About Trading Forex

FOREX
international foreign
exchange trading
Why is this presentation in English?
• The vast majority of worthwile literature on trading is

written in English
• Almost all trading platforms are in English
• Terms, used in trading, come from English and often
there is no meaningful translation available
• Most valuable resources on the internet are in English
• You need to get to grips with the correct terms in
English to be able communicate with other forex traders
abroad effectively
Forex trading - Mendel University

michal.kreslik@gmail.com 2
Why there is a currency market in
the first place?
• Companies, institutions and people in general
need to be able to exchange money in order to
be able to pay for goods from the foreign
countries
• All of us are in fact investors on
the currency market since all of us
hold some amount of currency.
Currency holders invest in the
economy of the issuer of the
currency they hold
• There are free-floating and pegged
currencies
Quick quiz
What is a market?
Market is a huge amount of people.

All markets are created when two or more
people have an equal disagreement on
value and an agreement on price.
“Price is what you pay, value is what you
get.” - Warren Buffett
What is a forex market
• FOREX, or FX stands for FOReign
EXchange
• FOREX is an OTC, or over the counter
market: unlike equities, there is no
centralized exchange for forex trading
• FOREX is a spot market: the trades are
not settled up in the future (like futures
or options) but rather immediately
• FOREX is an interbank market: the core
players in the forex market are central
banks, commercial banks and investment
banks. The prices on the foreign
exchange market are determined to
large extent by these interbank
participants
US Federal Reserve Bank

• FOREX is the the largest and the most liquid market
on the planet with $1.9 trillion daily trading volume.
• It is estimated that the
retail currency trading
volumes total $25 to $50
billion a day, a tiny fraction
of the $1.9 trillion-a-day
currency market but not far
off the $60 billion average
daily turnover on the NYSE
• FOREX trades 24 hours a
day, 7 days a week.
Trading moves across
borders and around the
globe with the clock
• 7 major currencies account for about 85% of
the daily trade volume: USD – US dollar, EUR -
Euro, GBP – British Pound, JPY – Japanese Yen,
CHF – Swiss Franc, CAD – Canadian dollar,
AUD – Australian dollar
• Major pairs traded on the forex: EURUSD,
GBPUSD, USDCHF, USDJPY, USDCAD,
AUDUSD. The most important currency in the
world is USD
• Cross rates are pairs where neither of the two
currencies involved is USD. For example:
EURJPY, CZKJPY, AUDNZD
• London, UK, is the centre of FOREX trading,
just as New York, NY, USA, is the centre of
stock trading. The most prominent financial
forex trading centers in the world are London,
New York and Tokyo
Chase Manhattan Bank, New York
What is the difference between
investing and trading in general?
• Buy & hold = investing
• The performance of trading systems is often
measured against the “buy and hold” strategy
• Investing is only possible by buying the security
• Trading is an active effort – trades don’t last so
long as the conventional investments do
• Trading = selling short & buying, too

Gold standard and fiat money:
Bretton-Woods system, 1944
• Bretton Woods Accord

established a fixed exchange rate
regime in 1944, whose aim was
to provide stability in the world
economy after the 1930ies’ Great
Depression and the World War II
• This accord fixed the exchange

rates of major currencies to the US
dollar and set the price of gold to
$35 per ounce. The accord required
central bank intervention to
maintain the fixed exchange rates
Gold standard and fiat money:
free-floating currencies, 1971
• The US Central Bank was required to exchange
dollars for gold, which eventually let to the
demise of this system, when the demand for
the dollar declined, as well as the gold
reserves, forcing Nixon to stop the exchange of
dollars for gold, effectively ending the system
in 1971
Richard Nixon
• The Bretton Woods system ended on
August 15th, 1971, when US President
Richard Nixon ended trading of gold at
the fixed price of $35/ounce. At that
point for the first time in history, formal
links between the major world
currencies and real commodities were
severed

