Trading, Investment & Portfolio Management

Trading, Investment &Portfolio ManagementInteractive Qualifying Project ReportSubmitted to the Faculty ofWORCESTER POLYTECHNIC INSTITUTEIn fulfillment of the requirements for theDegree of Bachelor of ScienceSubmitted By:Alex PresnalNikhil GodaniNicholas ComeauAdvisorsProf. Hakim HosseinProf. Michael J. RadzickiSubmitted: May 29, 2013

AbstractThe primary objective of this project was to develop a fully-functional, automated tradingsystem that generates profit, while gaining knowledge and insight about the methods and theoriesassociated with trading in the process. The early portion of this report will encapsulate theknowledge we’ve retained throughout the duration of this project, such knowledge is crucial tounderstanding the complex nature of trading, specifically focusing on the Foreign Exchange(Forex) Market. Once the vital background knowledge pertaining to trading in the Forex Markethas been thoroughly elucidated, the report proceeds to explain the methodology behinddeveloping a trading system. After this methodology section, the report than provides a detailedexplanation of the specific aspects of the trading system developed by each individual within ourgroup, as well as the results of each of these trading strategies. Lastly, this report delves into thefocal objective of the project; discussing every facet in the scientific methodology taken togenerate our group’s final automated trading system, as well as detailed results. The report isthen wrapped up with a conclusion that summarizes all that we have learned throughout thecourse of this project, as well as several recommendations of how this excellent project can beimproved further.ii

Table of ContentsAbstract . iiTable of Contents .iiiList of Figures: . viList of Tables .viiiChapter 1: Introduction . 11.1Project Description . 3Chapter 2: Background Information . 52.1 Common Trading Terms. 5Forex . 5Stock . 7Shareholder . 10Bond . 11Options . 13Futures. 13Exchange Traded Funds (ETFs) . 15Mutual Fund . 18Pip (percentage in point) . 19Leverage . 19Lot Size. 20Bid Price . 20Ask Price . 20Spread Trade . 21Short/Long . 21Currency Pair . 22Margin Call. 22Stop Loss . 23Profit Target. 23List of Currencies . 232.2 Fundamental Analysis . 242.2.1 Gross Domestic Product . 242.2.2 Interest Rates . 262.2.3 Inflation . 272.2.4 Unemployment . 28iii

2.2.5 Resources and Commodities . 302.2.6 Economic and Political News . 302.3 Technical Analysis. 312.3.1 Bollinger Bands . 322.3.2 Fast Stochastic Oscillator . 332.3.3 Stochastic Oscillator Slow . 342.3.4 Parabolic SAR . 362.3.5 MACD . 372.3.6 Relative Strength Index . 382.3.7 Moving Averages . 392.3.8 Pivot Point . 402.3.9 Hammer and Hanging Man Patterns. 402.4 Introduction to Trading Platforms . 422.4.1 MetaTrader4 . 432.4.2 Trade Station . 452.4.3 Comparative Analysis of MT4 and TradeStation . 482.5 Money and Risk Management . 512.5.1 Money Management . 522.5.2 Risk Management . 53Chapter 3: Methodology . 563.1 Methodology behind Developing a Trading System . 563.2 List of Our Project’s Objectives . 583.3 Why Forex? . 59Chapter 4: Personal Trading . 644.1 Nikhil’s Trading . 644.2 Alex’s Trading. 714.3 Nick’s Trading. 754.3.1 Manual Trading System . 754.3.2 Automated Trading System . 82Chapter 5: Group System . 955.1 System’s Objectives . 955.2 Entries . 965.3 Exits. 985.4 Order Types . 100iv

5.5 Position Sizing and Risk Management Rules . 1005.6 System Monitoring Rules . 1015.7 Asset Allocation . 1035.8 System Code . 103Chapter 6: Results of Group’s Automated System . 109Chapter 7: Conclusion . 111Chapter 8: Recommendations . 114References. 118Appendix A: News Discussions. 120Nick’s Weekly News Discussions . 120Nikhil’s Weekly News Discussions . 130Alex’s Weekly News Discussions. 139Appendix B: Performance Summary for Group Project . 146TradeStation Performance Summary for Group System . 146Trade Analysis and Trades List . 152Annual Returns . 194Daily and Monthly Returns . 194Weekly Returns. 198v

List of Figures:Figure 1: Idea behind Trading System Development . 4Figure 2: The 8 most commonly traded forex currencies . 6Figure 3: View of the Stock Market . 8Figure 4: Warren Buffet at the NYSE (New York Stock Exchange) . 9Figure 5: A Shareholder Meeting . 11Figure 6: A 200 Dollar US Bond . 12Figure 7: Gold Futures - Bullion . 14Figure 8: Crude Oil Futures - Energy Sector . 15Figure 9: ETFs - Exchange Traded Funds . 16Figure 10: Fidelity Investments, one of the largest Mutual Fund traders . 18Figure 11: Concept of Leverage Simplified . 20Figure 12: Spreads for Options . 21Figure 13: Common Currency pairs traded. 22Figure 14: GDP figures on Nations of the World . 25Figure 15: Color Legend on the above Comparison. 25Figure 16: Fundamental Analysis of change in Interest Rates . 27Figure 17: Prices shoot up due to Inflation . 28Figure 18: Unemployment, an Important Trend and Economic Indicator . 29Figure 19: News Updates play an Important Role in Market Predictions . 31Figure 20: Bar-Chart for Bollinger Bands . 32Figure 21: Bar-Chart for Stochastic Fast . 34Figure 22: Bar-Chart for Stochastic Slow . 35Figure 23: Bar-Chart for Parabolic SAR . 36Figure 24: Bar-Chart for MACD . 37Figure 25: Bar-Chart for RSI . 38Figure 26: Bar-Chart for Simple Moving Average . 39Figure 27: Bar-Chart for Pivot Point . 40Figure 28: Example of Hammer Pattern . 41Figure 29: Example of Hanging Man Pattern . 41Figure 30: Electronic Trading . 42Figure 31: MetaTrader 4 Logo . 43Figure 32: User Interface for MetaTrader 4. 44Figure 33: TradeStation Logo . 45Figure 34: TradeStation User Interface . 47Figure 35:

(Forex) Market. Once the vital background knowledge pertaining to trading in the Forex Market has been thoroughly elucidated, the report proceeds to explain the methodology behind developing a trading system. After this methodology section, the report than provides a detailed