Foris fx trend trading system
Hello everyone.........I have developed a long-term trend trading system for Forex (FORIS FX) that has a few twists compared to standard long-term systems.
First, it has a volatility profit target for a portion of the position. Second, and what I consider the best feature of the system, it has two trailing stops that work well in conjuction with each other. They leave less open profits on the table and also typically make small profits during smaller moves that most long-term systems would lose on.
All long-term trend following systems suffer drawdowns and this is no exception. However, my struggles before with long-term systems were the magnitude of these drawdowns despite being profitable. With my system now the drawdowns are much smaller. To be fair, you do not make as large of a return on big trends with the profit target feature (as you don't have your full position on the really big moves). This trade-off has been more than offset by the smoother equity curve achieved.
For more information go to www.globaltrendcapital.com or feel free to ask any questions on the forum!
I will post some chart examples in the next few weeks to show how the system handles trade management/exits vs. standard long-term trend trading systems. If you crave the high speed pace of day trading or swing trading this will not be your thing!
I used the same basic system on my retirement accounts and earned a 100+ return over a 2-year period. I have traded it on forex over the last year or so with good results.
To start things off
Just a few items for clarification:
It is only fair that I include a snapshot of the return I mentioned, so I have included that. The dates were not hand picked....these were the starting dates for the plan and the date I rolled over to an IRA due to limitations on investments in the 401k plan. In the IRA I am up about 10% so far for 2011. With Trend Trading you can't count on consistent annual returns as you don't know what market conditions will be. When they are right you can get some heft increases to your account balance.
I will do the same for the Foris FX strategy; however, the one wrinkle is that one the trailing stop features was added mid-stream. I don't think it is fair to show results for the system without this component included. What I plan to do is get a longer-term track record of Foris FX followed 100% and then submit it.
Change of Strategy
Although I have traded the James16 method and did earn a positive return with it I didn't see the return for the time invested. This is not a knock against his price action strategies. I have a lot of time commitments and finding the time to trade a swing or shorter timeframe is not worth it to me unless the returns are better than a longer term system.
I have nothing negative to say about price action trading, as I truly believe there are many good systems for trading. One of the big hurdles as a trader is finding the strategy/timeframe that works for you. I didn't think longer-term fit me at one point, but with the adjustments I made it suits me much better.
I believe the only Holy Grail (outside of insider information or ponzi schemes for the crook) is between your ears. With this system I don't care about being right and I don't care about predictions. I care only about return over time and reacting to price. I let the markets tell me when to get in, when to adjust stops based on my trailing stop system and when to exit (initial stop and volatility profit target).
I really think there are many people/traders out there that would get more enjoyment from being right 9 out of 10 times and still lose money vs. being right 4 out of 10 times and making money.
Let's face it, almost all of us can learn the mechanics of any system and "know" when and what we are supposed to do with it. The problem for many comes in the discipline and unrelenting stubborness to follow the rules. I think it is human nature to want to tinker or add some prediction/discretion to things. I think the biggest progress I have made as a trader (outside of returns) is in this department.
I have cut off external information, opinions and predictions and simply started reacting to what the markets do (vs. what everyone expects or experts say they should do).
I am probably in the minority in that I don't think everyone can learn to trade successfully. Even though I struggled myself and had it handed to me on several occassions, some people don't have the mental makeup to learn from their mistakes and change.
A good friend of mine that was interested in trading is a perfect example. He simply could not take every trade signal......if he lost (even though the losses were small) on a few trades he would not take the next signal, which typically turned out to be the "one". He has since moved on to other systems/approaches (some that are legitimate strategies), but continues to struggle with the same problem.
I think for many the final piece of the puzzle is the trading psychology department. Over the next few weeks I will as promised provide some trade examples vs. the traditional long-term trend following approach and show the differences visually. In addition, I would like to continue putting out some thoughts on trading psychology, primarily focused on the trend trading trader.
