Algofxsolution.com are the creators of smart portfolios of automated trading systems, known as forex robots or expert advisors offered as a solution for automated and time efficient trading verified by independent third party results.
In this interview with Brainyforex (June 2016) the founders Daniel Stepnicka and Pavel Mik provide us with some insights behind their methodologies of creating automated trading systems.
Brainyforex : Can you please tell us a little about your backgrounds?
Daniel: We come from Czech republic, a small state in the heart of Europe. The financial crisis in 2008/9 created some opportunities and one of them was forex trading which spread into the public. Meanwhile we studied IT and trading including a lot of technical analysis. I think that about 70-80% of our so-called trading career, we spent with mechanical approaches. Experiments with discretionary principles which crashed many times, mainly for subjective view and as I say, was a case of trying to catch the wind.
Pavel: I remember on our first steps in trading, when after school we would go to the internet cafe to make progress. It just goes to show how networking can work for you and when you focus on objective data without guessing, it can save you a lot of money and stress. In my view, this is the golden advice mainly for beginners.
Brainyforex : What do Algofxsolution believe are the most important core issues for creating a profitable trading system?
We see profitable trading system or better - diversified automated trading, as a result of systematic, objective and verified process of creating and stress-testing. A profitable trading system is really not about individual metrics as Profit Factor or historical backtests. I remember a sentence of a beginner trader whom said: “This system had profit every year for the last 15 years, so why I should not believe him”? Financial markets are fascinating in this way, in that just because the sun came up today does not mean that it will come up tomorrow.
Brainyforex : Can you please explain what you mean by this in more detail?
Approach to systematic automated trading is from our perspective mainly about the process of ensuring long term profitability. We see as a wrong way to automate some single idea in the market and then this idea optimize in time. It is very short term, trading patterns will disappear and you are without a chance to fix it. On the other hand, strong process adapts on market changes, looks for new patterns to trade and test how robust this pattern and algorithm for future trading and cooperation in trading portfolio. The verified process means that we simulated these strictly systematic procedures in time and verified how good results we get in the subsequent trading horizon. So now we have some probability for ensuring long term profitability. Your readers would probably want to hear more about this unique approach, but for now at least they know know how the process starts.
Brainyforex : So what exactly is your view of back-testing?
While I denied importance of back-testing in the earlier question, I have to put it into context. Back testing is of course a very important part of the whole process. You need to verify the relevancy of the traded pattern, you need to quantify risk for the trading system or the whole portfolio of trading systems. Back-testing helps you to be objective. The other question is, how good is the back-test? This is a very, very problematic part. You must have quality back-testing to make it correct. A good back test engine, quality data, relevant testing parameters. As you can see, back test is only one of many other very important parts in the process.
Brainyforex : Talking about the specifics of your trading systems, what is the longest time period that you would be prepared to hold onto a position until it is closed out for profit? And how long for a losing position?
This is a very individual algorithm (or system) from algorithm and also it depends on applicated process of initial creating. In general, we strictly apply basic risk approach. It means that every trade has an initial stop-loss which is the base of the whole risk adjusted controlling. Systematic trading have to be objective in our view, with no speculation about how long I should hold this losing position. These questions have to be known before start of trading. But there is of course also management of opened positions. Some trading systems lock profits with stop-loss adjustments some trading systems have integrated algorithms with definition of market conditions for closing opened positions. It depends on what pattern in the market such trading system trades. Our trading systems which our company provides hold position in average about 15 hours to one day, while losing positions are mostly held in hours, so no sitting on losses.
Brainyforex : Are trading positions opened based solely on price action or is more involved like supply & demand or what the hedge funds or commercials are doing?
The trading systems which we provide to the public right now use only price action. We work on unconventional approaches but our first intention is to offer simple algorithms which can use every trader with basic trading platform and also at most brokers. Used principles on which trading systems trade are not latency sensitive, does not matter if spread is 0.2 pips or 2 pips. We create trading systems which are practical for real trading.
Brainyforex : Are only currencies traded or do you also trade other markets?
Actual portfolios of trading systems include only trading algorithms for currencies or metals like gold. Mainly gold is very interesting for automated trading and we are not only once shocked how retail traders are scared of trading them. Very often argument are slippages. Yes, gold trading involves them, but trading systems are prepared to be robust against them. It is also a great market for lower correlations in a trading portfolio which is important to achieve good results in the longer term.
Brainyforex : What is the typical annual return and draw down that your systems can produce?
For draw down and return we concentrate primarily for the whole portfolio of trading systems as a single calculation. Because automated trading have to be objective, we also present objective risk which is the value for draw down which tends to be reached or slightly exceeded in future performance, but serves as a very objective risk value. With this value and our calculators on our website, users can very easy calculate how much they need in their account balance, what % drop in performance and what return they could expect. In general, risk to return ratio is about 1.4 or 1.5. In practice, if you tolerate a draw down of about 50%, you can expect an annual return of about 75%. These values are conservative, and we always say that you should be sceptical. We have also seen a very good improvement in the past 6 months and our portfolios have a better RiskToReturn ratios.
Brainyforex : Where do you see your company headed a few years into the future? Have you got any plans to branch out into other areas?
We would like to extend our offer about unconventional approaches, expand into other financial markets and of course improve our overall services and integrate more automation. We see FinTech industry as a potential competitor to traditional funds and investment approaches. We aim for customers to have more objective tools and also full control which is something what clients currently do not have with the traditional fund manager arrangement.
Brainyforex : Thanks for taking the time to provide us with a background into your work, we look forward to watching your portfolio's trading performance.
Readers interested in more information about Daniel and Pavel's work can contact them directly through their website.
NB : Update at 20 December 2019, Daniel and Pavel's website Algofxsolution.com has been put up for sale.