GBP/USD - one trade a day

Tons of chart time on this pair has revealed an interesting possibility. I'll be formally testing this theory in a demo account, beginning tomorrow.

The "system" couldn't be simpler. The money management takes a little more thought, so I will explain it first.

We are taking ONE trade per day (which will be described later) on G/U. We will ALWAYS set a 20-pip stop loss, and that 20-pips will ALWAYS represent 2.5% of our balance. This is important to remember.

Our goal for the month is 10% return on our opening balance. How we determine our TP for each trade is calculated from this. We will always set our TP so that, if TP is hit, it closes our month with a 10% gain. The first day of the month is simple, we risk 2.5% and want to gain 10%, so our risk:reward is 1:4. 20 pips risk * 4 = 80 pips reward. TP is therefore 80 pips for the first trade of the month.

If we have a 3% winner the first day, we have 7% left to go for the month. The next day, we are risking 2.5% and want to gain 7%. Risk:Reward for this trade is 1:2.8. We always risk 20 pips, so our TP is set at 20*2.8, or 56 pips.

Second day, we lose 2.5%. Now we have 9.5% left to go for the month. The next day, we're risking 2.5% to get 9.5%. 1:3.8 risk:reward. 20 pip risk * 3.8 reward means a TP of 76.

Hopefully the math is clear. I've simplified it a bit - the examples above do not take in to account daily compounding or spread. I have a spreadsheet that does the math for me, and these factors are considered when it calculates this. But, the concept may be challenging enough for some folks that I wanted it to be as simple as possible without losing anyone. I will post results daily, which should help you understand the math once you see it a few times.

On to the actual system. As I said, it couldn't be simpler, and it is something that I've discovered while spending hours pouring through G/U charts...

At the open of the 08:00GMT hourly candle, look back to the 00:00GMT hourly open price. If the 08:00GMT open price is lower than the 00:00GMT open price, we GO LONG. If the 08:00GMT open price is higher than the 00:00GMT open price, we GO SHORT.

SL is ALWAYS 20 pips.
TP is calculated as described above.

If neither TP or SL have been hit, CLOSE THE TRADE at the open of the 09:00GMT candle. Whether winning or losing, close the trade.

That's it. Each day, figure out your TP based on how far you are from the monthly target, wait for the 08:00GMT candle, enter based on the rules above, and set your 20-pip SL and TP that you calculated. Close the trade if it is still open at 09:00GMT.

Once you've hit the 10% target for the month, no more trades for the month. Set a goal, stick to it, and don't over trade.

For Clarity... I would NOT expect this system to work without the money management. If you take it upon yourself to backtest this, simply counting pips by looking at the 08:00GMT candle every day will probably not produce anything exciting. The key to whether or not this system will prove worthy is the high risk:reward. This is not a "how many pips can I make" system. This is a system with a pre-defined monthly target, and a money management strategy designed to help have the best chance to reach that target.

I will NOT provide "support" on this thread for how to figure out which candle is the 08:00GMT candle. If your broker is on GMT time, you have nothing to figure out. If you broker isn't on GMT time, do a search to determine how to calculate GMT based on your broker's time.

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UPDATE: 25-Feb-11
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In the 6-weeks or so that this thread has been open, not much has changed. Several concepts have been discussed - outlined below. Keep in mind, these are not "rules" per se. These are things that people observed, that you may choose to incorporate (or not) in to your trading of this system:

 

