Forex Derivative Pro

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Table Of Contents
How to Install Forex Derivative Pro _______________________________________ 3 Step 1. Copy ex4 and dll files ______________________________________________ 3 Step 2. Restart MetaTrader 4 ______________________________________________ 3 Step 3. Set up the working parameters common for all experts ____________________ 3 Step 4. Open a chart _____________________________________________________ 5 Step 5. Place Forex Derivative Pro on the chart ________________________________ 5 Step 6. Activate your Forex Derivative Pro ___________________________________ 8 Explanation of the external parameters ___________________________________ 11 General Parameters _____________________________________________________ 12 Currency Pair Specific Parameters _________________________________________ 18 Explanation of the EA State displayed on the chart _________________________ 21 Forex Derivative Pro Backtesting ________________________________________ 23 Frequently Asked Questions:____________________________________________ 26 The Forex Derivative Pro Strategy System ________________________________ 34 Entry Strategy _________________________________________________________ 34 Exit Strategy __________________________________________________________ 39 Determining the support/resistance levels ___________________________________ 46 Intelligent Money Management System _____________________________________ 54

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How to Install Forex Derivative Pro

Forex Derivative Pro is an Expert Advisor designed to run on Metatrader 4 trading platform. Therefore, in order to run it properly you will need the latest version of Metatrader 4. If you don't already have it installed you can download it for free at http://www.metaquotes.net/.

Installation Steps

Step 1. Copy ex4 and dll files

Place the ForexDerivativePro.ex4 file into experts folder of your MetaTrader 4 installation. The experts folder is usually found at C:\Program Files\MetaTrader 4\experts\. Place the ForexDerivativePro.dll file into the libraries folder. The library folder is usually found at C:\Program Files\MetaTrader 4\experts\libraries\. Please note: During this procedure Metatrader 4 should be closed.

Step 2. Restart MetaTrader 4 Step 3. Set up the working parameters common for all experts
Click on Tools on the menu bar and select Options. Options window appears. Select now "Expert Advisors" tab.

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Please check: Enable Expert Advisor Allow live Trading Allow dll imports Please uncheck: Confirm DLL function calls When youve made selections click OK.

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Step 4. Open a chart

Now you need to open the chart for the currency pair. You can open it by clicking on File on the menu bar and selecting New Chart. Choose the currency pair. Then choose the time frame.

Please Note: Forex Derivative Pro works with EUR/USD, GBP/USD and AUD/USD on M5 timeframe.

Step 5. Place Forex Derivative Pro on the chart

Now we are ready to place Forex Derivative Pro on the chart. Double click on ForexDerivativePro in the Navigator window. If you can not see Navigator window then click on View on the menu bar and select Navigator.

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Expert Advisor Settings window appears now. Select Common tab and make the selections as shown in the picture below.

Be sure to select Long&Short positions and:

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Check: Allow live Trading Allow dll imports Uncheck: Confirm DLL function calls When youve made selections, click OK to close the settings window. If youve done everything properly until now a smiley face will be displayed in the top right corner. Next step is to activate your copy.

If you see a sad face

that means that you didnt enable live trading. To correct this

right mouse click on the chart, select Expert Advisors, Properties. Expert Advisor Settings window will appear. Select Common tab and check the Allow live trading. If you see that means that Expert Advisor is disabled. To correct this click on the

Forex Derivative Professional Expert Advisors icon in the top menu bar (see picture below).

If you get a message: Warning: EA requires at least 840 bars prior current time you will either need to download historical data or just scroll the chart backwards. How to download historical data is explained in the section Forex Derivative Pro backtesting. This message usually appears if you are using a new account.

Step 6. Activate your Forex Derivative Pro

In order to get your activation key you will need your account number (demo or real). You can find your account number in the Navigator window under the Accounts.

1. Please record your account number. 2. Now go to the download area http://www.forexderivative.com/membersFD/ 3. Insert the account number into the box and press Get Key. Please make sure

Forex Derivative Professional that your Web Browser allows cookies.

4. Please record your activation number

5. Go back to the Metatrader 6. Right mouse click on the chart and select Expert Advisors, Properties. Select Inputs tab. 7. Double click on the KEY Value and type in your key number.

Forex Derivative Professional 8. Press OK Chart as below should be now displayed.

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Please note: during the activation process, you need to be logged in into your Metatrader account.

In order to get the most trades and therefore most profits out of Forex Derivative Pro you should enable it to run all three currency pairs. EUR/USD, AUD/USD and GBP/USD.

Your Forex Derivative Pro has now been activated.

