MPB Journal

Core Approach

Simple maths has lead me to the conclusion that spectacular returns can be made by trading and risking much less than most people think. Below are a few 'concepts' that are banded about and I am sure you have heard them before.

1) Do not overtrade
2) Never bet the farm
3) Select trades that have potential for high reward

So I added realistic numbers to these concepts as below:

1 trade per month
2% risk per trade
3:1 Reward/Risk ratio (or 3R)

Nothing earth shattering here. But this is where the maths is impressive:

12 trades per year, risking 2% on each trade and returning 3R = 101% return on account.

Sure, this assumes we are compounding our wins based on our total equity (fixed fractional money management) and we are correct 100% of the time.
Let's assume various % Win rates and their corresponding returns:

100% = 101% return per annum
66% = 47% return per annum
50% = 25% return per annum
25% = -0.7% return per annum (roughly breakeven for the year)

So with a 50% Win rate we get 25% ROI. If you do not feel this is spectacular then you need to quit trading. The best traders/investors in the world average about 25% ROI over their careers.

My approach to achieving this type of result is:

1) Identify a market that is vulnerable to a reversing i.e. has diverged significantly from the 'mean'.
2) Wait for that market to begin moving back toward the mean (trend change)
3) Then look to enter the new trend when you can set realistic 3R reward.

Steps 1 and 2 are the key, they require a lot of patience. This is hard to do in real time.

If you look at virtually any single market there would be at least one or two big moves in a year. If you are looking at a basket of say 30 markets, that's a minimum of 30 trades on offer per year. I would say that one trade per market per year is pretty conservative and not exactly overtrading.
So hypothetically, 30 trades per year, with a 50% win rate at 2% risk = 80% ROI.
Surely my point is made here?

In summary, the idea here is not necessarily to only take 12 trades per year, risk 2% on every trade and exit after 3R. It is merely highlighting that you do not need to "make a lot of trades" and "risk a lot of money" to make very good returns.

Disclaimer

This is a quick disclaimer on the methods and/or terms I use. I do not claim to have invented any of them. They are combination of the many things I have read, watched and experienced over the years. The terminology I will use may be the same/similar to the group or person I picked it up off and by calling 'it' something different is in no way me trying to brand it as my own.
My reasoning behind any opinion I have about the market is probably something I have read first and experienced second. This is how we build our own methods.

I think Al Brooks summed it up best in his book (Reading Price Charts Bar By Bar) it is paraphrased below:

"The most important message that I can deliver is to focus on the absolute best trades, avoid the absolute worst setups.......I freely recognise that every one of my reasons behind each setup is just my opinion and my reasoning about why a trade works might be completely wrong. However this is irrelevant.......I am comfortable with my explanations and they give me confidence when I place a trade, but they are irrelevant to my placing trades, so it is not important to me that they are right.....I can also reverse my opinion if I come across a reason that is more logical or if I discover a flaw in my logic......I am providing the opinions because they seem to make sense."

1) Down trend has been going for a while
2) COT positioning has built up to be pretty bullish (Chart Below)
3) Down trend broken with close above May 29 high
4) Bullish price action under way (HH and HL)
5) Price has retraced to a nice round number 1.0 (Chart Below)
6) 1.0 is prior broken resistance and 'may' become support

Buy stop orders will be placed above the June 22 High. Will place orders after the market opens on Monday 25th as there is potential for the market to gap. Will be aiming for 3R reward on this trade.

1) Big uptrend 'was' in place
2) The June 1 spike up (pin bar) failed to hold above the 25 Nov 2011 high
3) COT positioning was extreme bull for MXN on 1st June
4) COT positioning was extreme bear for USD on 1st June
5) Uptrend broken with close below 29th May Low.
6) Price has retraced back now.

Sell stop orders below 22nd June Low.
Stop Loss orders above the 21st June High.

I will be trailing up the sell orders until either filled or the June 1st High is taken out.

Orders go filled so now have positions opened.
AUD/USD - LONG
USD/MXN - SHORT

This is a trade I am currently Long also.
Position was opened on the 15th June.
Below I have detailed the conditions that lead to this entry:

Firstly, this Market became 'setup' due to the COT data was extremely bullish as represented by the 52 week Index of the Commercial Traders (has been for a while). Also Sugar has been in a downtrend for some time (hence the Large Bullish Comm positioning)

Bar by Bar analysis as below:

Bar1 - Recent Weekly High
Bar2 - First Daily close above this high (market has 'possibly' turned)
Bar3 - Is the end of the first attempt to reverse (continue with original trend) I could have entered on a break of this bar but missed it.
Bar4 - Was the end of the second attempt to reverse. I did buy a break of this bar. As a bonus the price structure showed a second higher Low adding to the odds of an up move.

Now waiting for profit to be hit, while trailing up stop loss.

COT data was extremely bullish as represented by the 52 week Index of the Commercial Traders

Bar by Bar analysis as below:

Bar1 - Recent Weekly High
Bar2 - First Daily close above this high (market has 'possibly' turned)
Bar3 - Is possibly the first attempt to reverse (Bear Close)

I would prefer to count off the first retracement bar with a lower high or lower low. This candle is a doji so market is stalling. I am not placing orders yet I will wait to see if this first leg runs a bit further. I am in no rush to buy the first pullback that looks a bit suspect.