1. The "9-pip" rule. Some folks have found during testing that if the distance between the 00:00 and 08:00 candle is less than 9-pips, losing trades significantly outnumber winners. My testing has shown this as well, and so beginning from March 1st, I will be incorporating this rule in to MY trading. I will not take trades where less than 9-pips separates the 00:00 and 08:00 open prices.
2. Use the 01:00 GMT candle instead of 00:00 GMT. One member has done extensive testing substituting the 1:00 candle to compare the 08:00 to, and reports that his results were better.
3. Proportionally modify the risk:reward to suit your taste. This system will have losers. In some months, there will be a lot of them. At 2.5% risked per trade, this can add up. If you want to control risk, reduce your risk (and reward proportionally). Consider risking only 1% per trade, with a 4% monthly target instead of 10%. Or 0.5% risk per trade with a 2% monthly target. Maintain a 1:4 ratio.
4. Don't stop at 10%. Some members have reported in their backests, continuing on past 10% gains in winning months has proven to be better long-term. Alternatively, when you hit 10% for the month, instead of stopping, simply "reset" to 0, adjust your position size, and start working toward 10% again.
5. How to handle the "last" trade of the month when you are near the 10% target... It probably doesn't make a lot of sense to risk 20-pips if you are only a few pips away from the monthly target. Some options - (a) set your target for the day at 20, to make the trade 1:1 risk:reward. (b) don't trade, close your month a little short of 10% - it's still a great month if you're that close. (c) don't set any TP, and take whatever you can get. If you go over 10% for the month, great!
6. Holidays - some folks have suggested not trading on UK holidays due to low anticipated volume.

When I re-read the thread, I will add anything here that I may have missed. I think this covers the bulk of the discussions.

At least one EA has been created and posted in a separate thread. You will find links to them within this thread. DO NOT post, ask for support for, or request any EAs in this thread. If you want to create and share your own EA, create a new thread for it. I will remove the ability for anyone to post further in this thread if they post an EA, request one be created, or ask for help with one that was posted elsewhere. The only reason for this is to keep the thread from becoming flooded with "EA help" or "can you add/change this" posts. I have nothing against EAs (I use one to trade this myself), and have absolutely no objection to anyone creating one and posting it in a separate thread.

**EDIT - removed the myfxbook link again. OANDA's MT4 demo is a mess...

Finally, I hope you are able to take this concept and develop a plan with it that works for you. This is a system that leaves nothing to interpretation. You don't need to confirm if a line has crossed, if a half-dozen indicators across 4 time frames all match up, or if something repainted or turned a shade of green you've never seen before leaving you wondering if you should have entered or not. Entries and exits are perfectly clear. The "rules" are nothing more than guidelines. If you have a thought on how to make it work better for you, by all means, try it out and see. Take this and make it your own. My results below are using the followung rules: 2.5% risked per trade (20-pip SL), 10% monthly target, don't trade when there is less than 9-pips difference between 00:00 and 08:00, 20 pip TP target when less than 20-pips away from 10% monthly goal (no trade less than 1:1 risk:reward), and trade every day (no skipping holidays).

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Results
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The results below are from forward-testing in demo, beginning January, 2011. I will make an effort keep this section up to date.

January, 2011: +10% plus an additional +6% *
February, 2011: -0.35%
March, 2011: -19.19%
April, 2011: +0.83%
May, 2011: -1.50% (through 13-May)

*in January, the 10% target had been hit before this thread was opened. We started from 0 on 12-January, and were up 6% from that point at the end of the month.

Tomorrow will be the first day of our trading month.

The demo is starting with a balance of $3000. Our monthly target is $300 (10%).

We have 10% to go for the month and are risking 2.5%, so therefore our risk:reward is 1:4.

Tomorrow's trade will have an 80-pip TP.
Every trade will have a 20-pip SL.

I'll be posting the results sometime tomorrow morning.

What about a back test? Even a manual one should be pretty easy to do.

Yep, I've done a manual backtest. Looked good enough to me at least to forward test, which is why I started this thread to track it. Wouldn't have gone through the trouble if it didn't look like it had potential.

Feel free to do your own backtest, if you agree, subscribe. If you don't, there are plenty of other systems to explore, pick one that best suits your taste.

So what were your results?

Good enough to start a thread and dedicate an account to explore. Only you can decide if it's worth your time.

If you loose your first trade, which is a %2.5 loss, does this mean the target for your next trade will be %10+%2.5= %12.5?
Thank you

Yes - the target is always what is left for the month.

And that's a good point.... The first few trading days of the month, the TP is not likely to be hit. Often times, I found the SL isn't hit either, so the trades end up closing at 09:00GMT somewhere in between SL and TP.

