What are good entries and exits?

Posted on July 30th, 2008 by admin, under online forex trading.

What are good entries and exits?

Given a mechanical Forex trading strategy that contains an entry model to generate entry orders and an exit model to generate exit orders (including those required for money management), how are the entries and exits evaluated to determine whether they are good? In other words, what constitutes a good entry or exit?

Notice we used the terms entry orders and exit orders, not entry or exit signals. Why? Because “signals” are too ambiguous. Does a buy “signal” mean that one should buy at the open of the next bar, or buy using a stop or limit order? And if so, at what price? In response to a “signal” to exit a long position, does the exit occur at the close, on a profit target, or perhaps on a money management stop? Each of these orders will have different consequences in terms of the results achieved. To determine whether an entry or exit method works, it must produce more than mere signals; it must, at some point, issue highly specific entry and exit orders. A fully specified entry or exit order may easily be tested to determine its quality or effectiveness.

In a broad sense, a good entry order in good Forex trading strategy is one that causes the trader to enter the market at a point where there is relatively low risk and a fairly high degree of potential reward. A trader’s Nirvana would be a system that generated entry orders to buy or sell on a limit at the most extreme price of every turning point. Even if the exits were only merely acceptable, none of the trades would have more than one or two ticks of adverse excursion (the largest unrealized loss to occur within a trade), and in every case, the market would be entered at the best obtainable price. In an imperfect world, however, entries will never be that good, but they can be such that, when accompanied by reasonable effective exits, adverse excursion is kept to acceptable levels and satisfying risk-reward ratios are obtained.

What constitutes an elective exit? An effective exit must quickly extricate the trader from the market when a trade has gone wrong. It is essential to preserve capital from excessive erosion by losing trades; an exit must achieve this, however, without cutting too many potentially profitable trades short by converting them into small losses. A superior exit should be able to hold a trade for as long as it takes to capture a significant chunk of any large move; i.e., it should be capable of riding a sizable move to its conclusion. However, riding a sizable move to conclusion is not a critical issue if the exit strategy is combined with an entry formula that allows for re-entry into sustained trends and other substantial market movements.

In reality, it is almost impossible, and certainly unwise, to discuss entries and exits independently. To back-test a trading system, both entries and exits must be present so that complete round-turns will occur. If the market is entered, but never exited, how can any completed trades to evaluate be obtained? An entry method and an exit method are required before a testable system can exist. However, it would be very useful to study a variety of entry strategies and make some assessment regarding how each performs independent of the exits. Likewise, it would be advantageous to examine exits, testing different techniques, without having to deal with entries as well. In general, it is best to manipulate a minimum number of entities at a time, and measure the effects of those manipulations, while either ignoring or holding everything else constant. Is this not the very essence of the scientific, experimental method that has achieved so much in other fields? But how can such isolation and control be achieved, allowing entries and exits to be separately, and scientifically, studied?

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Murray Forex trading strategy

Posted on July 2nd, 2008 by admin, under online forex trading.

This Forex trading strategy is based on the designing of turning zones from lines outlined both by Murray levels, and confidence intervals of linear regression channels. This Forex trading strategy is not a new one and has been constantly discussed at the forums. We just tried to combine the knowledge and bring something new into this strategy.

In the book named “THE (MIS) BEHAVIOR OF MARKETS” BY B.B. MANDELBROT & R.L. HUDSON is demonstrated that there are moments when reliable prediction of financial series is possible and vice versa there are complete chaos moments when reigns any forcasr is impossible. R/S statistics or Hurst’s criterion is applied for the estimation of financial row forecasting possibility.

Results based on R/S statistics:

Areas of reliable forecasting –Hurst criterion differs significantly from 0.5 (Besides, with criteria close to 1, trend methods are more applicable, and with criteria close to 0 – contr-trend ones.)Sites of impossible forecasting - the criterion is close to 0.5 (Brownian motion)

The following provisions are the most important appendices of Hurst Н parameter:

If Н = 0.5, the efficient market hypothesis is confirmed (Efficient Market Hypothesis - EMH), ie, yesterday’s events do not affect today, and today’s events do not affect the future. Events are not correlated and already used and devalued by the market.

In contrast with the Н > 0.5 today’s events will be relevant tomorrow, i.e., the information continues to be considered by the market some time later. This is not simply autocorrelation when the impact of information quickly falls, and this is long-term memory, which causes information influence during big periods of time. Certainly, such influence nevertheless weakens in time, but still slower than short-term dependency. This influence is characterized by cycle length, when it drops down till indistinguishable values. In statistics it is called time of series decorrelation.

Thus, if the fractal nature of time-series is proved, it means that hypothesis of fractional market (Fractal Market Hypothesis - FMH) is proved also, which, in turn, contradicts FMH and all quantitative models, which are derived from this hypothesis.

For quantitative definition Hurst withdrew empirical law in the form of:

H = Lg(R/S)/Lg(n/2)

R - max magnitude of investigated series

S - MQD (medium quadratic deviation)

n - quantity of observations (it is the dimension of the sample)

The essence of the forex trading strategy is in forecasting of trend movements on the channel of linear regression and calculating statistical significance at the Murray line during the moment of approach to the line - determining the probability of a turn.

Within different periods of time the line may have different statistical significance: at one time lines can serve as a resistance (support) towards the price schedule, in another time line could not even be taken into account.

At any given time it is possible to construct a huge number of linear regression channels on the prices graph. The criterion for selection of channels is the standard deviation. Only channels with a minimal and reducing standard deviation will have a minimal error.

So, The situation № 1

The market is growing. Price moves along the linear regression channel and is near the Murray line, which assums stop and turn. Price is at the top of the regression channel *, the Hurst moves to zero.

We enter into a short position.

We set stop - loss behind the following line of Murray (line of resistance).

The goal is nearest Murray line (line of support).

At approach to the goal we make a decision to take profits or to keep a position.

The situation № 2

The market falls. Price moves on linear regression channel and is near the Murray line, assuming stop and turn. Price is at the bottom of the regression channel *, the Hurst moves to zero. We enter into a long position. We set stop - loss behind the following line of Murray (line of support). The goal is nearest Murray line (line of resistance). At approach to the purpose we make a decision to take profits or to keep a position

The situation № 3.

The market is in flete. According to indications of Murray line we make assumptions about further continuation of movement. If we have an open position and its direction coincides with the indications of lines and with the Hurst parameter (for example, in coincidence with the position of the projected traffic rate is close to 1 or 0), then we do not take action with the position and are waiting for achievement of the goals.

The situation № 4.

The market in flete, Hirst indications are close to 0.5. Do not enter the market, all warrants are taken off.

*- Distance from the border of the channel, outlined by confidence interval up to the price defines(determines) probability of a turn. I.e. the closer the price to the bottom (top) border of channel in situation № 1 (situation № 2) the higher the probability of a turn.

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