This thread may never take off, as there are countless traders that want the instant high from day trading and shorter term trading. If there is interest, I hope some of you learn something (anything) that you can use to your benefit.
My thoughts go out to the victims of the Norway tragedy!
True Understanding of Long-term Trend Trading
What is long-term trend trading?
While most of you understand long-term trend trading, I wanted to go into more detail and approach it from a few different angles. I also would like to go into the process I went through to try and make the improvements / changes I was after. I believe that section has some good ideas for anyone using any strategy to consider for their own systems.
In its simplest form, Trend Trading to me is the concept of "Not arguing with price - ever". This may seem a little trite or too simple an explanation of a concept, but at the underbelly of trend trading long term it sums up the approach. In other words, if price is going up we are buyers and if price is going down we are sellers. Now that alone doesn't tell you when to buy if price is going up, how much to buy or when to sell/exit your postion, BUT the core strategy is reacting to price (once it proves itself) when a movement starts.
A good analogy to use when thinking of LTTR (long-term trend trading) is the following:
Let's say we have a bus that routinely goes from Point A to Point Z and beyond both ways, but there are several turns that can be taken - some lead back towards Point A and beyond while others eventually head back towards Point Z and beyond. As LTTR followers, we don't get on the Bus at Point or Stop A. We wait until the Bus has made some distance towards Point Z before "getting on".
Once we are "on the Bus" (have initaited a position), we know ahead of time if the Bus (price) goes a certain distance towards Stop A we get off to avoid the possibility it runs well past it. On the flip side, as we make continued progress towards Point Z we establish new Points that if the Bus goes back to we then get off the Bus (exit the position) to lock in our progress (profits). We don't have a predetermined exit position (not for the full position with my system at least) and hope to go well beyond Point Z.
Regardless of what people on the Bus are telling us about where they "think" the Bus is going or how far it "should" go we NEVER take any action based on those opinions. All that matters is where the Bus ACTUALLY goes. Where the Bus actually goes determines our actions, we react and never predict.
Advantages & Disadvantages of LTTT
- You do not have a high winning percentage
- You do not get in at the bottom or sell at the top (and vice versa)
- Erratic equity curve at times
- You give back sizeable open profits
- If you crave high paced action, you are at the wrong table
- In sideways markets you experience choppiness and drawdown
- Your winners are much larger than your losses
- You can have huge equity spikes/outsized returns
- Avoids the frustration/confusion of never ending fundamental factors
- Mechanics of system are not complex
- Transaction costs are low
- System automatically adjusts to each pair with repsect to volatility (in other words you buy an amount of units that put each instrument on an even playing field - higher volatile pairs will have smaller positions and vice versa)
- You don't need to be glued to the screen
- Losses on individual trades are small
Is trend trading for everyone?
NO. If you are trigger happy and need to be doing something constantly this is not for you. If your charts need to look impressive and mimic Space Shuttle or Fighter Jet technology you will be underwhelmed.
The other factor to consider is the nature of profits. Compared to swing trading or day trading, LTTT is more like a commission based job vs. a salary.
Day Trading and Swing Trading (if all goes well) has the "potential" to bring you a steady monthly income. LTTT is more like a pure commission job where you have huge months and other months where you dig into your bank account (or account capital) until the next big sale.
Unless you are a CTA or fund manager earning the standard 2% management fees on a larger fund, you can't predict or budget for monthly income. For many traders (especially those that want to trade for a living from day 1), this may make them discard the strategy entirely.
I hope this has give everyone a better understanding of what LTTT is and maybe even answered if this style of trading is for you. I promise I will get into actual charts/trade examples; however, my next topic will go into detail about the process I used to improve the system. As mentioned before, I think anyone can use these ideas to improve their own system with respect to exits.
Have a great weekend everyone!
Improving an Existing System
Ok fellow traders, I mentioned I would go into some more detail about taking a basic system and the process I used to improve it. As I stated before, basic trend following does work but has some disadvantages that I covered in the last post.