The reason I chose to set the TP for the monthly goal, is that every now and then, this candle has a huge range. It wouldn't be impossible for us to see a 50-60 pip candle, so we could make our monthly goal early on.. And rather than just close the trade with the candle close and have no TP, by setting it this way, you don't have to worry about it reaching the target and coming back... If it hits the target, it closes, and your month is done.

This concept is based on the MM I use in my manual trading. I generally only take trades manually that I think will be at least 1:4 r/r.

Basically, you only need one trade to hit TP in a month to have made your 10%...

GU looks like a good short maybe a rounded top coming in next few days.

How did you determine this as an entry point?

Thanks Jag. However, this isn't based on fundamentals or technical analysis. Entry is determined solely by where the 08:00 opening price is in relation to the 00:00 opening price.

Quite literally by studying hourly G/U charts, and first seeing visually that the 08:00 candle is (a) often a large candle, and (b) often at, or near, a "reversal point" that seems to happen with this pair more often than not. I spent several days looking for ways to capitalize on this reversal that frequently occurs, and this was the result.

But as I said earlier, this is an experiment.... I am forward testing a theory here. I have no idea if it will prove out..

Today we entered short at 1.5638.
Closed at the close of the 08:00 candle at 1.5642.

Net loss was 4 pips.
Net % loss was 0.37%

Tomorrow's target is 10.37%
Risk:Reward = 1:4.148
Target TP = 83 pips

This was actually a logic error in my EA. This trade SHOULD have hit SL and closed with a 20 pip loss. It took a while to realize, what actually happened was it opened and closed the trade at the same time - the 4 pip loss was spread. I'll have it fixed for tomorrow.

why you pick 08:00GMT and 00:00GMT for your system ? thanks for share

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RSI S+R

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What evidence do you have that you are able to take 10% a month out of this market ?

Do you appreciate how astronomical an edge that is ?

Answered above: http://www.forexfactory.com/showpost...8&postcount=12

None, yet. That's why we test like this.

Actually, yes, I do appreciate the r:r. My manual trading operates on a similar principal. I generally only take trades manually with 1:3 or 1:4 risk:reward. I am patient, may only take 2-3 trades a month and only take setups that have this potential. I normally risk 2-3% per trade, so yes, my typical "win" when I trade manually is between 6 and 12%. When all is said and done, I am manually pulling out between 8-10% most months. So yes, I believe it can be done. Maybe not automated, but definitely manually for someone who is patient enough to only take trades with a high r/r.

This approach is new (for me). I've observed something on several years worth of charts, and am applying a MM strategy with a very high risk:reward to it to see if it works out. Yes, it is unlikely the first trade of the month will close the month out - that's not the intent. The intent is that EVENTUALLY the month will close out. From the little I've run through manually so far, I'm finding trades closing somewhere between the 20-pip (2.5%) SL and the target with the close of the candle. And with this candle showing a range of 50+ pips often enough, that's more than half of my month. If I'm already halfway to target and hit one of those big candles in the right direction, I've made the month. The 20-pip SL prevents a huge loss if I'm entered in the wrong direction.

Maybe it will play out, maybe it won't. But to me, it's worth trying. Any very simple "system" like this that is totally non-discretionary that I can automate to supplement my manual trading is worth exploring. If it doesn't work out, I'll move on to another one. If it does, it goes on auto-pilot pulling in some pips when it can.

Nice answer, so thanks. Of course ANY idea is worth testing and I hope it works out for you.

I just feel that 10% a month is a huge expectation and is why so many new traders fail - they start with too high expectations and too little money.

Best of luck with your testing.

I agree 100%. It's taken me years to get where I am - with a lot of lost money and high expectations along the way. I would NEVER trade this, or any other automated system exclusively. Nor, would I recommend to anyone just starting out that they put their entire bankroll on ANY automated strategy. The only way to truly be successful is to study, study, study and develop a plan.

I primarily trade the daily charts, S/R, trendlines, and PA. That's my steady, consistent strategy. And it takes a ton of discipline to only go after the low-risk / high-reward potential trades. Little distractions like these help fill in the gaps between those trades