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Explanation of the external parameters

Once you have loaded the Expert Advisor to the chart you can change its external parameters by right-mouse clicking on the chart, selecting Expert Advisors, Properties and selecting the Inputs tab.

To see all the external parameters you will need to scroll down in the properties window. The external parameters are sorted into 4 sets. The first set comprehends all general parameters. For those parameters the recommended values are the default values. Only the GMTOffset needs to be adjusted in case that you dont want to open trades on Fridays. The other 3 sets of parameters comprehend currency pair specific parameters. For example set of parameters called EURUSD specific parameters will contain parameters specific for EURUSD, set of parameters called GBPUSD will contain parameters specific for GBPUSD and so on. See the picture below.

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General Parameters
KEY Key parameter is used to activate the Forex Derivative Pro. Activation process is explained in Step 6. Activate your Forex Derivative Pro at page 8. MoneyManagement This parameter is used to enable/disable the built-in money management system. It can have only two values true or false. If its true, then the built-in money management system is enabled. If its false, then the built-in money management system is disabled. The built-in money management system is explained in detail in chapter Intelligent Money Management System at page 54. MoneyManagementRiskLevel This parameter is only relevant if MoneyManagement is true (built-in money management system enabled).

Forex Derivative Professional It can have the following values LOW, MEDIUM or HIGH. If you are a conservative trader, we recommend you to use LOW risk level. If you are an aggressive trader, we recommend you to use MEDIUM or even HIGH risk level.

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The risk level controls how much capital will be risked per single trade. The default value for this parameter is LOW and we would advise you to keep it at that level until you make decent profits with the software and then you can change it to higher risk levels as you will not be risking your capital. FixLotSize This parameter is only relevant if MoneyManagement is false (built-in money management system disabled). In this case, the user has to define which lot size he wants to trade. The minimum lot size and maximum lot size depend on your brokerage. But in any case it can not be zero. OpenTradeOnFriday This parameter allows user to decide to trade or not on Fridays. It can have only two values: true or false. By default it is set to true. If it is true, then the EA will be able to open trades on Fridays. If it is false, then the EA wont be able to do so. Fridays are usually full of data releases and some traders prefer to stay out during those times. CloseTradeOnFriday This parameter allows user to close already opened trades on Friday. This parameter can have only two values: true or false. If its false, then the EA will let the positions open over the weekend. By default it is set to false. If its true, then the EA will check the open trades before market closing time (Friday 17:00 EST). Every open trade that reaches a profit level defined by parameter CloseTradeOnFriday_AtPips will be closed by the EA.

Forex Derivative Professional CloseTradeOnFriday_AtPips This parameter is only relevant if CloseTradeOnFriday is set to true.

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In such case it defines at which profit level the open positions are closed. The profit level is measured in number of pips (4-digits based). For example if you want that your order closes on Friday if profit is at least 30 pips then CloseTradeOnFriday parameter should be 30. GMTOffset This parameter can have only integer values between -12 and 14. It defines the offset in hours between GMT and your current server time. You can check your current server time on the information displayed by Forex Derivative Pro as shown below.

You can check current GMT time under: http://wwp.greenwichmeantime.com

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In the example above, the current server time (15:45) is one hour in advance compared to GMT time (14:45). So in this case the value for GMTOffset should be +1. This parameter is important only if you do not want to open trades on Fridays. CloseAllFxDerivTrades This parameter allows user to close all open trades opened by Forex Derivative Pro when desired profit has been reached. It can have only two values: true or false. By default it is set to false. If its true, then the EA will check the current balance of all trades opened by Forex Derivative Pro. In the example below the current balance of the open trades is 846.63$.

If the current balance is greater or equal than the profit level defined by parameter CloseAllFxDerivTrades_AtProfit, then the EA will close all open Forex Derivative Pro trades. If some open trades were in minus but desired profit has been reached this order will also be closed. Please notice that this feature takes all currency pairs into account. If its false, then this option will be ignored. CloseAllFxDerivTrades_AtProfit This parameter is only relevant if CloseAllFxDerivTrades is true. In such case, it defines at which profit level the open positions are closed. It is defined as the percentage of the current account balance. For example if the current account balance is 10,000$ and CloseAllFxDerivTrades_AtProfit is set to 10.0, then all open trades will be closed, if the current profit is 1,000$ or greater.

