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Strategy
Introduction
Strategy - a careful plan or method consisting of precisely determined efforts toward a goal.
In the spirit of Forex Currency Market, a trading strategy means a strictly defined method of taking decisions, answering the following questions:
- When should you open a position?
- What should the direction of the position be?
- What should the volume of the position be?
- Is it necessary to add or reduce the current position?
- When should you close the current position?
Its main purpose is to earn profit with a minimum fluctuation of your bank account. The strategy involved in a trading system has to give us clear buy and sell signals.
Building a strategy you can use two primary bases fundamental analysis and technical analysis.
Fundamental analysis relies on the identification and measurement of factors that determine the intrinsic value of a financial instrument. Such factors are the general economic and political environment. All those affect the supply and demand of the products or services concerned. If there is a decrease in supply but the level of demand remains the same, then there will be an increase in market prices. An increase in supply produces the opposite effect.
Technical analysis is primarily (but not exclusively) conducted by studying charts of past price and trading action. Many different methods and tools are used in technical analysis, but they all rely on the assumption that price patterns and trends exist in markets, and that they can be identified and exploited. It is not concerned with why a price is moving (e.g. poor earnings, difficult business environment, poor management, or other fundamentals) but rather with whether it is moving in a particular direction or in a particular chart pattern.
Technical analysis uses technical indicators, channels, support and resistance lines, Japanese candlestics, fractals, Elliot waves, Fibonacci numbers, and other techniques to predict the direction and force of the trend.
Forex Strategy Builder (FSB) lets you build a trading strategy grounded on the principles of technical analysis, in particular the technical indicators. It provides easy to use menus with all the indicator parameters and logic. Without using mathematical formulas or scripts, you determine what the point of entering and exiting the market is and what market conditions have to be fulfilled to do this.
Changing an indicator parameter or adding a new logic, FSB calculates and displays the trading result immediately. Right in front of your eyes a chart expresses your hypothetical account balance if you had traded, using the chosen strategy.
Because of the highly sophisticated methods of computing, the displayed results are maximally near to the real forex dealing. Looking over the account chart you can evaluate the strategy at once. If the chart is steadily increasing with minimum fluctuations, this means that the strategy is potentially good.
The statistics and the journal records show you all aspects of the strategy's behaviour.
User Interface
- What the next same direction signal of the open strategy does
- Edit the indicator's parameters of the open slot
- The open slot
- Add a new open filter
- Edit the indicator's parameters of the open filter slots
- Open filter slots
- Edit the indicator's parameters of the close slot
- Add a new close filter
- The close slot
- A close filter slot
- What the next opposite direction signal of the open strategy does
- Open the strategy overview window
- Account statistics
- Account balance chart
Indicator Slots
Forex Strategy Builder uses technical indicators arranged in slots.
There are four types of slots - Open, Open Filter, Close and Close Filter slots as you can see below:
The upper slot is called Open Slot. It determines the price of opening of a position.
The Close slot determines the price of closing the current position.
The slots between the Open and Close Slot are Open Filters.
The slots after the Close Slot are Close Filters.
Open Slot and Close Slot are always permanent.
You can alter the number of filter slots up to four for the Open Filters and up to two for the Close Filters. You can add new Open Filter slots by pressing the plus button next to the open filter, and Close Filters by pressing the plus button next to the close filter slot. When you want to remove a slot, press its minus button.
You can edit the slot by means of a dialog form. To open it, press the slot's button or click on the slot.
All slots may contain a technical indicator expressing a logic condition.
The Open Slot may contain Bollinger Bands, Day Open, Fibonacci, Fractal, Moving Average, Price Close or Price Open. Each of these can determine the price of opening. The ADX, for example, cannot, therefore it is not in the list.
The Open Filters' indicators are Accelerator Oscillator, Accumulation Distribution, ADX, Alligator, Average True Range, Awesome Oscillator, Bollinger Bands, Bulls Bears Power, Directional Indicators, MACD, Momentum, Money Flow, Money Flow Index, Moving Average, MA Oscillator, Parabolic SAR, RSI and Stochastic Oscillator. It is not necessary for the indicator in an open filter slot to determine a specific price. It has to express logic.
The Close Slot may contain Bollinger Bands, Close and Reverse, Day Close, Fractal, Moving Average, Parabolic SAR, Price Close, Stop Limit or Trailing Stop. Each of these can determine the price of closing the position.
The Close Filters may contain Accelerator Oscillator, Accumulation Distribution, ADX, Alligator, Average True Range, Awesome Oscillator, Bollinger Bands, Bulls Bears Power, Directional Indicators, MACD, Momentum, Money Flow, Money Flow Index, Moving Average, MA Oscillator, Parabolic SAR, RSI, Stochastic Oscillator.
The close filters are available when the Close Slot contains Price Close or Day Close only.
