Why Forex Trading is Frustrating

Or rather, why Forex trading is frustrating at a bucket shop like Oanda. I really don’t know which is the right statement to make because I can’t be arsed to do the research. I don’t have the time. What I can tell you is that my initial reaction when trading Forex is to take the profit when I’m in the money but my stock risk/reward ratio training always thwarts me. Or is thwart the right thing to write?

Forex at Oanda

Last year in November I made a simple trade shorting the EURUSD pair. I thought that the Euro was going to weaken because of all the problems it has with Brexit and Italian Bonds. I also thought the USD was going to strengthen because of consumer confidence and the Fed continuing to gradually raise rates.

In Forex trading, stop hunting is a favorite past time…

I had $125 dollars in my Oanda account and on a whim I just shorted the pair. Oanda is a market maker (aka bucket shop) which allows new Forex traders to open an account with as little money as $10 USD. They make their money by charging you a spread for the currency pair you want to trade. For the EURUSD it’s about 1.3 pips and for something like the USDZAR it’s like 80 pips. These spreads vary based on market volatility too.

So far, my initial thought on the EURUSD being in a downtrend has been underwhelming.

EURUSD Position

One of the things I’ve learned when trading with a bucket shop is that they know where your stops are. Stops are a great way to protect your position in case you are wrong. In Forex trading, stop hunting is a favorite past time, so you’ll immediately get stopped out and watch the market reverse and go back to being profitable if you weren’t stopped out!

I was hamstrung by my risk to reward thoughts.

So I trade without stops and it causes me to take on a lot of risk, too much for my liking these days. I’ve watched my position go from a small gain of 20+ pips to an easy loss of 200 pips.

EURUSD 2019-01-27

Above is snapshot my current Oanda trading screen. The little triangle in November is where I went short. You can see that in a few days I was profitable, my gut instinct said, “Take the profit and run!!!” However, my risk to reward training said, “No, you need to make 2X what you risked!,” so I stayed put and watched my position go from winning to losing. Then in late December I was profitable again, did I take profit? Nope. I was hamstrung by my risk to reward thoughts.

Fast forward to last week, I almost closed out my position with a 30 pip gain, after surviving a 200+ pip loss on paper. I almost did, but didn’t because my risk/reward training thwarted me again! Ugh!

How stupid is all this? On paper I risked 200 pips to make in theory 30 pips. This is why Forex trading is frustrating. You have to take on more risk than what your possible reward could be.

Risk/Reward Thwarting

I really shouldn’t say that my training in risk vs reward is thwarting me, it’s not. It’s warning me. I should listen to it because it’s the one thing you should really learn, internalize, and listen too when trading in ANY market. If you risk $1.00 to make $0.50, then you’ll go broke eventually. You will be wrong about the market no matter if you use technical analysis, AI, algo-trading, etc. You WILL be wrong and all it takes is being wrong once with bad risk vs reward ratio to blow up your account.

Carry Trade

There’s one thing that I completely overlooked with this trade, it’s the carry trade. The USD is a higher interest rate than the Euro, so I’m making some money from the interest of holding long USD and shorting EUR. So that’s been a plus, but it doesn’t negate the potential disaster I could face if the trend suddenly reverses and the EUR goes higher.

The fact that the EURUSD has been bouncing around at this level for the past few months is telling me that the downward trend is possibly over. It’s quite conceivable that some bizarre Trump Trade news can wreck havoc for my current position.

What Works; What Doesn’t Work

In my “What Works; What Doesn’t Work” post, I remember what I wrote for list number 3.

Day trading doesn’t work for me. I blow up all the time. What works for me is swing and trend trading. Do more of that and no day trading.

I’ve always found that the route to success is truly knowing yourself (what your weaknesses and strengths are) and doing more of what works and less of what doesn’t. Maybe I should amend #3 to include Forex or just stick with Passive Investing.

How Passive Investing Saved My Life

Passive investing saved my life in many ways, but not in the way you think. It didn’t swing from the trees like Tarzan and snatch me away from a charging Rhino nor did it give me a Flu shot. It did it in two main ways: Saving my time and avoiding costly mistakes. How? Read on my friend, read on. Continue reading “How Passive Investing Saved My Life”

Mean Reversion Trading Process in RapidMiner

Lately I’ve been think about becoming more active in trading again. I was reviewing some strategies and decided to recreate a mean reversion trading process in RapidMiner. I found a mean reversion trading strategy that uses Python here and just recreated it in RapidMiner.

The Process

The process is quite simple. You do the following:

1. Load in stock quote data via CSV;
2. Calculate daily returns;
3. Calculate a 20 day moving average;
4. Calculate a rolling 90 day standard deviation;
5. Generate Trading Criteria per the article
6. Wrap it all together and look at the Buy vs Hold and Buy Signals
Mind you, this doesn’t include commission costs and slippage. I suspect that once I add that in, the Buy and Hold strategy will be the best.

PS: to test this, just go to Yahoo Finance and download historical quote data for a stock and then repath it in the Read CSV operator. Use at least a 2 year time period.

Next Steps

I still have several ‘kink’s to work out but I can definitely see the opportunity for optimization here, such as:

  1. Why use a rolling 90 day window? Use parameter optimization to vary that value from 50 to 100.
  2. Why use a 20 day moving average? You could vary between a 10 or 30 day MA?
  3. Write a python script to download EOD stock data and then have RapidMiner loop through it.
  4. Write an commission and slippage subprocess to see if this method IS really profitable or not.
  5. Offload the processes to a RapidMiner Server and have it spit out trading recommendations on a daily basis