Forex Derivative Professional NFA_ComplianceRule_2.43 This parameter depends on whether a NFA-regulated forex broker is used or not. It can have only two values true or false. If its true then EA is adjusted in that way, that the NFA rules 2-43 (http://www.nfa.futures.org) are followed. Otherwise the EA remains unchanged. By default is set to true. DisplayEAInfoOnChart This parameter can have only two values: true or false. If its true, general information and the current state of the expert advisor will be displayed on the chart otherwise not. DisplayPatternSignalOnChart

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This parameter can have only two values: true or false. If its true, the pattern signal will be displayed on the chart otherwise not. Pattern signal looks as a sort of trendline that is used in combination with several other internal parameters to generate trading signals. DisplaySRLevelsOnChart This parameter can have only two values: true or false. If its true, the support and resistance levels will be displayed on the chart otherwise not. DisplayDeltaEMAOnChart This parameter can have only two values: true or false. If its true, the information used for long-term trend confirmation will be displayed on the chart otherwise not. EmailNotification

Forex Derivative Professional This parameter sends email notifications about opening trades. It has only two values: true or false. By default is set to false. But if you want to receive an email notification you will need to set up your email under Tools/Options/Email. ECN_TradeExecution This parameter controls how trades are opened. It has only two values: true or false. By default is set to false. If its false, then the EA places open orders together with the stop

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loss and take profit values. If its true, then first a market order is placed without stop loss and take profit and immediately after that, the trade is modified by setting the stop loss and take profit values. This setting is needed when trading with ECN brokers. MaxSlippage It is not always possible to obtain the exact price when trading. The value of MaxSlippage defines how far from the expected order price is still considered acceptable for opening and closing orders. MaxSlippage is specified in number of pips in a 4-digits based representation. The recommended value for MaxSlippage is 3 pips (0.0003). The order will not be executed, if current slippage is higher than specified by MaxSlippage. MaxSpread As for any other trading strategy, the spread value has an influence on the performance of Forex Derivative Pro: The higher the spread, the lower the profit factor. But the effect is not so dramatic, as our system does not employ scalping strategies. Forex Derivative Pro constantly monitors the spread. If the current spread value is higher than the value defined by MaxSpread, then you will get a message in the Experts tab and no trades will be opened in such a time period. MaxSpread is specified in number of pips in a 4-digits based representation.

Forex Derivative Professional Just before the forex market closes, the spread usually increases. So it may happen that the last spread information and thus the spread which MT4 will use for backtesting during the weekend - is much higher than in normal trading hours. Due to this fact, you may have to increase the MaxSpread value during the weekend, in order to be able to perform backtesting. MagicNumber

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Forex Derivative Pro applies an identifying number to each order it opens, the so called magic number. This enables you to identify which orders where opened by Forex Derivative Pro and which ones by other EAs. The default magic number value used is 395790116.

Currency Pair Specific Parameters

Currency Pair Specific Parameters have the same meaning for all currency pairs traded by Forex Derivative Pro. The names of these parameters differ only in their endings. For example, parameter TP_MaxValue for currency pair EURUSD is called TP_MaxValue_EURUSD, for GBPUSD is called TP_MaxValue_GBPUSD etc. They differ in their values. So, when you want to change values of these parameters please assure that desired currency pair is chosen. TP_LevelOffset This parameter defines the distance between the support/resistance level and the final take profit level as explained in chapter Take Profit on page 40. In case the entry signal is bullish, the take profit level will be at TP_LevelOffset pips below the resistance level. In case the entry signal is bearish, the take profit level will be at TP_LevelOffset pips above the support level.

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This parameter - as explained in chapter Take Profit at page 40 -defines the maximum take profit value accepted. In case the EA cannot find a proper support/resistance level within this distance, then the EA will take the take profit level at TP_MaxValue pips distance from the entry point. SL_LevelOffset This parameter defines the distance between the support/resistance level and the final stop loss level as explained in chapter Stop Loss at page 39. In case the entry signal is bullish, the stop loss level will be at SL_LevelOffset pips above the support level. In case the entry signal is bearish, the stop loss level will be at SL_LevelOffset pips below the resistance level. SL_MinValue This parameter - as explained in chapter Stop Loss at page 39 - defines the minimum stop loss value accepted. That means that support/resistance levels that would lead to a stop loss level lower than SL_MinValue, are not taken into account. SL_MaxValue This parameter - as explained in chapter Stop Loss at page 39 - defines the maximum stop loss value accepted. In case the EA cannot find a proper support/resistance level within this distance, then the EA will not take the position. ProfitProtect_AtPips This parameter defines - as explained in chapter Profit Protection at page 42 - at which profit level the profit protection is activated. It is written in number of pips (4-digits

Forex Derivative Professional based) in plus of the current open trade. The EA should protect the profit only once the

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open trade is in the green for a respectable number of pips, as the trade needs to be given some space. So you should not set this value too low. ProfitProtect_Factor This parameter defines the amount of reached profit we want to protect at the moment the profit protection is activated. For example 0.3 would mean that we want to protect 30% of the reached profit. But this value is only relevant at the very single moment at which the profit protection is activated. The closer the price from the established take profit, the more pips are protected. Theoretically when the price reaches the take profit level, the profit protection stop loss level from below is also equal to the take profit. This is explained in detail in chapter Profit Protection at page 42. ProfitProtect_Exponent This parameter defines how fast the profit protection factor will be increased; the closer the current price is from the established take profit. This is explained in detail in chapter Profit Protection at page 42.