Strategy logic
A forex trading strategy can be divided into two major parts: open and close strategy.
The open strategy takes care of the entering the market. It determines the exact price and time of opening a new position.
The close strategy takes care of the exiting the market. It determines the exact price and time of closing the existing position.
The open strategy has to send orders for opening a new position, and the close strategy for closing it.
It is possible for the open strategy to send a new signal after a position has already been opened. In this case, if the signal is in the same direction as the position, new lots can be added to it. In the opposite case, when the direction of the signal is opposite, depending on the number of order lots compared with the position lots, there are three options - reducing, closing and reversing the position.
The particular action of the open strategy can be chosen from the two dropdown menus in the strategy tool bar.
A same direction signal is a buy signal during a long position and a sell signal during a short position.
The possible actions of the next same direction signal are:
- Add - when we have long position and the open strategy gives another buy signal, a new buy order will be sent to the market. Respectively, during a short position, a sell order will be sent by the next sell signal.
- Nothing - a new same direction signal will not send a new order.
Opposite directions signal is a sell signal during a long position and a buy signal during a short position.
The possible actions of the next opposite direction signal are:
- Nothing - a new opposite direction signal will not send a new order.
- Reduce - if we are long on the market, the next opposite signal raised by the open strategy will send a new sell order to the market with one lot volume. This will reduce the amount of our position. Of course, if we are one lot long only, the position will be closed. The same logic acts when we are short. The next buy signal will reduce our short position with one lot. In case the position is one lot only, it will be closed.
- Close - an opposite direction signal raised by the open strategy will close the current position.
- Reverse - opposite direction signal raised by the open strategy will close the current position and will open another one in the other direction with one lot amount.
The close strategy can only close an open position. It cannot reduce it or open another one.
The Open Strategy will send a signal when all the logic conditions form Open Slot, Open Filters and Close Slot are satisfied. The order price will be determined in the Open Slot.
If, there are no Close Filters, the Close Strategy will send a close order every time the market reaches the price determined into the Close Slot.
When Close Filters are used, the logic is different. When the market price reaches the Close Slot price, a close order will be sent if one of the Close Filters' logic is satisfied.
Here is the difference between the Open and Close Filters: the Open Strategy needs permission from all the Open Filters to produce a signal, while only one satisfied Close Filter's logic is enough for the Close Strategy to send an order.
Close Filters can be used only when Price Close or Day Close are in the Close Slot.
Setting the Strategy
When building a strategy using Forex Strategy Builder you should think for the long position only! When the testing algorithm of the program calculates the strategy, it performs mirror logic for both position directions. It is not necessary for the logic of the short position to be entered into the program. It makes this automatically.
Examples:
[Open] Price Open
[Close] Price Close
This strategy consists of two indicator slots, Open and Close Slot. No Filters are used.
The Open Strategy will send orders with price Price Open of the bar, but because of no filters to determine the direction. Two orders will be sent: Buy Market Order and Sell Market Order in the same time. The first order will open a position and the second one will close it immediately. The result is Position Neutral and Loss equal to the Spread.
At the end of the bar, the Close Strategy does not send order because there is no position opened.
An example of wrong logic:
[Open] Price Open
[Filter] Momentum
Logic The Momentum value rises
Base Price Price Close
Period 10
[Close] Price Close
For more details read here.
We have to use Momentum(Price Open, 10 )
[Open] Price Open
[Filter] Momentum
Logic The Momentum value is rising
Base Price Price Open
Period 10
[Close] Price Close
Or:
[Open] Price Open
[Filter] Momentum
Logic The Momentum value rises
Use previous bar value
Base Price Price Close
Period 10
[Close] Price Close
...
Statistic information
Forex Strategy Builder calculates the following statistics:
- Account balance - the account balance at the end of the tested period in pips. It is equal to the gross profit minus gross loss.
- Minimum account - the minimum amount of the account in pips
- Maximum account - the maximum amount of the account in pips
- Maximum drawdown - the magnitude of a decline in account value, in pips, as measured from peak to subsequent trough. For example, if a trader's account increased in value 2000 pips, then dropped to 1500 pips, then increased again to 2500 pips, that trader would have had a maximum drawdown of 500 pips.
- Gross profit - the total amount of all profits in pips
- Gross loss - the total amount of all losses in pips
- Sent orders - the number of orders that have been sent to the market
- Executed orders - the number of executed orders. The executed orders are equivalent to the difference between the sent orders and the canceled orders.
- Dealt lots - the total number of dealt lots (short + long)
- Number of bars - the number of history bars, used for the calculation
- Time in position - the per cent rate of the bars that we are on the market
Account balance chart
The chart displays the account balance in resalt of the trading with the loaded market data.
When you click over it the full chart will be displayed on a separate window.