Dynamic Forex Trading with Predictable Results Is Possible
Extremely active traders and high-level asset managers including hedge funds, retail mutual funds, and prop traders have as a common goal the desire to accurately forecast investment returns and work their systems so that they can profit from these forecasts. Trading with a the same method and using the same tools day in and day out can help the trader dial in their forecasts and assumptions which make up their system because it allows them to discard data that simply doesn’t work. In the business this is known as the “reductive” method. Trading Forex with systems that employ the reductive method is about trying to simplify a complex problem, condition, or experiment by minimizing the number of variables that go into it. When you can do this, you bring yourself closer to achieving predictable returns.
Of course dynamic trading very often means that the money manager is going to generate significant turnover in the portfolio and that means higher trading costs. To this end any good high-frequency trading model must constantly weigh the advantages of getting high volumes of valuable data obtained against the transaction costs incurred. Live Trading with such a system requires that the manager try more than one return predictor which is a way to anticipate what return you can reasonably expect across differing time-periods. The longer the time frame the more accurate the predictor should be.
What we will attempt to do in this article is to reveal to you that the optimal Forex trading strategy is one in which the expected profits, the progress of expected future profits, the risks associated with earning these profits, and the transaction costs borne while engaged in the activity to earn these profits are all correlated. Leaning too heavily in one area when trading with this system may generate additional short-term profits, but such action can increase transaction costs, increase risk exposure, or both. The concept here is to build a closed-form solution for trading with the portfolio you manage, and if the forecasted results you want to achieve turn out to be unattainable, then you either need to increase the size of the portfolio or adjust your risk/reward parameters. If neither is acceptable, then you need to consider not trading at all.
Trading with an optimized system
An optimized trading system is one that is fully intuitive. The best portfolio consists of a combination of positions that you already feel give you the highest probability of earning a profit with, and at the same time reduces the amount of transaction costs you incur by reducing the urge for you to churn your portfolio. Consistent with this principle is the idea that a trader facing transaction costs will trade more frequently and aggressively when confronted with a large number of trading signals. If you reduce the number of trading signals than you will reduce the transaction costs over longer periods of time.
The key role that the return predictor plays within the system that you choose to trade with takes its meaning from is rooted in statistical analysis, with a particular emphasis on regression analysis. Regression to the mean analysis takes into account that most things in nature are part of or move within a cycle. What you can walk away with from understanding this principle is that your trading results too will cycle between high and low returns, profits and losses. The goal of the Dynamic Trading system is to smooth out those cycles so that your equity curve follows a gentle slope up, and does not resemble the EKG readout of a cardiac patient. To accomplish this you need to make sure that the systems and methods that you employ will permit you to control the frequency of your trading, your transaction costs, and your expected profits (subject to compounding) over the long run. When all these variables are controllable, then you can modify your trading plans to actually influence the shape of your equity curve. As we all know, the better your equity curve looks, the more capital that you are going to be trusted with as a professional money manager. So, in conclusion, trade with a Dynamic and workable system.
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