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Explanation of the EA State displayed on the chart

As you have already seen there is some information displayed on the chart such as broker company, account currency, balance etc. But the most important information is EA State. (see picture below)

If everything is going well EA State message will be RUNNING PROPERLY otherwise there will be different messages depending on the state of the expert advisor. Here are some of those messages. EA State: EA STOPPED Warning: Wrong Time Frame

Forex Derivative Pro can only work on M5 time frame. EA State: EA STOPPED AUD/USD. Warning: Wrong Currency Pair

Forex Derivative Pro trades following currency pairs: EUR/USD, GBP/USD and

Forex Derivative Professional EA State: EA STOPPED -> Please insert your key. Activation key needs to be inserted. EA State: EA STOPPED -> Warning: Wrong KEY Correct key needs to be inserted. EA State: Warning: Old Metatrader version New Metatrader version needs to be downloaded. EA State: Warning: Wrong EA Settings Check your EA Settings. Be sure to allow live trading and dll imports. EA State: Warning: No connection available! There is no connection. Please note that for testing mode you also need a connection. EA State: Warning: EA requires at least 840 bars prior current time

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As explained on our homepage most of the strategy parameters are not defined as fixed, but calculated constantly as function of other market variables. In order to be able to do so, Forex Derivative Pro needs a certain amount of data. If you get this message you can either go to Tools -> History Center and download all of the historical data for that currency pair or just scroll M5, H1, H4 and D1 charts backwards for about 900 bars each. Please note that the EA should be installed only on M5 chart.

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Forex Derivative Pro Backtesting

In order to perform backtesting you will first need to download historical data. Click on Tools on the menu bar and select History Center. History Center window will be now displayed. Double click on the currency pair, and download all of the data from M5 to D1..

Close the History Center window. Click on View on the menu bar and select Strategy Tester. Strategy Tester window will be now displayed.

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Select the proper currency pair, select the time interval, period (needs to be M5). Click on Expert properties button. Select Inputs and insert activation key if it isnt already there. Close the window. Click on Start. To see the results click on Results, Graph, Report tabs. Please Note: In order to perform Strategy Testing Forex Derivative Pro needs to be activated and connected.

Visual Testing
If you would like to see the behavior of Forex Derivative Pro in the past you could perform visual testing. This is done in the same way as backtesting so you need to follow the steps described above plus in the Strategy Tester window you need to check Visual Mode (see the picture below).

Click on the Expert properties. The window like below will be displayed. Make sure that the parameters DisplayPatternSignalOnChart, DisplaySRLevelsOnChart, DisplayDeltaEMAOnChart are set to true. You may need to resize the chart while watching the trades in order to see how it behaves regarding the S/R levels.

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Now you can watch how trades are made.

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Frequently Asked Questions:

What is Forex Derivative Pro? Forex Derivative Pro is an Expert Advisor designed to run on Metatrader 4 trading platform. So in order to run it properly you are going to need the latest version of Metatrader 4. If you don't already have it installed you can download it for free at http://www.metaquotes.net/downloads. What is an Expert Advisor? Expert Advisor is an automated trading system written in mql4 programming language. All trading decisions are taken over automatically by the EA based on predefined set of rules. Which currencies can I trade with Forex Derivative Pro? You can trade three major currency pairs such as EUR/USD, GBP/USD and AUD/USD. What timeframe do I choose? Forex Derivative Pro uses information from several timeframes to calculate exit/entry points. The lowest one is M5. So in order for Forex Derivative Pro to run properly it needs to be put on a M5 chart. That applies for all currencies. What do I need to run Forex Derivative Pro? You need to install the latest version of Metatrader 4 trading platform on your PC and you need a reliable Internet connection.