For any system (assuming your risk % doesn't change and you hopefully use stop losses), you have control over your entries, profit targets (if any) and exits (including your initial stop loss). Let's break these down one by one:
Basic break-out entries used in longer term trend following systems are honestly just not much better than a 50/50 shot when it comes down to it. Most I have used or seen come in somewhere between the 40-60% range, with some a bit lower but not usually higher. This is not really a problem per se, as if you are averaging a 4 or 5R return for each profitable trade and a 1R loss for each losing trade the system is still making money.
Simple math using 5R for profitable trades, 1R for losing trades and a 40% win rate yields the following after ten trades:
4 winners @ 5R = $20
6 losers @ 1R = $ 6
For every 10 trades, on average, you would earn $14 if you made $5 on each winning trade and lost $1 on each losing trade. The same concept applies if you are risking $100 per trade, $1,000 per trade or $10,000 per trade based on your account size and % risked.
The only "slight" improvement I was able to make was adding a filter for long and short entries. It was not a dramatic improvement, but an improvement none-the-less.
Although it was quite a process, I manually went back on real and simulated trades and tried many different things to see if I could improve the winning percentage on entries. Despite using ADX, RSI, fibs, volume (in the stock world) and many other indicators the simple fact was nothing (other than the simple filter) improved winning percentage very much on the entry side.
At this point I didn't see a reason to try and force something that was not there. The old joke about a pig in lipstick applies here. For long-term trend following you are going to have to accept the fact that 50/50 or slightly more or less is about the best you are going to get with ENTRIES.
I do want to point out that there is a danger in looking ONLY at entries with a system when determining winning %. Depending on the exit system used, your % can increase or go down same as with stop losses. A really wide stop loss will give trades more chances/room to go in your favor while a very tight stop (especially in trend following) will reduce your %. I am not pretending these are not related. Regardless, using commonly accepted stop loss and exit techniques I did not find any meaningful improvement with any indicators and only a SLIGHT improvement with a filter. I incorporated that filter and moved on to the next piece of the puzzle.
This is where things got interesting and I feel some real value was gained. Most importantly, as I incorporated these techniques in real time trading the results mirrored what I saw (or at least thought I saw) in manual backtesting.
First, I made a decision to use a volatility profit target for a portion of the position. This somewhat goes against standard trend following rules. You never want to short change your potential profits as you don't know when the trend will end. I agree with that concept; however, equity curve structure and drawdowns have become a real focus for me. I will get into drawdowns and equity curve in much greater detail down the road.
I had to be honest with myself and admit in the past I had a hard time with such brutal drawdowns with LTTT. This change does reduce your returns, but the magnitude of the drawdowns and resulting equity curve is worth the trade-off to me. While this may seem like a strange choice (to knowingly limit returns), as you trade longer and trade larger accounts you may come my way.
Think about it, while going from $2,000 in your trading account to $1,600 (20% drawdown) may not even phase you - what about going from $2,000,000 to $1,600,000 ($400,000 drawdown)? There are countless CTA's that manage funds that dwarf those figures and will take monstrous drawdowns during choppy markets. I applaud them, but I think every trader needs to trade within their comfort zone, whether it is time frame, drawdown, or risk vs. return parameters. I simply do better and perform better as a trader with less severe drawdowns than standard trend following systems.
Let me say again that I do not believe or endorse Holy Grail notions. All the changes I made do not work every time and I have seen nothing that does work every time. Putting that fact aside, I think you can come across some moments when a lightbulb goes off. This happened to me when I added the second trailing stop. The way I came up with the second trailing stop was the same process I used with the entries. Going back over actual and hypothetical trades and looking for any type of pattern that locked in more profits or lost less money. LTTT systems have a flaw with the standard exit strategy of giving back huge open profits at times.
