Like Options, But Not

Trading Automated Spot Forex Systems

by Joseph James Gelet

Want to trade spot forex? With proper risk controls, this method can be used like options to take a position in the market.

Options offer traders a unique way to take a position in the market not offered by traditional markets. Options have certain features such as static cost of the option, which quantitative analysts and portfolio managers appreciate greatly. Options are considered sophisticated, and in many ways they are. Although it is easy for anyone to open an option account and trade, strategies involving options can quickly become complex.

Some exotic options are customized to meet the demands of traders who want to take specific views of the markets. One is the double no-touch, which pays off if the market does not touch the two outlying prices. This is betting that the market will stay within a range. During short periods of time, this can be highly successful, such as during a week where the market is waiting for news announcements and lacks volatility and volume. However, it is sometimes difficult to find liquidity for such short-term options, where an automated spot system would be valuable. It is more difficult to win using this strategy over a longer period of time, such as months. However, there are many reasons that the market will be in a defined trading range, so you should explore all possibilities.

Grid trading system
A grid trading system, as it is referred to by foreign exchange traders, places orders above and below the market every specific number of pips (the number of pips can be adjusted according to the pair of currencies traded). You sell above the market and buy below. As long as the market is in a trading range, the strategy will never lose. Once the pair starts trending in either direction, the strategy will begin to open more and more losing positions until the total drawdown of the system becomes unmanageable or wipes out the account balances. Horror stories about accounts being wiped out and other personal experiences have allowed traders to brush off these systems as useless.

Image 1

Figure 1: eur/chf. Since June 18, 2009, the EUR/CHF has traded between 1.5365 and 1.5105, which is a 350-pip range. You can use this range to set your grid levels.

...Continued in the April issue of Technical Analysis of Stocks & Commodities

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