Forex Derivative Professional Are there any free updates? Yes, all our loyal customers will be able to download every new version free of charge. Can I test your system on a demo account? Yes, you can. Can I run your Expert Advisor on different currency pairs at the same time? Yes. You just need to attach the EA to different charts. By doing so you will get more trades and therefore a higher revenue probability. What if my brokerage uses 5 digit price quotes? Will Forex Derivative Pro still work? Yes, it will work fine, as Forex Derivative Pro is designed to handle this case. My Metatrader crashes when I try to attach Forex Derivative Pro? You need to download and to install the newest version of Metatrader 4. Do I need any specific academic background in order to be successful? Not at all. Successful forex traders come from many different professions. Very often,

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people who are very successful at school or at their businesses wrongly believe that their success will be automatically translated at forex trading. What kind of Internet connection do I need? We would recommend you to use either Cable or DSL Internet service if it is available in

Forex Derivative Professional your area. I have got invalid key message although I entered the right account number. For some reasons sometimes Metatrader does not recognize the account number if you are not properly logged into the account. Please make sure that you are properly logged on and connected. In the right upper corner I don't see happy face , I see a sad face .

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That means that you didn't enable live trading. To correct this you need to "right mouse click" on the chart, select Expert Advisor, Properties. Dialog Box will be displayed. Select Common tab and check the Allow live trading. In the right upper corner I see , I don't see a happy face That means that Expert Advisor is disabled. To correct this click on the Expert Advisors icon in the top menu (see picture below).

Why I am not seeing Support/Resistance levels on the chart? Please make sure that parameter DisplaySRLevelsOnChart is set to true. Sometimes you need to adjust your chart. You can do this by holding left mouse button down and going up and down on the right border of the chart. What happens if my computer crashes or Internet connection is lost while Expert Advisor is running?

Forex Derivative Professional Forex Derivative Pro will run again when connection is restored. In the meantime your positions are protected by a stop loss. Do I need to constantly monitor the software? No, you don't. Expert Advisor does the trading for you. Which brokerage can I use? Any brokerage that supports Metatrader trading platform. When I open Metatrader I don`t see Navigator window?

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Click on the View/Navigator in the Metatrader toolbar or simply press CTRL+N hotkey. Why my testing results slightly differ from yours for the same time period? One reason is that you are using different history data. Second reason is that we are not using the same brokerage. Different brokerages have different spreads. Because of that the results may slightly differ. Even the same brokerage can have different spread values during different times. How do I attach EA to a chart? You can do it by just double clicking on the EA name in the Navigator window. Dialog box will be displayed. Check the settings as explained in the User Manual and press ok. You can also attach EA to a chart by right clicking on the EA name in the Navigator window. Again Dialog box will be displayed. Check the settings as explained in the User Manual and press ok.

Forex Derivative Professional How can I remove EA from the chart? Right-click on the chart and select ExpertAdvisors/Remove. Is there a stop loss integrated in the system?

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Forex Derivative Pro exit strategy consists of much more than a simple stop loss. But for protection purposes, especially when your Internet connection fails, every opened position has a stop loss. Can I use Forex Derivative Pro on a demo or on a real account? You can use Forex Derivative Pro both on a demo and a real account. Where can I find the Account Number and why do I need it? You can find your account number in the Navigator menu

Forex Derivative Professional You need the account number to get your activation key in the download area.

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Why has my position been closed even though neither take-profit nor stop loss level have been reached? Forex Derivative Pro exit strategy consists of much more than placing a simple stop loss and take-profit level when the position is entered. The strategy constantly monitors the market and decides when it is the proper moment to close the position. However in vast majority of cases the position will be closed at TP or SL levels. But for protection purposes, especially when your internet connection fails, every opened position has a stop loss and take-profit level. Why do I get the message Warning: EA cannot trade with Your Desired Risk Level => Increase Risk Level OR Use FixLotSize OR Change Account Type? If youre trading with a low account size, then it can occur that Forex Derivative Pro needs to trade micro or even nano lots in order to be able to trade with your desired risk level (MoneyManagementRiskLevel). If this is the case and your current account doesnt allow to trade such low lot sizes, then you will see this message. You have three options in case you get above message. Either you change to an account where you are able to open lower lot sizes or you set the lot size manually (MoneyManagement = "False", FixLotSize) or you increase your desired risk level (MoneyManagementRiskLevel). What is behind the variable NFA_ComplianceRule_2.43? If you have an NFA-regulated broker, then there are some rules which will influence your trading in case you want to open more than one position at once for the same currency pair in the same account. For example hedging is not allowed any more. That means, that