Gold standard and fiat money
• Almost every country in the world is on a system of fiat money
• Money by itself is intrinsically useless - it is used only as a medium
of exchange
• Commodities always possess some
intrinsic value. Currencies do not.
This is the most important
difference between the commodities
and the currencies
• Paper money is totally useless all by
itself (50 mil. pounds robbery,
money laundering)
• Currency value is entirely dependent
on demand and supply
• Ithaca hours, Gresham’s law (bad
money/good money) Got soybeans?
Bringing retail forex trading to life
• Prior to 2000, retail forex
trading was largely unknown
to the public since there were
almost no forex brokerages
nor were they regulated
• Commodity Futures
Modernization Act of 2000
has been approved by US
Congress on December 15th,
2000 and signed into law by
president Clinton on
December 21st, 2000
• Among others, this act allowed the CFTC (Commodity Futures
Trading Commission) to regulate and oversee the Forex
brokerages
• Historically, only big banks, institutions and big corporations
were allowed to trade on forex – this has been changed
Why forex is becoming so popular
recently with retail investors?
• The Chicago Mercantile Eschange (CME)
introduced the E-Mini S&P and Nasdaq 100
contracts in 1997 and 1999 and stocks were going
“forever” upward in the nineties, so retail
investors were not interested in forex at that time.
Well-established currency contracts were traded
through CME
• BUT, In 2000, the stock market collapsed (dot
com bubble), technology and other stocks tanked
• Retail forex brokers were ready to take orders
online
• The trading hours are not limited. No sessions.
Forex trades 24 hours a day, 7 days a week
(Saturday and Sunday are weak days when
almost no trading occurs)
• No opening gaps in forex

Why forex is becoming so popular
recently with retail investors?
• Massive liquidity means getting in & out of
positions is not an issue
• Stops are guaranteed
• You pay only the spread, retail brokers
usually offer Level II spread + several pips
• Zero commissions, almost no slippage
• Currencies don’t have accounting scandals
or wayward CEOs
• Futures: problems with calculating
continuous contracts
• Futures, options, stocks: lower leverage
then forex
Bank of Riyadh

Quick quiz
How many days do all the citizens of the Czech Republic
need to work (to produce Gross Domestic Product)
to make up for one day’s worth turnover
on the forex market?
11.8 years.
(2005 GDP of the Czech Republic
= $161 billion,
daily forex turnover = $1900 billion)

Major currencies:
USD - United States dollar
• Issuer: United States of
America
• Currency: US dollar (USD,
greenback)
• Most traded in: EURUSD,
GBPUSD, USDJPY, AUDUSD,
USDCAD, USDCHF, NZDUSD
• Central bank: U.S. Federal
Reserve System – The Fed
• Chief monetary policy maker:
governor Ben Bernanke
(formerly Alan Greenspan)
• The Fed is the most influential
central bank in the world
• Alan Greenspan retired
January 2006 Alan Greenspan
Major currencies:
USD - United States dollar
• Issuer: United States of
America
• Currency: US dollar (USD,
greenback)
GBPUSD, USDJPY, AUDUSD,
USDCAD, USDCHF, NZDUSD
• Central bank: U.S. Federal
Reserve System – The Fed
• Chief monetary policy maker:
governor Ben Bernanke
(formerly Alan Greenspan)
• The Fed is the most influential
central bank in the world
• Alan Greenspan retired
January 2006 Ben Bernanke
Quick quiz
What is the origin of the word “dollar”?
It was a mid-16th century coin minted in the

silver mine of Jáchymov (Joachimsthal),
Czech Republic – “Joachimst(h)aler”.
Later: German Taler, Flemish Daler –
American dollar.

Major currencies:
EUR - Euro
• Issuer: European Union
• Currency: Euro (EUR)
EURJPY, EURAUD,
EURCHF, EURGBP
• Central bank: European
Central Bank (ECB)
• Central bank governor:
Jean-Claude Trichet
Jean-Claude Trichet
Major currencies:
JPY – Japanese Yen
• Issuer: Japan
• Currency: Japanese Yen
(JPY)
• Most traded in: USDJPY,
EURJPY, AUDJPY,
CHFJPY, GBPJPY
• Central bank: Bank of
Japan (BoJ)
• governor Toshihiko Fukui
• Often labelled “lifelong
bureaucrat”. A boring old
guy Toshihiko Fukui