It is a drawback of using a standard channel low for exiting positions. The trailing stop I added locked in more profits or lost less in a high majority of the historical trades I reviewed. To be fair, you can end up getting out a trade too early and have to re-enter. The strange thing is that this almost never happened. This 2nd stop DOES NOT and never will catch the top or bottom. What it does do is catch a bigger portion of the middle and in several cases gets me to break-even on the early part of a trade that ends up going bad. When I normally would have lost my 1.5% or 2% risked I broke-even instead.
Without giving this trailing stop away, I will simply say bursts of price movement in the trends direction trigger the stop to be put in place. Again, we don't exit when it happens- we simply lock in more profits.
These three things, the filter, the profit target and the tandem trailing stop basically allowed me to do the following:
1) Reduce the number of trades and increase % wins slightly with the
2) Volatility profit target lessened drawdowns, smoothed out my equity
curve and knowingly reduced returns
3) Tanden trailing stop system pretty much gave back those returns I lost
with number #2 and smoothed the equity curve even more
I guess I am getting more mature or simply older, as when I was in my twenties I can't imagine ever even discussing a focus on lower drawdowns and smoother equity curves. Potential or possible returns was all I cared about at whatever cost or potential fluctuations to my equity curve. I hope this helps everyone with their own system development and also answers questions about how Foris Fx came about.
Later this week I will throw in a screen shot of a current trade comparing standard LTTT stops vs. a tandem system as I use. It will be interesting to see how it plays out in real time.
Hope everyone had a great weekend!
Enhancing the exit strategy
I am going to attach a chart of a current trade I am in and mark the relevant areas. My purpose in this chart is not as a recommendation to trade or trading advice - it is for illustration/educational purposes only.
I have shorted this pair several times now, with the current entry taken around the .8520's area marked by the light blue arrow. Our volatility profit target was hit (marked by the green arrow). Our remaining position has a trailing stop marked by the wider dark blue arrow around the .8040 area. So we took a portion of profit at .8050's area and have the remaining position locked in at around .8040.
Using a standard trend following channel system (say 55 day entry / 20 day exit), our current stop would be the highest high of the last 20 days. Using this example, our current stop would be at the .8530 area (basically break-even).
While it is not an outrageous open profit (+688 pips), it is a sizeable move to only be at break-even. This is where I veer off the course from traditional trend following. Quite simply, I am willing to give up some in potential return by being stopped out and having to re-enter if needed to avoid giving up +688 pips of profit. I will give up 200+ pips without even blinking an eye to not miss a major move. 688 pips? No.
Now I won't pretend to know if this will be a major move or not. I will be the first to state unequivocally I don't have the slightest idea. Could I give you several reasons (fundamentally sound reasons in fact) why it should continue to go down or why it should reverse and go up? Yes, in fact I might even present a good case for both scenarios. Guess what? Opinions and sound fundamental advice for this pairwill never change the undeniable fact that I don't know for certian where or how fast it will go assuming it doesn't just meander along sideways.
At this point in the trade I don't care where it goes. If I give up those 200 pips, so be it. I will take that risk every single time. What I cannot do is give up all +688 pips.
Channel Exit Flaws
Any system that relies solely on channel exits has no choice but to give back large open profits at times. Why is this? Think about it this way......what is the one element we are completely ignoring when using channel exits? Channel exits focus more on time, or number of days when using daily bars. In other words, we have to be in the trade 20 days or so typically BEFORE there are any adjustments to protect open profits or reduce our initial stop loss. Again I will ask, what is one element we are completely ignoring? I will tell you, and I think there is a hidden gem for all traders that can be gleaned from this.
"We are completely ignoring how far price has moved in our direction during that time". Think about it........if in five days price has moved +700 pips in your favor with scenario 1, but only 20+ pips in your favor in scenario 2 do you think you should treat those the same? Even if our channel stop is still below our initial stop loss I challenge you to tell me you should treat both trades the same.
