Howdy all,
I'm sorry but I like open discussions around theories of trading. I'm not going to give you a system saying when X currency is above this MA with RSI here then buy 3 lots, blah blah blah. Here is the latest theory that's been mulling around my head.
How KISS can a trading system get? How about if I told you all you had to do was place on order at the open of a new candle without consideration of any past price movement? What if I told you the system was at the very least 80% correct? You'd say get out of town right? Maybe its not that easy, but it can be!
It all hit me when d3vil posted a thread about a strategy he was considering. You can read about it here:
http://www.strategybuilderfx.com/showthread.php?t=17439
My idea is nearly exactly the same except on one thing. d3vil's system requires that a currency move 50 pips to trigger a trade in that direction. My idea is, why wait for the 50 pips? I say, at the open of a new candle on a daily or weekly chart open a trade in any direction with a take profit of only 10 pips or so. No thought required, just enter a trade.
Look at a daily and weekly chart. There is a lot of movement in those candles. This system doesn't care about all that movement though. This system cares only about a few pips, 10 perhaps. What do you see in each candle on those charts? Rarely, very rarely do you see a candle open and go in one direction without any form of shadow in the opposite direction. Meaning, if a candle is a long white candle, there is still usually a shadow of a few pips below the open.
That's what got me thinking. What if when a new candle on a weekly or daily chart is formed you enter a long or short trade for only 10 pips profit. Why do I mind only taking 10 pips? Well look at the chart. How many times did a new candle form where you would have entered a position and not made the 10 pips? (I should note I'm looking at GBP/USD, EUR/USD, and USD/JPY) I'd say the win/loss ratio is 80/20. That's a very conservative number I'd say.
Also note the problem with the 80/20 number. Out of the trades that would have gone wrong, how many of those would you have been on the bad side of? If the trades were picked at random we can assume you would have been on the right side in those losing situations 50% of the time and 50% of the time on the wrong side. So the win loss ratio would probably actually be 90/10. Not sure how much better actual judgement could help, but then consider if you were able to use some chart reading experience to place yourself in the winning position of the possible losing trades better then 50% of the time. Win/loss then becomes upwards of 95/5.
I just got back from a trip to the SEMA convention in Las Vegas so I haven't looked at the charts to confirm those win/loss numbers. I'd say on a weekly chart those numbers will stand up pretty well though.
Here is another thought that came from this. What is risk/reward? Why do most of us measure our reward in pips rather than by how risky the play actually is? I see the above strategy as very safe considering the extremely low pip goals and high frequency of being correct. It is up for discussion, but I would feel very safe placing much more than just 2% of my account towards such a trade. Thus, when you're making $100 a pip consistently do you mind only taking 10 pips a week? $52K a year is probably a lot more than most make here trading. The idea is to just keep reinvesting and adding more funds to slowly build the value of your pips. When we try to take more pips, in any strategy, our probability of success begins to drop dramatically.
Right now I am having difficulty determining an exit strategy for a stop loss system though. With such long time frames we allow plenty of movement and don't want to wipe out our 10 pip profits with one long candle of 100+ pips. There are plenty of times when a currency will retrace 60 pips to give us our profits as well though. This makes me wonder how many of those 80% good trades did this and would be eliminated by a stop loss to reduce our chance of success to only 80% overall or less.
The take profits and losing exit strategy still need to be worked out. I've been thinking about taking only 5 pips from a daily candle to average 25 pips a week. The success rate would be increased on a daily candle while still giving us more pips than taking just 10 on a weekly chart. The system could also be applied to many different currencies at once to give a possible 100 pips per week if just 4 currencies are used that work well. The more volitile with low spreads the better. Isn't that cool? A system that works well with volatility. EUR/USD would work well too. We need currencies with many shadows in their candles.
This thread was also to get people thinking about different forms of trading. Many systems try to be successful based on how many times the thought process is correct. This system is based off of how many times in a time period currencies actually do something. I'm having trouble putting it into words, but do you understand what I'm saying? It's like, when a candle first opens on a long time frame chart it is 100% certain that it will move from the open in one direction or the other. What other certainties can we base a system off of? I'm going to look at a similar strategy, but with entries near the very end of a candle to see if the candles after it tend to overlap the previous close by a few pips. Could we increase the probability of success with that?
I'll finish by saying the last benefit of this system. It's so easy even an EA could do it! (Thinking of the geico caveman commercials, haha) Seriously though. No indicators. No thought process. Trades for long/short could be completely random and still be in situations where it wouldn't matter which position you take and still be upwards of 80% correct. Simple strategies could be entered though. For example, when the previous candle was red then enter a short on the open for the next candle. If it was green enter a long trade. This would add some decision making to the strategy and might help eliminate those losing trades better than 50% such that the win loss is 95/5 right off the bat.