Major currencies:
GBP – British Pound
• Issuer: United Kingdom
• Currency: British Pound
(GBP, cable, Sterling)
• Most traded in: GBPUSD
EURGBP, GBPCHF,
GBPJPY
• Central bank: The Bank
of England (BoE)
• governor Mervyn Allister
King Mervyn A. King
Major currencies:
CAD – Canadian dollar
• Issuer: Canada
• Currency: Canadian dollar
(CAD, loonie)
• Most traded in: USDCAD
• Central bank: Bank of
Canada (BoC)
• Central bank governor:
David Dodge
David Dodge

Major currencies:
AUD – Australian dollar
• Issuer: Australia
• Currency: Australian
dollar (AUD, aussie)
• Most traded in: AUDJPY,
AUDUSD, EURAUD
• Central bank: The
Reserve Bank of Australia
(RBA)
• Governor Ian MacFarlane
Ian MacFarlane
Major currencies:
CHF – Swiss Franc
• Issuer: Switzerland
• Currency: Swiss Franc
(CHF, swissy)
• Most traded in: CHFJPY,
EURCHF, GBPCHF,
USDCHF
• Central bank: Swiss
National Bank (SNB)
• Governor: Jean-Pierre
Roth, Chairman of the
Governing Board Jean-Pierre Roth

Major currencies:
NZD – New Zealand dollar
• Issuer: New Zealand
• Currency: New Zealand
dollar (NZD)
• Most traded in: NZDUSD
• Central bank: Reserve
Bank of New Zealand
(RBNZ)
• Governor: Alan Bollard Alan Bollard

Major currencies:
CNY – Chinese Yuan
• Issuer: People’s Republic of
China
• Currency: Chinese Yuan (CNY)
• Central bank: People's Bank of
China
• governor Zhou Xiaochuan
• CNY is deliberately
undervalued to prop up
Chinese export – great
opportunity to buy CNY now!
• Currently pegged to the USD
Zhou Xiaochuan
Quick quiz
When one currency changes its value

againts another currency, the pair quote
changes. But what happens when the
domestic currency changes its value
compared to the domestic goods value?
Inflation or deflation occurs.

Bulls, Bears, Sheep and Hogs
• Bulls make
money when
prices are going
up. Thus, a
bullish market
is an upward
one
• Bears make
money when
prices are going
down. Thus, a
bearish market
is a downward
one
rk et
a
ishm
ll
bu
bullish market in EURUSD from Feb/2002 to Jul/2002:

trend following trading systems are making money
bea
rish
mar
ket
bearish market in EURUSD from Jan/1999 to Jul/1999:

trend following trading systems are making money
are re
s e
choppy market = rice go
ing wh
p no
choppy market in EURUSD from Mar/2004 to Sep/2004:

mean reversion trading systems are making money
• Sheep get trampled
under feet when bulls
and bears make
money because of
their fear
• Hogs get slaughtered

because of their
frequent
overleveraging and
greed
Technical analysis versus
fundamental analysis

Fundamental analysis:
what moves currencies the most?
• Unexpected events like war, hurricane etc.
• Macroeconomic data:
1) Monthly non-farm payrolls report (NFP)
2) FOMC (Federal Open Market Committee) rate decision
4) Central bank governors’ speeches
3) Quarterly GDP data
4) ECB (European central bank), BoE (Bank of England),
BOJ (Bank of Japan), BOC (Bank of Canada) rate
decision meetings
5) Consumer Sentiment Indices

Fundamentals - macroeconomic calendar
ECB rate
decision
NFP

Contrary opinion
• Successful trader has to be able to fade

mass psychology (COT report)
"Thus to be independent of public opinion is

the first formal condition of achieving anything
great.“
- G. W. F. Hegel
Commitment of traders - COT
Weekly CFTC COT report consists of data for three groups: large hedgers
(commercials), large speculators, small traders. COT commercials are
usually right:

Forex statistics: total ranges (volatility)
sorted by daily range/spread

Forex pairs: bid/ask spread in pips

Forex pairs: monthly range in pips

Forex pairs: daily range in pips

Forex pairs: 15 min range in pips

Forex pairs: daily range/spread

Forex pairs: 15 min range/spread

Forex pairs: trendiness (daily range
/ 1 min range)

