The Homework Corner : Learning About Broker Dependency – Assignment No.2

It has always been very surprising to me that people usually talk about broker dependency without the slightest understanding about the true nature of how broker quotes differ and how important this can be for the development of long term profitable strategies. People tend to think that broker dependency is some “rare factor” which can be neglected on most strategies when as a matter of fact the opposite can be true depending on the system and brokers being compared. On today’s homework assignment I will try to guide traders into the understanding of broker dependency issues and how this can or cannot affect trading strategies.

As you all may know by now, the forex market has the great disadvantage of being an over-the-counter type of market where instruments are traded independently by different liquidity providers without the need to “pass through” a central exchange. This makes overall trading and system development “messy” since there is no “correct data” and indeed any forex liquidity provider has the right to give whichever price values they wish to offer people to buy/sell the instruments they want to trade.

In order to ¬†better understand broker dependency I encourage you to carry out the following¬†assignment. It is important that you carry out this MANUALLY as the use of data mining tools, EAs or other type of “aid” to do this will diminish the educational value of this piece of homework. Here is what you would need to do :

1. Record the value of the High and Low prices of 10 five minute candles, 10 one hour candles and 10 daily candles on 3 different brokers (your choice).

2. Record the RSI (20 period) value for each of the above mentioned bars.

3. Record the SMA (50 period) value for each of the above bars.

4. Determine the difference between all candles and all calculated indicators (certainly you can use a spreadsheet program to hep you do this)

Now in order to better understand the above you should answer the following questions :

1. What is the magnitude of the difference between the High/Low values between the three brokers ?

2. What is the magnitude of the difference using the RSI and the MA ?

3. Does the use of indicators increase or decrease broker dependency ?

4. How do you think indicator periods affect broker dependency ?

5. What percentage does the difference between brokers represent on the 5 minute, one hour and daily bars ? What time frame is less broker dependent ?

6. If differences amongst brokers amount to more than 10% of a bar’s values do you believe a system which is developed on a given set of data can be used successfully on another ? could a system’s edge be an artificial construct due to data manipulation on a certain broker ?

Hopefully after solving the above mentioned homework you will be able to get great insight into the magnitude of broker dependency and how the way in which a system is coded (time frame, indicators, price data used) greatly affects the possibilities of success it has based on how it may be affected by broker dependency issues. By solving the above assignment you will be able to much better understand the way in which broker dependency works and you’ll start to truly understand how VITAL it is to consider this when designing trading system for long term profitability.

If you would like to learn more about my work in automated trading and how you too can design systems based on sound trading tactics please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach towards automated trading in general . I hope you enjoyed this article ! :o)

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