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it is not allowed to open long and short positions at the same time, for the same currency pair and in the same account. You can read more about it under: http://www.nfa.futures.org If you use an NFA-regulated broker, then you should set the value to "True". If your forex broker isnt NFA-regulated, then you can set the value to "False". Forex Derivative Pro opens only one position per currency pair at once. So in case there are no other EAs active in the same MT4 account, the NFA compliance rules wont affect the EA performance. But if you are using an NFA-regulated broker and you want to use more than one EA on the same account, then it may happen that Forex Derivative Pro is constrained and sometimes not able to open positions. Does the spread affect the performance of Forex Derivative Pro? As for any other trading strategy, the spread value has an influence on the performance of Forex Derivative Pro: The higher the spread, the lower the profit factor. But the effect is not so dramatic, as our system does not employ scalping strategies. Forex Derivative Pro constantly monitors the spread. If the current spread value is higher than the value defined by MaxSpread, then you will get a message in the Experts tab and no trades will be opened in such a time period. A State information RUNNING PROPERLY displayed on the chart is frozen as if the EA wouldnt be working. What has happened? This occurs in case Metatrader 4 does not receive any more ticks. For example during the weekend or in case your internet connection has failed. Can I activate Forex Derivative Pro on different accounts?

Forex Derivative Professional You are able to run our system on different accounts. Only thing that you need is to

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activate it with different keys (different account, different key). You can get your key in our download area: http://www.forexderivative.com/membersFD Can Forex Derivative Pro co-exist with other EA's on the same MT4 account? Forex Derivative Pro uses a magic number for controlling its positions. So our EA should work properly together with other EAs in same account. But there is one exception due to the new NFA rule 2-43: in case you are using a NFAregulated broker, we recommend not to use Forex Derivative Pro together with other EA's. Otherwise there is nothing against it.

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The Forex Derivative Pro Strategy System

Please Note: We have included this chapter in our manual in order to give our reader a glimpse into the making of a profitable trading system. Some of the technical language that is included may be new to some of our readers. However the understanding of this chapter is not necessary for the successful usage of our strategy, as for this you only need to know how to install Forex Derivative Pro in Metatrader. The entry and exit strategy will be explained first. As the support/resistance levels play a central role in the strategy system, they will be explained in detail in a separate chapter. Finally the Forex Derivative Pro intelligent money management system is explained.

Entry Strategy
For generating entry signals Forex Derivative Pro uses uses long-time proven concepts improved with some of the advanced mathematical algorithms combined in a cuttingedge fashion to create a our own Derivative Entry Signal.

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Confirmation against Support/Resistance levels

Once the EA recognizes an entry signal (for the sake of this explanation let it be a bearish signal), it will check how probable it is that the trade will be profitable based on the proximity of important support/resistance levels. Generally speaking the EA will request that there is a strong resistance level near current price, which will lower the probability that the price develops too far away against our trade. It will also request that there is NOT a strong support level near current price, which would lower the probability that the price develops for a proper number of pips in our trade direction. Lets check first that there is a resistance level lowering the probability that the price will go too far away against our trade.

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In this case, the EA will request that there is a strong resistance level within the SLMax range, as we do not want to risk too many pips in one trade.

What do we mean with strong resistance level? The support/resistance levels as explained in chapter Determining the support/resistance levels at page 46 are the local minimums of the price histogram. The price histogram itself shows the probability that a certain price value is reached. Lets say that current price is 1.437 and that we have a local minimum at 1.445. In such case there is low probability that the price will rise beyond 1.445. The lower the value of the price histogram at 1.445 compared to its immediate neighborhood, the lower the probability that the price rises beyond 1.445. And this will be our measure for the strength of the resistance level. So we will request a minimum distance in order to consider that probability as low enough.

Forex Derivative Professional If the EA does not find a strong resistance level within the SLMax value, then the EA wont enter the trade. Now lets check that we can not find support level near our bearish entry point. In this way we are increasing probability that the trade will go in our direction.

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If the EA does find a strong support level close to the entry price, then the EA wont enter the trade otherwise it will look for the next support level in order to establish a take profit value.

Confirmation against Higher Time Scale

Once the entry signal is confirmed with nearby support and resistance levels it needs to be confirmed against higher time scale.

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Basically, the EA will not open a position which is against a clearly defined higher time scale trend. For that purpose the EA uses the EMA slope calculated by the formula:
EMA . t

The reason for doing so is that by using the slope information one can recognize changes in the trend much faster then by using usual methods. In the picture below one can see how the slope information reacts much faster to trend reversals.

If the entry signal is against a clearly defined higher time scale trend, then the EA wont enter the trade.

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Exit Strategy
So, all the conditions were fulfilled and the EA entered the trade on the bearish side. First the EA needs to determine the Stop Loss level.

Stop Loss
Stop loss is calculated using the next resistance level. Since the entry signal is bearish we expect the price to move downwards. The price may also move upwards but we do not expect such an upward movement going far beyond the next resistance level.

The final stop loss level is increased by an offset value defined by the external parameter SL_LevelOffset. The offset has the following purpose. The probability that the price moves clearly through the resistance level by for example 50 pips is much lower than the probability that it just bounces for number of pips around the resistance level.