Margin and leverage
leverage = position The margin required to control
a position size of $100000:
size / margin
margin = minimum
$25,000
amount of money to
be deposited $20,000
with your broker to
maintain a desired $15,000
position size
margin call = $10,000
request to add
money to your $5,000
account to maintain
the open position(s) $0
return on margin, equities margin $25,000 forex margin $250
return on account
Margin and leverage
leverage = position The position size (amount of money)
you control with 1 dollar:
size / margin
margin = minimum $400
amount of money to $350
be deposited
with your broker to $300
maintain a desired $250
position size $200
margin call =
$150
request to add
money to your $100
account to maintain $50
the open position(s) $0
return on margin, equities leverage 1:4 forex leverage 1:400
return on account
The anatomy of a forex quote
• The currencies are always traded in two-way quoted pairs
• In fact, everything is always traded in two-way quoted pairs:
=
• You see, we have just created a quote: 1 COW = 2 PIGs, or:
COWPIG = 2.0000 (read: 1 COW equals 2 PIGs)
• Two-way quote means that it works the other way round, too:
PIGCOW = 0.5000 (read: 1 PIG equals 0.5 COWs)
Quick quiz
Can you give me an example

of one-way quote?
I bet you can’t since there are no one-way

quotes in the world. Every quote (price)
since the dawn of civilization is an
expressed ratio between two values.
EURUSD is trading at 1.2408 Bid, 1.2411 Ask

1.2408/1.2411
• EURUSD = 1.2408 Bid, or
1 EUR / 1 USD = 1.2408 Bid, or
1 EUR = 1.2408 USD Bid
1.24 = big figure
• EUR is the base (unit) currency
• USD is the quote (price) currency
• EURUSD ask = 1.2411. If I BUY the EURUSD pair, I get the Ask
price
• EURUSD bid = 1.2408. If I SELL the EURUSD pair, I get the Bid
price
• Ask price minus Bid price = spread

The anatomy of a forex quote:
spread, slippage, liquidity and volatility
• Spread is the difference between the Bid and Ask prices
• Spread changes with liquidity and volatility

The anatomy of a forex quote:
spread, slippage, liquidity and volatility
• Slippage is the
difference between the
posted price and the
actually filled price. low volatility
Slippage seldom
happens in forex market
• The higher the volatility
and the lower the
liquidity, the higher the
spread and the higher high volatility
the slippage

pip, lot, minilot, overleveraging
• One PIP or POINT it the smallest measure of price move,
regardless of fractional representation:
1.2349 118.25 0.8235
• 1 LOT = 100000 units of base currency
• 1 MINILOT = 10000 units of base currency
• Overleveraged traders are called “hogs”
• Possible legal changes to prevent novice traders to go
broke fast pending
• The major cause of beginner traders to fail is
overleveraging (trading too many lots at once)

Forex trade detailed
EURUSD Bid: 1.2532 EURUSD Bid: 1.2632
EURUSD Ask: 1.2535 EURUSD Ask: 1.2635
1. I buy EURUSD and

I pay 125 350 USD
2. Then I sell EURUSD

and I get 126 320 USD
126 320 – 125 350

= 970 USD net profit
after spread
I buy 1 lot of EURUSD. I sell 1 lot of EURUSD.

I buy 100000 EUR, I sell 100000 EUR,
I pay 100000*1.2535 USD I get 100000*1.2632 USD
Intraday versus overnight positions
• Intraday is any position opened
any time after 5 pm EST and
closed before 5 pm EST the next
day
• Overnight is every position which
is held thru exactly 5:00 pm EST
(Estern Standard Time) Monday -
Friday
• You are credited to your trading
account or you are charged from
your trading account according
to the currency pair you hold
• The percentage p.a.
charged/credited depends on the
currencies interest rates
differentials in the pair you hold
overnight
• You are credited to your
trading account if you are
long the currency pair where
the UNIT currency has a
higher interest rate than the
PRICE currency (GBPJPY:
+20.5% p.a.)
• You are credited to your
short the currency pair
where the PRICE currency
has a higher interest rate
than the UNIT currency Five o’clock – time
(EURGBP: +5.5% p.a.) to collect the interest rate :)

• You are charged from your
long the currency pair where
the UNIT currency has a
lower interest rate than the
PRICE currency (EURAUD: -
9.7% p.a)
• You are charged from your
short the currency pair
where the PRICE currency
has a lower interest rate
than the UNIT currency Five o’clock – time
(USDCHF: -10.65% p.a.) to pay the interest rate :(

Quick quiz
Why do you think the 5:00 pm EST time has

been selected internationally to represent
the end of a forex trading day?
Because, historically, it is the closing time

for major US stocks, options and futures
exchanges

The topology of forex market

Level II quoting

Quick quiz
What do you think the forex brokers

live off?
Primarily they live off of taking the other

side of their clients’ positions. Also, they
profit from the spread.

