Forex Howto

In my day job I have a currency hedging requirement and I’ve been thinking about how best to resolve it.

I’m in Australia and need to provide a quote for a service in Australian dollars. A supplier of the service is located in the US and I pay them US dollars.

Doing the hedge is rather straight forward, buy the amount of US dollars required, then sell when the hedge is no longer required.

The more complex part is how to hedge the changes between providing the quote and being paid, with the recent volatility this could be fairly significant.

What I’ve decided is most suitable is to make trendline projections off the lows and use those for quote rates so if the payment is forthcoming quickly the rate is better, if the payment is slow, it’ll cost more as the AUD declines.

Is there a better way to do this?

I’m a big fan of cartoons, cartoonists are great at saying a lot without using many words.

This one is by Michael Ramirez.

I have a strategy which I’ve been trading/testing for a while now with pretty good results (still needs some fine tuning). I’ve been trading that strategy and only that one (I don’t have a lot of time for trading). I’ve been thinking recently damn I wish I went short on the AUD, GBP and EUR I would’ve made bucketloads of money (it’s always easy in hindsight isn’t it).

I did open a short position on the AUD a couple of weeks though it was taken out via stop loss quickly by volatility.

I’ve been so preoccupied with my statarb strategy that I haven’t really looked at trending positions. I’m not sure that is a bad thing, though it would’ve been nice to be short

One of the people I follow on twitter is previous, I just noticed a graphic he posted a link to (sorry I don’t know the original source), I thought it was quite interesting, not so much from a FOREX perspective, though more from an American economy perspective.

Make sure to click through for the full sized image… makes reading the text a little easier

Some years back I did some research into Genetic Programming and using it for automated trading. Needless to say it didn’t get the results I was looking for so I gave up relatively quickly. Since then I’ve looked at many other methods of automated trading and now I’m back to Genetic Programming. I’ve learnt more and think with some better input data and looking for the right problem to solve it will hopefully be more successful.

The idea with Genetic Programming is to evolve a computer program in the same way that evolution happens in the real world. So you start with a randomly generated population of which there will be some that are fitter than others, you keep those (survival of the fittest) and have them interbreed thereby passing on features and mutating as well as generating new ones randomly… do this over many many generations and hopefully you end up with a damn smart program which is an expert at trading.

I’ve set a spare computer to spend it’s hours evolving these trading agents, preliminary results appear to be on the way to successful.

Finding the problem to solve appears to be critical, my attempts at generating price prediction agents thus far have been less than spectacular. Generating buy/sell signals seems to be more successful.

Early days still, will update more in the future.

The current best program in the current run is:

(IFGT (- (SMA100[2])(- (/ (ATR5[1])(IFGT (- (4)(- (- (/ (/ (ATR10[2])(IFGT (1.810102)(- (/ (ATR20[3])(SMA50[2]))(* (HIGH[4])(/ (4)(/ (IFGTE (* (* (* (IFGT (ATR5[1])(- (/ (ATR20[3])(SMA50[2]))(IFGTE (HIGH[4])(/ (4)(/ (ATR20[3])(HIGH[1]))))))(SMA10[1]))(SMA10[3]))(5.492882))(CLOSE[2]))(SMA10[3])))))))(IFGT (4)(/ (SMA10[1])(ATR100[1]))))(* (/ (8.307099)(/ (2.057818)(/ (LOW[2])(ATR100[1]))))(ATR10[2])))(HIGH[4])))(2.057818)))(1.782779)))(* (/ (8.307099)(/ (2.057818)(/ (ATR10[1])(ATR100[1]))))(ATR10[2])))

Looks like gobbly gook though it is remarkably more understandable than Neural Networks which are basically just a black box. It will be interesting to see if I can generate a successful agent with GP. I may also try on the same data a Neural Network based agent. Neural Networks do have an advantage in that we can have multiple output nodes where we’re stuck with just one for GP.

