Thursday, October 21, 2010

Trading the Key Dollar Pairs; Doing The Ground Work

In a series of articles I will look to build a profitable Forex strategy built around EURUSD, GBPUSD, AUDUSD and NZDUSD using the Zignals Trading Strategy Builder. The goal of these articles is to educate on the use and Strategy Builder Engine and to enable readers develop their own strategies around their favourite currency pairs.

The Zignals Strategy Engine was designed to trade stocks, so strategies built around Forex symbols will buy 'shares' and won't use leverage, so returns are factored on a 1:1 basis. Therefore, a Forex strategy which invests $20,000 into Euro will calculate returns off a $20,000 investment, not a $200 margin investment (100:1) as is typical for Forex trading.

The second point about our Forex strategies is they have to share the same 'Base' currency. But strategies can be replicated to use different 'Base' currencies - in effect you might run two or three strategies together to get signals for Sterling, Canadian or Australian Dollars (unfortunately, no Yen or Swiss Francs yet).

Okay - I'm interested, how do I start?

An earlier article described the process for stocks, but let's look at this from the point of view of Forex. On loading the Strategy Builder you will be greeted with a grid-like workspace.

The left part of the screen offers five steps to help build your strategy.

The last step, "Publish to Zignals" (highlighted in orange), is the one which brings your strategy to life. Only complete the last step when you are happy with the strategy and are ready to receive the trading signals.

1. Setup

The first step contains a couple of key components which need to be completed.

Name: This is the name of your strategy, sky is the limit for naming

Strategy Type: This is the first important choice to be made as once set it cannot be changed after a strategy goes 'live'. Default is "Long" which means we will be buying our currency pairs.

Money Management: The first major choice is to select the Currency. This should be the Currency base for your trading pair(s). Since our strategy is based around Dollar pairs we will set the base to 'USD US Dollar'. Alternatives are Euro, Sterling, Australian Dollar and Canadian Dollar (no Yen or Swiss Franc at the moment).

As the Strategy Engine was designed around stocks it is hard-wired with certain stock-strategy relevant variables. In this case, a Starting Capital of $100,000 (effectively a $1,000 Forex account), a Cost-per-Trade of $10 (would be $0 for a true Forex strategy), a Slippage Percentage of 0.2% - which means entries are 0.2% more expensive and sales receive 0.2% less that the quoted price, and a Delay between trades set to 15 days. The Delay between trades is a feature to protect against whipsaw signals and is particularly useful in trending strategies. But to remove any possible confusion on our signals we will set it to zero.

Stop Condition: This is the first real area we can toy with. Because we haven't considered the technical signal we are going to use we can keep these values unchanged. But as you become more proficient in your strategy building you will optimise the best exit conditions for your strategy.

2. "Stocks"

The second step defines what your strategy will trade. "Stocks" is not limited to stocks, but also includes currency pairs, indices or commodities. However, the 'Base' currency of the list components must match to the Currency selected in Step 1. In our example, our strategy was built using the US Dollar so our "stocks" must feature currency pairs based on the dollar. This strategy will use four currencies in a New "stocklist" called 'Quad Currency'.


However, you could create new "stocklists" for other key currency pairs., e.g:


Hey, what about a list of Euro pairs?

So why can't you create a "stocklist" around a selection of Euro pairs like EURGBP, EURCAD, EURAUD? The issue is to do the with last currency of each of these pairs - they are all different. Remember, a "stocklist" must use currencies where the last currency in the pair matches the "Base" currency selected in Step 1.

Is there a workaround?

Yes, strategies can be built around a single currency pair. Once your strategy is created you can save it under another name with a different 'Base' currency and trading currency pair, e.g. A Sterling Base Currency (GBP) trading just the EURGBP pair.

3. Rules

I will discuss this feature more next week. Let's just add a 20-d cross above a 50-d SMA rule - the first one on the list of default trading rules. It will appear on the screen highlighted by a glowing border; both the information boxes at the top and bottom will similarly glow - so what does the glow mean? The glow areas mark the actionable points which need to be configured before the strategy can be considered complete.

To create a complete Strategy it is necessary to connect added rules in Sequence from their start point at the top, to the end point in the Result box.

To do this, mouse over the body of the box attached to the Start Point and left click on it (i.e. this is the box which contains the name of your strategy). When you left click, the background colour of the box in the middle (which is the Rule) will change from Orange to Green. While keeping the left-click engaged on the box, drag it towards the Rule until you see a large plus-sign on a green circle background appear.

Release the mouse to connect the rule. A white connection line will appear from the Start Point to the rule.

Repeat the process for connecting the Rule to the End Point. Remember, left-click-and-drag the rule until it's over the Result box - not the End Point.

When this is done correctly another plus-sign will appear with the word 'Connect' beneath.

When the strategy is successfully connected there will be no more glowing borders and a line of flow will have been created from top to bottom.

In a later article I will look at some complex rule arrangements, but this allows us to move to Step 4: Backtest.

4. Backtest

The Backtest is the meat-and-veg of the Strategy Builder - in effect, how good is your strategy?

The Backtest defaults to the last 2 years-to-date but can lookback for any period to 2000. In a later article we will look at a more rigorous test regime for our Strategy as we test in out-periods (i.e. different time spans than used to build the strategy).

To run a Backtest all that is required is to hit the button and Run. At the end of the Backtest the Result section will populate will results and you will have the option to view a Portfolio listing all of your trades.

If you decide to view a Portfolio you can give it a name.

After saving you might have to wait for 30 seconds-1 minute as the Portfolio populates with your trades and is loaded.

Here you will be able to see all the Transactions for your strategy, individual returns per trade and graphical Performance summaries.

At this point, if we were happy with the strategy we could 'Publish to Zignals' - but for now, close the Portfolio window / switch back to the Strategy Builder, save the strategy, and we will look to improve returns in next week's article.


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Dr. Declan Fallon, Senior Market Technician for, offers a range of stock trading strategies via his Zignals home page. Each Zignals member has an unique home page which they can share with friends and clients to sell their strategies. Zignals offers a full suite of financial services including price and fundamental stock alerts, stock charts for Indian, Australian, Frankfurt, Euronext, UK, Ireland and Canadian stocks, tabbed stock quote watchlists, multi-currency portfolio manager, active stock screener with fundamental trading strategy support and trading system builder. Forex, precious metal and energy commodities too.

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