lots of spikes in the data. I may try EODDATA and see what I get.

The nice thing is that this is being testing during the night and day while I'm at work, then I fix the bugs in the evening.

For anyone that is entering orders manually, there is a simple script you could use with Amibroker to initiate your order all at once will little risk of error. It's fast and accurate. I use it to send bracket orders while I’m at work.

"The Squeeze" - Part 2

Here is the code for "The Squeeze" for Amibroker.
I don't think system by itself works very well. It needs some work, possibly using it in conjunction with MACD would work, but I haven't done any work on it at this stage. Feel free to play with it, if you come up with some ideas please share.