Bar4 - Retracement under way (lower low and lower high complete)

Order set to buy a break of this candle (signifying end of retracement)
Looking for about 3R or greater.

Long position opened.

Looks like Crude may be trying to put in a bottom.
We had a large up close Friday but did not quite close above the previous weeks high (close enough though??).
$78 seems to be solid previous and now current support.
Will watch this one for a potential Long.

Similar to Crude Oil (but cheaper to trade) COT is pretty bullish this commodity as well (amongst many others)
Closed above weekly high with a large strong candle closing pretty much on its high. Will now wait for the retracement.

Hey,

So please correct me if I'm wrong.

You basically wait for a daily break of the weekly high/low, then enter on a retrace with daily price action. Is that correct ?

Also what do you do if price doesn't retrace and just goes for several days/weeks, like the recent E/U 700 pips drop ?

Hi there,

Yes you are correct. However, the first and most important thing is to wait for the setup. I was not interested in the Euro for a short just prior to that drop.

For the sake of clarity however I will use the 1st May High as the downswing you are talking about (I assume) and show how I would have entered.....all in hindsight now but you will get the idea:

Bar1 - Close below April 23rd Weekly Low (Downtrend confirmed, look for pullbacks to short)
Bar2 - Higher Low confirms a pullback (sell a break of Bar2 low)
Bar3 - Higher Low but is an inside bar...these are a bit more tricky (sell a break of Bar3 low with stop above Bar3 High or more conservative above the high of the bar before)
Bar4 - Higher Low + Higher High confirms a stronger pullback (sell a break of Bar4 low, you can see the 3R profit in that trade also)
Bar5 - Higher Low + Higher High confirms a stronger pullback (sell a break of Bar5 low)

As you can see I use Daily price action (Highs Lows, Higher Highs etc) to tell me when a retracement has taken place. I do not use Fibs, Gann, Pivots, EMA's or Oscillators for this purpose. Sometimes I get in too early and then stopped out but its rare that I get left behind, as you can see for the example above.

Also the further into the new trend we get the harder getting the 3R profit is (obviously), of the 5 entries above 4 or them would have had 3R.

Hope that helps.

AUD/USD - LONG
Sugar - LONG
USD/MXN - SHORT

Thank you for taking the time to explain it in detail.

I have an interest in your idea since I thought about something similar, but never tested it. You made the next step. So could you please explain the problem I have with the following chart (EUR/USD):



When a fake break makes a new weekly high, do you wait for the break of the new high or stick with the first one?

If you like I can remove the chart so as to keep the thread's look clean.

Firstly your chart is fine no probs.
I would use the first close as you have indicated. As this has been validated with the first daily close above it.
Once that occurs I would deem the market to have bottomed providing the recent swing low (June 1) is not taken out by ANY price action i.e. and intraday low as this would obviously void the bottom call.

The counting or defining of a retracement in which to place orders around on this chart in particular is complicated by the fact there are inside and outside bars after the bottom was 'confirmed'. Trading these bars takes a bit of skill and dare I say it luck?...

My 'general' rule for inside bars is to trade a breakout of the bar before, this tends to be much safer (as the example below shows)

Check my Bars below:

Bar1 - Confirms new uptrend
Bar2 - Outside bar (lower low so confirms it was a retracement) Buy Stop above Current High.
Bar3 - Inside Bar (Buy stop remains above Bar2 High)
Bar4 - Just a bar that did NOT trigger Long as Bar2 high not taken out. Buy Stop orders now above this High.
Bar5 - Normal Bar.....
Bar6 - Inside Bar (Buy Orders remain above Bar5)
Bar7 - Just a bar (outside bar in fact) that did NOT trigger Long as Bar5 high not taken out. Buy Stop orders now above this High.

We get filled the next day....well and truly.

So the guts is
1) Confirm new trend
2) Confirm retracement
3) Trail Orders until we get filled.

Sometimes the bar with the orders above (that gets filled) will 'look' like a reversal bar (Pin etc), sometimes it will not.
I do not always subscribe to the fact that 'we must wait for a pin bar, or a failed breakout or engulfing pattern etc' because you can miss the first explosive move. Others will disagree and that's fine.

Hope this helps.

It makes sense now, thank you again and I hope you will continue to post trades and charts. They are a spot of clear blue sky amongst these dark cloudy indicator threads.

Full disclosure - I had to Demo this trade, one contract was too much risk for my account size. Shame really as it hit the 3R profit in 3 days......nice example none the less and always good to go through the process.

Note: Bar 4 did not appear to be a classic 'continuation bar' but yielded none the less. This is why the bar shape is not always that important. While others are waiting for the 'perfect pullback + continuation signal' we have grabbed 3R profit and are done.

Bar1 - Confirm Trend change
Bar2 - Retracement (Buy stop above High, Stop Loss below Low)
Bar3 - Orders filled.

Thanks....

Based on the price action I decided to take 2/3 of my position.
We have had some coiling of price with two consecutive inside bars. Price could breakout either way so in anticipation of an upside move I have moved the SL to breakeven and left some on the table.