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The stop loss should not be too close to the entry price. Because of that a minimum stop loss (SL_MinValue) is defined.

Take Profit
Take profit is calculated using the next support level. Since the EA entered the trade on the bearish side it expects the price to move downwards. At least until the price encounters the next support level.

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The final take profit level is reduced by a minus offset value (TP_LevelOffset). This has the following purpose. A support level can not be determined with a 100 percent accuracy. So a bounce off a support level does not have to occur exactly at support level. In order to take this into account the take level is reduced by TP_LevelOffset.

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If the next resistance level is found to be at greater than TP_MaxValue, then TP_MaxValue value is taken as take profit level.

Profit Protection
Once the trade has come into certain profit the profit protection variable is activated. On one hand we want to let the trade have some space in order to reach the take profit level. On the other hand we want to ensure that part of our profit is locked. Forex Derivative Pro is using the following formula when calculating Profit Protection. ProtectedPips = HighestCurrentProfit x Factor Factor with = Start factor + (x xo)/(x_TP x0) ^ n x (1 - Start factor)

Forex Derivative Professional Start factor n x_0 x_TP = = = = ProfitProtection_Factor ProfitProtection_Exponent ProfitProtection_StartAtPips Take Profit (as determined using the rules explained in the

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previous chapter) Here is an example how much pips are protected in case of:
start factor 0.3 n-power 3 x0 60 tp 102

Here is a snapshot of how the stop loss may be readjusted in order to protect part of the already achieved profit.

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The term (x xo)/(x_TP x0) ^ n of above formula is shown in the graph below. The higher the n value the more parabolic the curve (That means that the trade is given more space). But in any case the closer the price from the established target profit, the more pips are protected. Theoretically when price reaches the take profit level, the profit protection stop loss level is also equal to the target profit. .

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Note: The above explained algorithm is only executed for M5 open ticks. This is done in order to avoid noise effects due to price volatility.

Opposite Derivative signal

In case an opposite Derivative entry signal occurs, then, under consideration of further factors, the following actions may be taken: close the trade, if it can be closed in decent profit readjust the take profit

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Determining the support/resistance levels

Forex Derivative Pro establishes the support/resistance levels by determining the price histogram for H1 and D1 periods and finding its local extreme values.

The EA may also consider to add max & min values and to add round numbers. Finally the EA will average over all of the levels. In the following we will focus on how the support/resistance levels are established, when it is about to determine the stop loss. In this case and as explained at page 39, the EA needs to determine the local minimums (price levels of low probability) of the price histogram. The calculation of the support/resistance levels for take profit purposes are generated in analogous way by finding the local maximums.

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Determining the price histogram

In the following we will focus on how the D1 price histogram is established. The calculation of the H1 price histogram is done in analogous way. First the EA gets the bar data information from the last 3 years.

Next the price histogram is established.

80 70
Number of Occurrences

60 50 40 30 20 10 0 1.22 1.27 1.32 1.37 1.42

Price

1.47

1.52

1.57

1.62

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Find local extreme values

As established before, we will focus on determining local minimums.

80 70
Number of Occurrences

60 50 40 30 20 10 0 1.22 1.27 1.32 1.37 1.42

Price

1.47

1.52

1.57

1.62

A proper local minimum has to fulfill following requirements: it has to be the absolute minimum within predefined price range difference to left side maximum and right side maximum is greater or equal than predefined minimum delta

Forex Derivative Professional For example lets take the example to define the price range as per +/- 50 pips and the

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minimum occurrence delta as per 10 and apply it to the local minimum candidate 1.307. As can be seen, 1.307 fulfills the requirements. 1) absolute minimum within +/- 50 pips distance
70 60 Number of Occurrences 50 40 30 20 10 0 1.275 1.2875 1.3 Price 1.3125 1.325

1.307

absolute minimum

2) difference to left side max and right side max within +/- 50 pips distance >= 10
70 60 Number of Occurrences 50 40 30 20 10 0 1.275 1.2875 1.3 Price 1.3125 1.325

> 10

> 10

1.307

Forex Derivative Professional There is no optimal single set of values for the variables PriceRange and MinOccurrenceDelta.

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If one just tries to soften the requirement for example by reducing MinOccurrenceDelta, then very often less relevant local minimums are found, whereas , for-the-eye-relevant local minimums are still ignored Example: when using PriceRange = 20 pips and MinOccurrenceDelta = 10 the local minimum around 1.40 or 1.38(see red arrows) are ignored. Also when reducing MinOccurrenceDelta to 3, the local minimums around 1.40 and 1.38 are ignored. Instead much less relevant minimums are recognized (see green arrows).