Update: I thought I’d post the next fittest agent after the above one so that you can see how a program evolves

(IFGT (- (SMA100[2])(- (/ (ATR20[3])(IFGT (- (ATR20[3])(- (/ (ATR10[1])(IFGT (- (4)(- (- (/ (/ (ATR100[1])(IFGT (2.727904)(- (/ (ATR5[1])(SMA100[2]))(* (/ (/ (ATR10[1])(1.463929))(/ (IFGTE (/ (SMA10[3])(SMA100[2]))(ATR10[2]))(SMA10[3])))(/ (ATR10[1])(1.463929))))))(4))(* (ATR20[3])(/ (16.978725)(/ (1.395991)(/ (LOW[2])(ATR100[1]))))))(ATR20[3])))(ATR10[2])))(/ (/ (ATR10[1])(ATR100[1]))(ATR10[1]))))(SMA100[2])))(1.991408)))(* (/ (8.911259)(/ (2.029770)(/ (ATR10[1])(ATR100[1]))))(ATR10[1])))

Part 1

Part 2

Part 3

I came across rather funny microblog today called Sad Guys on Trading Floors. It’s pictures of traders with some excellent captions.

Taking LSD before going to work on the trading floor is not advised.

With so many bargain stocks around at the moment I’m thinking about buying some as an investment, my problem: finding a good Australian broker with low transaction costs.

I’ve had a look at the typical banks (Westpac, Commsec, Macquarie Bank and etrade though it’s not a bank) for buying shares, the impressions I got from looking at their sites:

• High transaction costs
• Cost structures hidden away in hard to find places, mostly I gave up trying to find out where they will charge me
• No real interest in helping the client

I had a bit of a look at places offering CFD trading, I may look at it though I have my concerns about this as a long term thing… quite possibly incorrectly so.

The most promising I found was a place called Bell Direct, they look to be relatively new which may not be a good thing. Their website gave me the impression that they do have some interest in looking after their clients. I think I will probably signup for an account there and buy some shares.

If only they were as good and simple as Oanda!

One of the prominent mainstream aussie bloggers Duncan Riley has a post in which he’s trying to work out what is up with the aussie dollar.

One of the key factors in the recent decline of the aussie dollar is what is known as the carry trade.

The key thing with carry trades is relative interest rates between the countries, if I can borrow money for 1% in one country and earn 7% interest in another country then it’s a damn easy way to make 6% interest, leverage that position and we have some very attractive returns, this is not to mention that we might also make some outright returns if the currency we have bought continues to go up as more people do what we are doing. When some people get nervous and start closing their positions down, then it’s a stampede with everyone getting out as quick as they can. To do this, they need to sell their high yielding currency and buy some of the lower yielding currency in order to pay back what was borrowed, the result? The high yielder falls, the low yielder rises, when there is a stampede this happens very quickly.

The most popular currency to be the low yielder is the Japanese Yen which can be borrowed for next to nothing. Then it’s a matter of taking your pick of the higher yielding currencies, with Australian interest rates recently at 7.25% it was a fairly popular choice as the high yielder. This was great, until it looked like Australian interest rates had peaked. Since then there has been a rush for the doors which has seen the currency tumble down at an alarming rate.

I’ve included below a weekly chart of a popular carry trade, the GBPJPY (My charts didn’t have enough weekly data on the AUDJPY to give a good picture), you’ll notice that it goes up and up and up relatively slowly for weeks on end, then it falls like crazy in a single week.

For those that aren’t traders though are reading this, when the chart is going up (green) that means the GBP (British Pound) is increasing in value, the JPY (Japanese Yen) is falling in value… the opposite is true when the chart is falling and the candles are red.

OK, so you think you’ve got a great strategy and it works great, you’re raking in the cash and life is looking up. Then something big happens and you go into a big drawdown waiting for the mean reversion.

That’s what happened yesterday/last night for me, the aussie dollar falling like a rock was that something big and it sent me into a big drawdown, the worst I saw was around 10% on my live account and something stupid on my ATC account. My live account recovered ok and this morning it was only down to a 1.5% drawdown so I took that… The ATC entry? Well that got hammered!

I had a think about some possible filters to add to my strategy, firstly I think I need to look at longer term trends on the different currencies (eg. AUD and EUR are showing more weakness than the GBP), so only ever buy GBP and sell AUD and EUR. Another possibility is to do some analysis on shorter term trends and workout a smart lot sizing algorithm to counteract the probabilities of big drawdowns.

I probably won’t get much chance to do the second idea for a little while, though I imagine I’ll start the first filter as it’s an easy one to implement.