Long and Short positions

Hedge position

STOP and LIMIT orders
• STOP order: this or worse price – used for trend-following concepts
• LIMIT order: this or better price – used for mean-reversion concepts

Quick quiz
Which price is better if we are selling short?
B
Price A is better.

Volume: trade volume, tick volume

Forex market trading volume

Timeframes
• Tick-based charts versus
time-based charts
• The concept of time
frames, each timeframe is
a world onto itself
• Long-term, intermediate-
term, short-term, intraday
trades

Timeframes – EURUSD monthly

Timeframes – EURUSD weekly

Timeframes – EURUSD daily

Timeframes – EURUSD 240 min



Timeframes – EURUSD 1 tick

Timeframes – EURUSD 100 ticks

Charting – open, high, low, close
• Often referred to as OHLC

• What is a session, 5pm – 5pm
• Open is the first price that occured during
the bar
• High is the highest price
• Low is the lowest price
• Close is the last price
Charting – Japanese candlesticks
positive candle: negative candle:
usually white, green or blue usually black or red

Charting – Japanese candlesticks

Charting – western bars

Charting – line on close

Charting – Heikin-Ashi candles

Charting – Point & Figure

Charting – Renko

Indicators - intro
• There are thousands of various indicators, I will
present only a handful of the most widely used
ones
• Every indicator distorts the price action
• You may program your own indicators on most
platforms
• Oscillators are normalized indicators, i.e. they
oscillate between some predetrmined boundary
values (for instance, 0 – 100)

Indicators – moving averages (simple,
exponential, weighted, triangular, adaptive...)
exponential ribbon

Indicators – oscillators, RSI:
relative strength index, OB, OS
overbought
oversold

Indicators – oscillators: stochastic

Indicators – Bollinger bands:
SMA with 2 standard deviation envelopes

Indicators – momentum:
close – close[length]

Indicators – Fibonacci retracements

Indicators – probability map:
normal range

Indicators – your own:
close – average(close, iLength);

Indicators – your own:
Tradestation EasyLanguage programming code

Price patterns:
general principles
• Patterns are only “civilized” trendlines
• There are dozens of price patterns: rectangles, head and shoulders,
double tops and bottoms, triple tops and bottoms, chinese double
tops/bottoms, symmetrical triangles, right-angled triangles,
broadening formations, wedges, diamonds, rounding tops and
bottoms, shakeout tops and bottoms, flags, pennants, gaps, island
reversals etc....
• We will discuss only the most widely used ones here
• Price patterns are either bullish, bearish or continuation
• Price always breaks out from the pattern. Upside breakout or
downside breakout
• Breakout from a price pattern should always be accompanied by a
sharp rise of volume, this is especially true for the upside breakouts

Support and resistance
the sellers are stronger

at the resistance level
resistance is a ceiling
above the price action

psychological issue:
strong support and resistance are
often found at or near round numbers (1.1800, 1.2000)
support is a floor
below the price action
the buyers are stronger

certain moving averages

often act as a dynamic
support / resistance level
SMA – simple moving average

Average(close, 100)

Pivot points act as
support / resistance levels
• Pivot points are calculated from
the previous day’s high, low and close prices:
R3 (resistance 3) = H - (2*(L - P));

RM3 (interim resistance 3) = (R2 + R3) / 2;
R2 (resistance 2) = P + (R1 - S1);
M4 (interim resistance 2) = (R1 + R2) / 2;
R1 (resistance 1) = 2*P - L;
M3 (interim resistance 1) = (P + R1) / 2;
PIVOT (the pivot point) = (H + L + C) / 3;
M2 (interim support 1) = (P + S1) / 2;
S1 (support 1) = 2*P - H;
M1 (interim support 2) = (S1 + S2) / 2;
S2 (support 2) = P - (R1 - S1);
SM3 (interim support 3) = (S2 + S3) / 2;
S3 (support 3) = L - (2*(H - P));

