Another trading contest from Dukascopy

Dukascopy started a new contest this month. This contest is manual trading only on a demo account with no cash commitment by contestants. The twist is that the ranking is determined not only by your demo account balance, but also the total pips gained, popularity, and scoring by Dukascopy’s judges.

Each trade in the contest needs to be commented by the contestant through the JForex trading platform (when you submit an order the platform asks you for a comment). See my contest page for comment examples (shameless plug). About half of your score is based on these trade comments as they are the basis for generating popularity points and the Dukascopy judges’ final evaluation.

I can see the potential in this contest as it offers transparency and encourages interactions rather than let everyone just gamble away. However, most of the trade comments now are meaningless as it’s clear that you can generate buzz simply by making ridiculous gains. Perhaps this might change after this month’s final ranking is released as it is not clear how Dukascopy will allocate each contestant’s 25% of points. The judging by Dukascopy can effectively bump or dump you a few ranking.

The incentive to do this is the USD $15,000 ‘cash’ prizes to be won every month just like the Dukascopy Strategy Contest. And similarly, these ‘cash’ prizes are deposited into the winner’s Dukascopy trading account with a withholding period. So they’re forcing you to open an account with them if you win, which is understandable as this is a marketing effort.

For information or registration in the contest, visit the Dukascopy website and navigate to the Trader Contest page.

Why winning automated contest strategies don’t work in real trading

I despise sellers of trading robots making misleading promises like “doubling your money every month”. They are nothing more than snake oil salesmen exploiting on the greed and ignorance of others. Yet I am finding myself in a similar situation lately.

Ever since my interview at Dukascopy about my JForex automated trading contest win, I seem to have established a persona for being able to generate 45%+ return per month using my strategy. Despite my constant reiteration that this is merely a lucky result in a risk-free game, I am still getting inquiries from people interested in following my trading signals.

In another attempt to rein in expectations, consider this chart of my contest demo account balance for this month.

September 2010 JForex contest balance

As you can see, my strategy doubled the account within days. However, it also lost half of its paper value plus some more soon afterward. As it stands now, my September strategy will not be in the top 10 for this month.

If I haven’t mentioned this embarassing negative return, you wouldn’t have noticed it, would you? That’s the thing with trading contest and those snake oil trading robots, we hear a lot about them when somebody win. But what happens to those same people when they aren’t winning or the countless other unfortunate followers lost money?

This reminds me of the lottery system. Our perception of the probability of winning the lottery is drastically distorted because we hear about the winnings so much while neglecting the fact that there are millions of losers out there.

The fact is, most of the seemingly impressive trading robots out there will not last for the long term. The only reason that I have won three times out of the five months is that I change my strategy’s parameters in expectation of the future month’s market condition. That expection is based on my own market analysis from my real trading. It isn’t something that can be readily quantified yet.

The way I see it, the only way in which others can exploit my success is to buy my real secret trading system, which is, perhaps unfortunately, my brain.

My interview at Dukascopy in Geneva

To gamble or not to gamble?

There is only two more trading days left in the April Dukascopy JForex Strategy Contest. I am currently ranked 6th. But there’s a fierce fight for my spot. I’ve been moving between 6th and 8th all week even though I haven’t made any trade. The other people are putting on big bets hoping to squeeze in a top 6. Why? According to the winning prize structure, the 4th to 6th winners will each receive $1,000. Whereas the 7th to 10th will each receive $500 only. With my current account standing at $120,032 (20% gain) this month, it is quite viable for others to try to take my spot. See the table below for the top 10 standings as of this writing.

April standing 2 days before close

My options are to either fire up my strategy to make more trades or do nothing. The risk in running my strategy again is that I might lose money and make myself even less competitive. My strategy’s working timeframe is in hours, so there isn’t much room for error. As such, I feel that with only two days of trading left, time is not on my side.

On the other hand, I will probably lose out my 6th spot as I am not far away from others behind me. So if I do nothing, I will most likely end up 7th or 8th and lose half the prize money.

After pondering about this briefly, I’ve decided to do nothing. The odds are just too much against me. I have seen too many people in this month’s contest risking to move up from a good rank only to expose themselves too much and lose out of the top 10 completely.

An explanation of my Keltner Channel and Candlestick hybrid setup

This is an explanation of my automated trading strategy for the Dukascopy JForex Strategy Contest in April. This strategy just made its first trade today after running for about 72 hours. My contest demo account closed with a gain of 7% on this first trade. Note that this strategy is built for competing in a contest and not for real trading (i.e., it’s purely a no cost gamble).

Here is the concept for this high probability trading setup. Referring to Figure 1 below, the red arrow marks my short entry on EURGBP today.

These are the technical analysis indicators the strategy uses:

1. Trend: Signaled by 50 bar moving average above (bullish) or below (bearish) the 200 bar moving average.
2. Momentum: Oversold or overbought RSI conditions, but not used in a traditional manner…
3. Volatility: I use the Keltner channel to measure volatility.
4. Price action: Observe candlestick behaviour to identify trend continuation. This is where the secret to this strategy happens. I will explain this below.

Note that I used a Bollinger Bands in the chart of Figure 1 because I couldn’t find the Keltner Channel indicator in Metatrader (my charting software). It doesn’t affect my conceptual illustration anyhow.

The setup:

1. Identify overarching trend via 50/200 moving averages as explained above.
2. Confirm price is still playing to the trend by checking if current market price is on the right side of the 200 bars moving average. Price above for bullish and below for bearish.
3. Once steps 1-2 are in place, it’s assumed that the trend is strong. We look for a setup in the trend’s direction. In particular, we look for a failed counter-trend retracement setup using candlestick in combination with the Keltner channel.
4. Sounds fancy but it’s simple. Using a short-side example, the bar’s high has to penetrate above the Keltner channel yet it closes within it. Then the short entry is signaled. The opposite for a long-side entry.
5. RSI overbought and oversold conditions are used to filter out slow and steady counter-trend moves (those are evil).

Another benefit of using a price channel is that I also use it to peg my take profit target and stop loss.

As I said in my previous post, because Dukascopy expects winning contestants to submit their source codes, I am not using anything proprietary or extraordinary here. As such, this is totally different than what I use to trade on my own. Namely more reliance on indicators and less on price action and risk management.

EURGBP, 30-min