What do you all think? The beginning would be slow, but once you start earning $50 or more a pip, the profits will add up quickly. Matt
I'm sorry but I like open discussions around theories of trading. I'm not going to give you a system saying when X currency is above this MA with RSI here then buy 3 lots, blah blah blah. Here is the latest theory that's been mulling around my head.
How KISS can a trading system get? How about if I told you all you had to do was place on order at the open of a new candle without consideration of any past price movement? What if I told you the system was at the very least 80% correct? You'd say get out of town right? Maybe its not that easy, but it can be!
It all hit me when d3vil posted a thread about a strategy he was considering. You can read about it here:
http://www.strategybuilderfx.com/showthread.php?t=17439
My idea is nearly exactly the same except on one thing. d3vil's system requires that a currency move 50 pips to trigger a trade in that direction. My idea is, why wait for the 50 pips? I say, at the open of a new candle on a daily or weekly chart open a trade in any direction with a take profit of only 10 pips or so. No thought required, just enter a trade.
Look at a daily and weekly chart. There is a lot of movement in those candles. This system doesn't care about all that movement though. This system cares only about a few pips, 10 perhaps. What do you see in each candle on those charts? Rarely, very rarely do you see a candle open and go in one direction without any form of shadow in the opposite direction. Meaning, if a candle is a long white candle, there is still usually a shadow of a few pips below the open.
That's what got me thinking. What if when a new candle on a weekly or daily chart is formed you enter a long or short trade for only 10 pips profit. Why do I mind only taking 10 pips? Well look at the chart. How many times did a new candle form where you would have entered a position and not made the 10 pips? (I should note I'm looking at GBP/USD, EUR/USD, and USD/JPY) I'd say the win/loss ratio is 80/20. That's a very conservative number I'd say.
Also note the problem with the 80/20 number. Out of the trades that would have gone wrong, how many of those would you have been on the bad side of? If the trades were picked at random we can assume you would have been on the right side in those losing situations 50% of the time and 50% of the time on the wrong side. So the win loss ratio would probably actually be 90/10. Not sure how much better actual judgement could help, but then consider if you were able to use some chart reading experience to place yourself in the winning position of the possible losing trades better then 50% of the time. Win/loss then becomes upwards of 95/5.
I just got back from a trip to the SEMA convention in Las Vegas so I haven't looked at the charts to confirm those win/loss numbers. I'd say on a weekly chart those numbers will stand up pretty well though.
Here is another thought that came from this. What is risk/reward? Why do most of us measure our reward in pips rather than by how risky the play actually is? I see the above strategy as very safe considering the extremely low pip goals and high frequency of being correct. It is up for discussion, but I would feel very safe placing much more than just 2% of my account towards such a trade. Thus, when you're making $100 a pip consistently do you mind only taking 10 pips a week? $52K a year is probably a lot more than most make here trading. The idea is to just keep reinvesting and adding more funds to slowly build the value of your pips. When we try to take more pips, in any strategy, our probability of success begins to drop dramatically.
Right now I am having difficulty determining an exit strategy for a stop loss system though. With such long time frames we allow plenty of movement and don't want to wipe out our 10 pip profits with one long candle of 100+ pips. There are plenty of times when a currency will retrace 60 pips to give us our profits as well though. This makes me wonder how many of those 80% good trades did this and would be eliminated by a stop loss to reduce our chance of success to only 80% overall or less.
The take profits and losing exit strategy still need to be worked out. I've been thinking about taking only 5 pips from a daily candle to average 25 pips a week. The success rate would be increased on a daily candle while still giving us more pips than taking just 10 on a weekly chart. The system could also be applied to many different currencies at once to give a possible 100 pips per week if just 4 currencies are used that work well. The more volitile with low spreads the better. Isn't that cool? A system that works well with volatility. EUR/USD would work well too. We need currencies with many shadows in their candles.
This thread was also to get people thinking about different forms of trading. Many systems try to be successful based on how many times the thought process is correct. This system is based off of how many times in a time period currencies actually do something. I'm having trouble putting it into words, but do you understand what I'm saying? It's like, when a candle first opens on a long time frame chart it is 100% certain that it will move from the open in one direction or the other. What other certainties can we base a system off of? I'm going to look at a similar strategy, but with entries near the very end of a candle to see if the candles after it tend to overlap the previous close by a few pips. Could we increase the probability of success with that?
I'll finish by saying the last benefit of this system. It's so easy even an EA could do it! (Thinking of the geico caveman commercials, haha) Seriously though. No indicators. No thought process. Trades for long/short could be completely random and still be in situations where it wouldn't matter which position you take and still be upwards of 80% correct. Simple strategies could be entered though. For example, when the previous candle was red then enter a short on the open for the next candle. If it was green enter a long trade. This would add some decision making to the strategy and might help eliminate those losing trades better than 50% such that the win loss is 95/5 right off the bat.
What do you all think? The beginning would be slow, but once you start earning $50 or more a pip, the profits will add up quickly. Matt