Forex Derivative

Forex Derivative Pro 1

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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

Forex Derivative Professional 3

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.


Please check:

Enable Expert Advisor

Allow live Trading

Allow dll imports

Please uncheck:

Confirm DLL function calls

When you’ve made selections click OK.


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”.


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:


Check:

Allow live Trading

Allow dll imports

Uncheck:

Confirm DLL function calls

When you’ve made selections, click OK to close the settings window.

If you’ve 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 didn’t 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


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


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.


8. Press OK

Chart as below should be now displayed.

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.


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 don’t 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.


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 it’s true, then the built-in money

management system is enabled. If it’s 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).


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.

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 won’t 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 it’s false, then the EA will let

the positions open over the weekend. By default it is set to false.

If it’s 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.


CloseTradeOnFriday_AtPips

This parameter is only relevant if CloseTradeOnFriday is set to true.

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


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 it’s 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 it’s 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.


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 it’s 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 it’s true, general information

and the current state of the expert advisor will be displayed on the chart otherwise not.

DisplayPatternSignalOnChart

This parameter can have only two values: true or false. If it’s 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 it’s 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 it’s true, the information used

for long-term trend confirmation will be displayed on the chart otherwise not.

EmailNotification


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 it’s false, then the EA places open orders together with the stop

loss and take profit values. If it’s 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.


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

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.


TP_MaxValue

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


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

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.


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 Warning: Wrong Currency Pair

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

AUD/USD.


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

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.


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.


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 isn’t 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.


Now you can watch how trades are made.


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.


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,

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


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 .

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 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?

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.


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?

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


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

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 you’re 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

doesn’t 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


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 isn’t 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 EA’s active in the same MT4 account, the NFA compliance rules won’t

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 wouldn’t 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?


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

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 NFA-

regulated broker, we recommend not to use Forex Derivative Pro together with other

EA's.

Otherwise there is nothing against it.


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 cutting-

edge fashion to create a our own Derivative Entry Signal.


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.

Let’s check first that there is a resistance level lowering the probability that the price will

go too far away against our trade.


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. Let’s 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.


If the EA does not find a strong resistance level within the SLMax value, then the EA

won’t enter the trade.

Now let’s 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.

If the EA does find a strong support level close to the entry price, then the EA won’t 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.


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:

EMAt∆∆ .

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 won’t

enter the trade.


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.


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.


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.


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 = Start factor + (x – xo)/(x_TP – x0) ^ n x (1 - Start factor)

with


Start factor = ProfitProtection_Factor

n = ProfitProtection_Exponent

x_0 = ProfitProtection_StartAtPips

x_TP = Take Profit (as determined using the rules explained in the

previous chapter)

Here is an example how much pips are protected in case of:

start factor n-power x0 tp 0.3 3 60 102

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

already achieved profit.


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.

.


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


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.


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.

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1.22 1.27 1.32 1.37 1.42 1.47 1.52 1.57 1.62Price

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

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1.22 1.27 1.32 1.37 1.42 1.47 1.52 1.57 1.62Price

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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


For example let’s take the example to define the price range as per +/- 50 pips and the

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

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1.275 1.2875 1.3 1.3125 1.325

Price

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2) difference to left side max and right side max within +/- 50 pips distance >= 10

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1.275 1.2875 1.3 1.3125 1.325

Price

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> 10 > 10

absolute minimum

1.307

1.307


There is no optimal single set of values for the variables PriceRange and

MinOccurrenceDelta.

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).

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1.22 1.27 1.32 1.37 1.42 1.47 1.52 1.57 1.62Price

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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.


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.

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.

1.233

1.604


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

1.45

1.50

1.40

1.35


Here is an example how the price very often moves around S/R levels Above levels were determined on 2009.12.21 22:00.

As once can see, after that the price bounces very often around the previously determined

S/R levels.

Levels Determination

Time


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.


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 ∞=⇒> LPF 1

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 ),(1 nMaxDrawdowossMaxSingleL LLMinLPF =⇒> with

≡ossMaxSingleLL Maximum lot size in order to avoid predefined maximum single loss

≡nMaxDrawdowL Maximum lot size in order to avoid maximum drawdown

ossMaxSingleLL can be easily calculated based on the stop loss used

nMaxDrawdowL 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


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 won’t 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 pseudo-

random 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

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


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).

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

risk values to trade with.


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.


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.

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Forex Derivative