Pivot points act as
support / resistance levels
R2
M4
R1
pivot points often
correspond with significant
support and resistance
levels during the day
M3

Price patterns:
head and shoulders

Price patterns:
head and shoulders – measuring objective

Price patterns:
head & shoulders automatic software detection

Price patterns: reverse H&S

Price patterns:
reverse H&S measuring objective

Price patterns:
double top

Price patterns:
double bottom

Price patterns:
symmetrical triangle

Price patterns:
symmetrical triangle

Price patterns:
ascending triangle

Price patterns:
ascending triangle

Price patterns:
descending triangle

Price patterns:
descending triangle

Bar patterns / candlestick patterns
• There are hundreds of
the so-called “bar
patterns” or “candlestick
patterns”
• The bar patterns are

classified as either:
- bullish
- bearish
- continuation
• The bar patterns are

prone to computer
assisted detection

Bar patterns / candlestick patterns:
automatic computer-assisted detection
software
automatically
detects pre-
programmed bar
patterns

Trendlines
Down trendline is always

drawn across the highs,
it represents the resistance
Up trendline is always
drawn along the lows,
it represents the support

Trendlines:
automatic, computer-calculated trendlines

Channels

Elliott Wave Theory
• Ralph Nelson Elliott
believed that the
a b
movement of prices could 5 c
be predicted by observing 4
and identifying a repetitive 3
pattern of 8 consecutive 2
waves, 5 one way and 3 1
the opposite way:
• Eliott wave theory has its advocates and opponents. In forex

market, it’s not much used nowadays. Objective rules programming
based on Eliott Wave Theory is rather problematic
Fancy an adrenaline?
Then indulge in
bungee-jumping.
ler s.
ga mb
is f or
n aline
A dr e
Professional currency
trading is a boring
business...
Black-box trading systems
• Beware of the so-called black-box trading systems!
• There are lots of black-box trading systems ads all over the internet
• The vendors of black-box
trading systems capitalize
on inexperienced novices
• Never ever ever trade
based on black-box system
signals, you never know
what might go wrong
• If you can’t backtest the
system for yourself, then
don’t ever trade such a
system
Trading systems and strategies:
the power of computers
• From the 1980ies, the widespread computer simulation and
backtesting accessibility have changed the markets considerably.
• The computing power is becoming ever more cheaper and cheaper.
The markets have become evidently more efficient. As a result, every
tiny inefficiency is quickly uncovered and capitalized upon
• Consequently, the
successful trading
tools from the past
are no longer
working today.
• It is not possible to
design a profitable
trading strategy
without the use of
a computer force
any more
Quick quiz
Imagine you have $1 million in your account. Will you choose:
A) Trading system which makes 11 dollars profit 50% of the time

and loses 10 dollars 50% of the time, or
B) Trading system which makes 11% profit 50% of the time and
makes loss 10% of the account 50% of the time?
A is correct.
- Trading system A will show a moderate yet steady equity growth:
11 – 10 = 1 dollar average profit every 2 trades
- Trading system B will go broke eventually:
111% * 90% = 99.9% = 0.1% average loss every 2 trades
the power of applied math
• Forex market is ideal for
utilization of mathematical
models-based trading systems.
The massive proliferation of
cheap computing power and
high liquidity of the market
makes forex very efficient
nowadays
• Applied mathematics and
financial statistics methods are
widely and successfully used for
professional trading systems
development

The forex market

is so efficient
that, on the
lowest level,
the
movement is
resembling
the Brownian
motion – it is
almost totally
random:
Plasmode 1 – randomly generated sample

The forex market

is so efficient
that, on the
lowest level,
the
movement is
resembling
the Brownian
motion – it is
almost totally
random:

The forex market

is so efficient
that, on the
lowest level,
the
movement is
resembling
the Brownian
motion – it is
almost totally
random:

