As many of you know I have become a regular contributor to Currency Trader Magazine, one of the most important and well respected online publications dealing with the foreign exchange and futures currency markets with detailed market analysis and trading strategies coming from world renowned professionals. Within this magazine I share concrete and sound trading techniques which I design in order to help traders achieve profitable outcomes or exploit unsuspecting inefficiencies found within forex trading. One thing that distinguishes my articles from many that are published within this and other magazines is that I always do a very cautious evaluation of the strategies over long periods of time to make sure that they have a true statistical edge over periods of at least 10 years. Most of my articles give a concrete look about a forex strategy with clear rules and performance targets.
In this month’s edition (October 2010, which you can see here) I have shared an article dealing with a very unexplored area of forex trading – particularly around mechanical system development – which is the use of volume based systems. The article explains to traders the concept of a Normalized volume oscillator (NVO), using it to validate a very common candlestick pattern to design a valid breakout system. The interesting thing about this article is that it shows the extreme influence of using or not using volume to validate the candlestick pattern with the results of the volume system achieving a positive mathematical expectancy and a good level of profitability while those of the non-volume based system achieve an account wipe out in a very quick way.
Those of you who are Asirikuy members might remember that a month or so ago I did a video or two about the NVO and the creation of a similar strategy using a very simple two bar make up. The idea within this article was very similar, to show how the interpretation of a candlestick pattern depends greatly on the actual volume that develops within the pattern. The strategy shared within this month’s version of Currency Trader also highlights clearly the difference between the volume filtered and non-volume filtered scenarios as the volume filtered pattern has a very clear interpretation while the appearance of the pattern without the volume filter is utterly random and due to a very wide variety of possible market circumstances.
During the past few months I have focused significantly on the development of similar systems using volume information (by using the NVO indicators) and every time I become more convinced that this is the door to the development of a whole new range of long term profitable systems for Asirikuy. Volume provides us with the opportunity to get a whole new panorama of the market, focusing on the underlying fabric of price action instead of the charts in themselves. By using volume – even if it is only the tick volume we can use – we get a whole new universe of possibilities which is not only limited to the validation of candlestick patterns but which can also be used to validate support/resistance breakouts, to detect more complex price patterns (like flags and pennants), etc. Certainly only time will tell what creative systems we will be able to come up with by using volume information within Asirikuy.
Many of you may also be thinking about the possibility to use volume information to improve current Asirikuy systems but sadly the answer is that volume needs to be thought about since the beginning to be of any actual good use. Systems like Watukushay No.2 and Teyacanani – which are candlestick pattern based – do not benefit from NVO filters since they weren’t designed to use one to begin with. The actual mathematical definitions of the patterns within the systems already filter low volume (almost by definition) and including additional volume filters yields only negative results. Using volume information does not allow us to make much more profitable systems implicitly but it does allow us to create new systems with information that was previously simply not available.
If you would like to learn more about the creation of automated trading systems and how you too can gain a true education in this field please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to automated trading in general . I hope you enjoyed this article ! :o)