TradersStudio^® Professional Has Realistic Forex Analysis

TradersStudio Pro has complex support for backtesting systems to trade Forex. TradersStudio has created a session, which handles all the special Forex issues.

1. Margin is based on account leverage and lot size. Account leverage is set just like in real time trading when the account is created at the session level.
2. Trading Profit and loss is adjusted for interest rate differential, between the borrowing and lending countries.
3. Profit reported both in pips as well as dollars.

 

Problems with Trading Forex

Other backtesting platforms say they support foreign exchange currency trading, but many of the issues that present themselves only in Forex trading are not accounted for. One example is that the margin of an account is based on the leverage that the account was set up with. This means that the margin for ‘Trader A’ could be substantially different than the margin for ‘Trader B.’

In this new trading world, it is sometimes forgotten that trading Forex is totally different than trading futures or equities. Unlike the markets with exchanges that manage what is viewed as the historical data bank, Forex is the ‘Wild West’ of trading since each broker maintains their own historical database. When trading Forex pairs, you are trading on the broker’s electronic system in isolation. It is typical that the retail trader’s order is sold at the ‘bid’ price and bought at the ‘ask’ price as this spread in ‘pips’ is how the broker(s) earn their money rather than charging commissions on a per trade basis like futures or equities.

There are sources for composite Forex data like E-Signal^® Forex with its composite quote of multiple Forex brokers and banks. The problem with this arrangement is that the broadcast price is based on an average bid or offer making it possible to have a trade that occurs outside the daily range since that range is composed of average bids and offers while a fill may be at the actual highest ask or lowest offer of the day.

Another issue in Forex trading is that margin is not established by the exchanges. It is possible to establish an account with a pre-arranged leverage level, which can be as high as 400 to 1 for some brokers and lot sizes can vary from full lots to various sized mini-lots. For example, the Euro/U.S. dollar full lot size is $100,000. Some Forex brokers have minimum lot sizes set at $25,000 while others have their minimum lot sizes set at $10,000. Assuming ‘100 to 1’ leverage, it is possible to control a $10,000 mini lot with $100 in your margin account.

Another problem is that trading Forex requires not only the currency conversion like trading foreign futures, but there is also an interest profit or loss if a trade is held overnight. The following section discusses the interest calculation.

Forex Pairs Interest Calculation

Two rates are involved when calculating the interest incurred by a trade. There is the rate for the base currency and a rate for the quote currency. If there is a pair of currencies ‘B/Q’ with ‘B’ being the base currency and ‘Q’ being the quote currency, the following possibilities exist:

• If the trade is long ‘B/Q,’ interest is received for borrowing ‘B’ with the rate determined by ‘B’s’ borrowing rate. Interest is charged from the lending interest for ‘Q’ determined by ‘Q’s’ lending rate.
• If the trade is short ‘B/Q,’ interest is charged from the lending interest for ‘B’ and received the borrowing interest for ‘Q.’

 

In both cases, the difference between lending interest and borrowing interest or swap is incurred. If lending interest is greater than borrowing interest, then interest is paid to us; otherwise, an interest cost is incurred. In order to calculate the difference, both interest values must be converted into the account currency. If the account currency is the same as either the base or the quote currency, no conversion is needed for that currency.

For a particular currency, the borrowing interest rate is always higher than the lending interest rate and interest applies if a trade is held overnight, which is after 5 PM EST time.