Quick quiz
Choose between two trading systems:
A) One that makes $9000 with 100% probability
B) One that makes $10000 with 95% probability
B is correct.
0.95 * 10000 = 9500, which is more than 1*9000

precise rules programming
• Trading system = precise entry and
exit rules
• Trading strategy = trading system +
particular market + particular time
frame + position sizing/money
management algorithm
• Trading systems may be based
solely on strictly quantifiable facts.
Thus, fundamental factors are not
suitable for trading systems
development
• To formulate and properly test the
trading system, you need to be able
to specify the rules precisely and
program it into some trading
platform. If you can’t program it
yourself, you should hire a
professional programmer ->
Trading systems and strategies
• Trading systems categories:
– trend-following: moving averages, breakout models, continuation
patterns...
– mean-reversion: oscillator-based, false breakouts, reversal patterns...
– seasonal: based on some intrinsic market cyclicity, like recurrent price
fluctuations during the harvest season in soybeans (not much used in
forex trading systems development)
– neural networks-based: neural network takes a number of input
variables and uses them to predict a taget, exactly as in regression.
Neural networks may yield unrealistically good results in in-sample
backtesting and at the same time fail miserably in the out-of-sample
testing. The use of neural networks models should be done with caution
and experience
– genetic algorithm-based: these models may combine conventional
trading techniques with a new approaches to try and find previously
not-thought-of and unexpected yet extraordinary solutions. In trading
systems development, genetic algorithms are used for 1) searching for
a trading model, 2) searching for an optimal set of input parameters for
the existing model, 3) doing both of the above simultaneously
developing your own Holy Grail

chart signals

conventional versus genetic optimization
• Once you have programmed and checked your trading system, you should
optimize it to achieve the best linearity of the equity curve
• You should not optimize the system on NetProfit alone!
• Sane fitness functions include:
– NetProfit/MaxDrawDown
– NetProfit/Margin
– VanTharp Expectancy
– PROM (Pessimistic Return on Margin)
– Ideal Profit Correlation
– Equity Curve Linear Regression Max Error
– Equity Curve Linear Regression StdDev
– Sharpe Ratio
• Conventional, exhaustive optimization is sufficient only for very low number
of input parameters combinations
• Genetic optimization is not very likely to be fooled into the local maxima.
The fitness landscape is shaped gradually

Trading systems and strategies: genetic optimization

Trading systems and strategies: genetic optimization,
out-of sample and walk-forward testing
in-sample equity out-of-sample

equity

backtested equity curve

Position sizing algorithms
• You can achieve an exponential equity growth if you reinvest the profits
rationally. The power of compound interest
• 8 pips a day:
– Max leverage: 1:100
– One minilot for every whole $100 in an account
– Starting equity: $200

trader’s psychology – are you match tough?
• One of the most important

aspects of system trading is
trader’s own psychological ability
to execute trades as intended
• The deadly emotions of fear,
greed, regret and elation may
undermine trader’s success
• Demo-account trading doesn’t
prepare traders psychologically
for live-account trading.
Emotions involved in live-account
trading are inimitable

Mendel University
michal.kreslik@gmail.com The Bank of England
140

About Trading Forex

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About Trading Forex

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FOREX

• The vast majority of worthwile literature on trading is

Forex trading - Mendel University

Market is a huge amount of people.

Forex trading - Mendel University

Forex trading - Mendel University

• Bretton Woods Accord

• This accord fixed the exchange

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

What is the origin of the word “dollar”?

It was a mid-16th century coin minted in the

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

When one currency changes its value

Inflation or deflation occurs.

Forex trading - Mendel University

bullish market in EURUSD from Feb/2002 to Jul/2002:

bearish market in EURUSD from Jan/1999 to Jul/1999:

choppy market in EURUSD from Mar/2004 to Sep/2004:

• Hogs get slaughtered

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

• Successful trader has to be able to fade

"Thus to be independent of public opinion is

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Can you give me an example

I bet you can’t since there are no one-way

EURUSD is trading at 1.2408 Bid, 1.2411 Ask

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

1. I buy EURUSD and

2. Then I sell EURUSD

126 320 – 125 350

I buy 1 lot of EURUSD. I sell 1 lot of EURUSD.

Forex trading - Mendel University

Forex trading - Mendel University

Why do you think the 5:00 pm EST time has

Because, historically, it is the closing time

Forex trading - Mendel University

Forex trading - Mendel University

Forex trading - Mendel University

What do you think the forex brokers

Primarily they live off of taking the other

Forex trading - Mendel University

Forex trading - Mendel University