So how do we solve this problem? Well I am not giving away my own strategy, as I put a ton of time in manual backtesting bar by bar to hone it down. Regardless, this should at least get your brain working and thinking about it. I don't care if you are day trading or swing trading, trade management should be different based on how far and fast price moves in your direction.
Later in the week I want to delve into equity curve / drawdown discussions. Admittedly, I know most new traders will not even read or spend time reviewing conversations about those topics. It much more exciting to talk about entries, or new indicators, etc...etc....
I hope many of you will take the time to at least review it and really get a better understanding of what you can really handle in drawdowns. Those log charts showing back-tested results over 30-years don't look that dangerous. When you look at them in a linear mode and see the actual drawdowns and percentage losses during that timeframe you need to really be honest with yourself. Could you really handle going from $1.8 million to say $1.2 million and then maybe back to a million before jumping forward to $2.4 million?
When looking at a back-tested chart it gives you comfort because you know that you rebounded after severe drawdowns. Your quick answer will be "Yes" as you look at the right of the chart. Would it still be "Yes" with a blank hard right edge?
Have a great day!
I believe the longer/more you trade (at least in my case), the emphasis goes further away from looking for magic indicators, hyped winning percentage methods (that lose money) and more on how can I lose the least amount while still making a good return.
Drawdowns are simply the losses (peak to trough) in your equity curve. The magnitude of these can be controlled in one respect by how much your risk per trade. Let's take a very simple example of a $200,000 account - under scenario 1 you risk 2%, under scenario 2 you risk 1/2%.
Let's say you have a bad month of 8 trades, where only one trade is a winner and 7 are losers. For simplicity, let's also assume your profits (with respect to losses) are 4R.
After 8 trades in scenario 1 you are down 6%, or $12,000. For now let's ignore fixed fractional betting after each individual trade and assume we use $200,000 as our equity balance for risk purposes on each trade.
After 8 trades in scenario 2 you are down 1.5%, or $3,000. As expected, since we are risking 1/4 in scenario 2 vs. scenario 1 - the amount we are down is also 1/4. Reducing risk percentage gives you smaller drawdowns, but also lowers your return by the same factor. In other words, if in scenario 1 we are up 16% for the month under scenario 2 we are only up 4%.
Sorry I have not followed up everyone..........I have an opportunity to enter a hedge fund incubator program (trader injects capital - 10% / capital company leverages and injects their capital - 90%), which if all goes well could lead to the management of an actual hedge fund.
Depending on time demands I will try and show more updates on trades within this thread.
Have a great weekend!
Currently full with students (www.citadelcapitalonline.com), but I am offering subscription services (trading signals) until November when I should have enough time to pick up some more traders to mentor.
I will also be doing an interview at Mercenary Trader (www.mercenarytrader.com) within the next month that I will provide a link to once it is wrapped up.
Pretty quiet markets overall on the currency side.........we both know that won't last long.
Hedge Fund incubator program
I am leaning 90% towards moving forward with this opportunity. Once this happens I will be required to stop the system sales at the website. I will maintain the trading signal service and continue to write articles.
I am including a recent article here that hopefully hammers home the importance of taking "great" losses for the new traders.
All the best!
Link to trading interview
Link to Mechanical Trading Series Article
Part III of Mechanical Trading Series
Here is a link to the 3rd intallment of the trading series
Part IV of Mechanical Trading Series
Here is the link to the fourth installment of the trading series
Part V of Mechanical Trading Series
Here is Part V of my Mechanical Trading Series as well as a link to sign up for a free 30-day subscription to trading signals.
No commitment required or other non-sense. Take it for a free test drive and see if it fits your trading style.
To better describe what I do, I have a new company name and site as detailed below.
Go to the site and follow the link for 30-days of free trading signals!
Here is a link on the home building sector and strategies to pick between stocks based on relative strength/weakness. Equally applies to forex and commodities.
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