80 70
Number of Occurrences

60 50 40 30 20 10 0 1.22 1.27 1.32 1.37 1.42

Price

1.47

1.52

1.57

1.62

So the challenge is to find a method to find support-resistance levels from more relevant to less relevant. Once a certain number of levels are found, then the search is stopped. An intelligent, iterative-based method is used for finding the most relevant levels.

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Add max/min values

Even though max/min-values over a time period do not fulfill above requirements for local minimums they are definitely also important S/R levels. So they also will be considered as support/resistance levels. This is done for every time period.

1.604

1.233

Add round numbers

Even though a round number may not be a local minimum of the price histogram, they definitely are important psychological S/R levels. So in case no local minimum is found near a round number, this round number will also be considered as S/R level.

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1.50 1.45 1.40 1.35

Average over all levels

Average over 50 pips over H1, D1 levels and round numbers

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Here is an example how the price very often moves around S/R levels

Above levels were determined on 2009.12.21 22:00.

Levels Determination Time

As once can see, after that the price bounces very often around the previously determined S/R levels.

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Intelligent Money Management System

How to reach decent profits and at the same time protect your capital?
The task is to find the proper lot size for reaching decent profits, but at the same time protecting your capital from suffering a painful setback. One can describe this task mathematically as finding the lot size which maximizes the profit subject to the constraints that we do not want to experience a single loss or a drawdown greater than predefined values.

Please note: for those of you who do not understand the difference between single loss and drawdown, the explanation follows. Single loss is the maximum loss you can suffer in a single trade. Drawdown is the highest setback of your account balance.

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In mathematics such problem is known as constrained optimization and can be solved by using the method of Lagrange multipliers. See the picture below:

Without any constraint for a strategy with a profit factor greater than 1, the solution for optimal lot problem is as follows: if PF > 1 L = That means the bigger the lot size, the greater the profit we will have. However, if constraints come into play the solution is as follows: if PF > 1 L = Min ( LMaxSingleLoss , LMaxDrawdown ) with
LMaxSingleL oss
Maximum lot size in order to avoid predefined maximum single loss Maximum lot size in order to avoid maximum drawdown

LMaxDrawdown

LMaxSingleL oss can be easily calculated based on the stop loss used

LMaxDrawdown is much more trickier to calculate The difficulty here is to determine MaxDrawdown. The reason is that the maximum drawdown is not just the maximum loss you may phase in a single trade, or the loss you

Forex Derivative Professional may suffer in the case you get maximum number of losses in a row. The maximum setback can also occur in the case you get losing trades within winning trades. Clearly speaking there are millions of combinations and you can only determine the maximum drawdown in terms of probability. We will use a 3sigma-probability level which means that with 99.75% probability almost 100% - we wont reach the predefined drawdown. For doing so we use the so-called Monte Carlo method. Monte Carlo methods are a class of computational algorithms that rely on repeated random sampling to compute their results. Monte Carlo methods are often used when simulating physical and mathematical systems. Because of their reliance on repeated computation and random or pseudorandom numbers, Monte Carlo methods are most suited for calculation by a computer. Following steps are done: A) For 1 lot do the following calculation 1) First we calculate the probability distribution for the outcome of a single trade

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2) Then we simulate 10,000 samples, each one with 1,000 trades, based on the previously determined probability distribution for the outcome of a single trade 3) Calculate the probability distribution that a Max Drawdown occurs 4) Calculate the cumulative distribution function and determine the 3s point 5) We get the maximum drawdown value for trading 1 lot => now we need to adjust the lot size so that we get the maximum desired drawdown B) As the maximum drawdown is proportional to the lot size, we can use the following trick. We calculate the needed factor for multiplying the max drawdown axis in order that

Forex Derivative Professional the 3 sigma point falls as desired. With the same factor we multiply the 1 lot size and obtain the desired value. Here is a general example how this could look like, when plotting the determined drawdown as function of profit factor and winning percentage rate (accuracy).

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Ok, now that we now how to control the risk, it is about to determine which are proper risk values to trade with.

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How to determine proper risk values?

Our software has a Money Management Risk Parameter set as an external variable. It can have following values. LOW, MEDIUM and HIGH. In our case risk level means that no more than predefined percent of the trading capital can be risked per single trade. We have set the default value to LOW as it will take the greatest care of protecting your capital. Basically it will slowly increase the lot size as your account grows. After your account reaches some decent level profit you can switch the risk level to MEDIUM as now you can afford more risk as you are trading with the capital that you have already won. After that it is up to you to decide when to switch the risk level to HIGH as it provides the highest opportunity for making rapid profits.

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U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.