Trend reversal on structure

OK, so I have been away from the markets for quite some time, but trading always pulls me back... it is a bit like an addict who although gives up, and has that little token, saying 1 week... 1 month... 3 months... 6 months... 1 year... 18 months.... 2 years... Oh crap.... 1 hour.... etc etc... I am back on it... or off it depending.

in the meantime - i have been doing a LOT of thinking... and actually playing A LOT MORE poker... (and yes i am winning, but have hit a downswing which make me question why i bother!) But anyway.. there are a lot of things that parrallel poker and trading - expected value, risk v reward or pot odds v implied odds etc etc...

Anyway, a lot of these basic maths issues can be brought over to trading. After all, if you have an expected value of each trade of 51%... 50 being break even, and everything above is value over time is a profit, and everything below 50 being a losing value... well, you have a winner on your hands.

This is where my new strategy (that is now going into forward testing) brings some of these elements together.

The strategy itself is very very easy, and i am happy to share it here... however, what i want to share, is the trade plan and money management that goes with it, as this is where i firmly believe makes it a winner or a loser over the long term - Expected Value (or EV for short)

There is a lot of terminology that gets thrown about for the fist bit - and that is Support and resistance lines/Supply and Demand, PRZ, Random market movements, astrological alignment, Fib retracements etc etc... It doesn't matter what you believe, but these are places where we can expect price to go in the other direction.

I am coming from a point of supply and demand, and that is how i will describe it.

We are looking to draw rectangles on the chart where buyers and sellers accumulate... so you should have a rectangle at the top of price, and a rectangle at the bottom of price. We are looking for where the buyers and sellers move the market. Where price is bouncing about with no clear movement - we are not concerned about these.

The easy way to find these places - is to simply zoom out as far as you can go and see where the price moves happen over time... it shoudl be pretty clear. If there is uncertainty, then you have not got the right areas.

I have one indicator on the chart.. it is called trend reversal points... and it is only represented on the chart with either a blue or a red dot.

That is it for the visual element.

What makes a successful system?

One that never loses... if you believe that, then skip along to the next system.

A successful system, in my opinion (which is key here) is one which has a healthy amount of winners in relation to losers.

What does this mean?? It depends on the system.

A system that has 1% of winners, but has a risk reward ratio of 100:101… ie you might win 99 out of 100 trades, but you only risk 1 pip and gain 101 pips over 100 trades, will be winner… don’t get me wrong, I don’t think my tolerance could cope… but I know that some people could… but what a terrible way to live!!!

A system that wins 99 trades out of 100, but every 100 trades you lose 101 pips risking 1 pip each trade, is going to be a loser over time.

S what we need is to create a strategy that by percentage, wins more than the risk reward… so, if we win 50% of the time, risking more than 1:1 risk to reward, we are going to be on to a winner.

Our EV over time will have us winning.

Something to point out here, is that the law of big numbers means that for the first 150 trades, they could all be losers… that is the nature of things.. it does not mean to say that it will be a loser over 1000 trades.

In a nutshell…. Ultimately we are looking for profitable pips… sorry, scratch that… we are looking for profit… green cash…

So to recap…

We need a system that will profit long term (hence the forward test on demo only)

We have a simple strategy:

Supply demand areas, that will serve as entry and exit points

We need a confirmation indicator to say that we have a 50% chance or more that we are going to win the trade.



Our trading plan:

The most overlooked point of any strategy… people think that If you have a winning strategy, then it needs to just be set and forget… that is SOOO wrong.

You need clear definitions for WHY you are entering the trade. You can call it whatever you like – structure, harmonics, abcd, 1:1, fib retracement/projection… pretty much everything rolls up to a decision to either enter or not… to exit or not.

I have done the thinking in regards to this and the rules of my game are as follows:

Draw in relevant supply and demand areas. What do I mean by relevant? The places where decisions are made. You may have heard of the elastic band theory – It is very relevant in band strategies – so bolinger bands for instance – price will always return to the mid line, like an elastic band… it doesn’t matter how far away it gets... price will always return to the centre line and bounce or cross it…

That is great in theory, but does not really help, as we have no idea when that would be (or rather I cant see a correlation that I can take advantage of)

However, what I DO know, is that with an alarming percentage of the time, price will always retreat to the supply demand areas. Open any chart, and you will see this. It may take a long time but the good thing for us, is that the area NEVER changes. That makes it predicatable. And no I am not saying that you leave positions open, because I said that price would always get back there, I am saying that a large percentage of the time, you will be right.

What is even better, is that once you get good at drawing in these supply and demand zones, you will start getting trades that will have a big R:R – anywhere from 1:1 to 1:10. Looking at the back testing, the average R:R is along the lines of 1:2 to 1:3. What does this equate to? For every pip, you get 2 or 3 back… so for a trade with a SL of 50, you could be looking at 100-200 pips profit.

That is super!

There is an even greater plus point to this though. If you get good at these levels, they are self fulfilling Stop loss zones. If you are expecting sellers to come in, there are places predefined in the market that the buyers will win the battle. From there, it is likely that we are in a breakout which we have just avoided. The even BETTER point, is that your stop loss will reduce the beter you get at drawing these in… I hope to show you how these can improve over time by posting my trades.

This stuff is not complicated, and the more complicated the system, the more likely it is to fail in the hands of a less than competent trader. This is what I am looking to avoid. Simple rules. Simple entries. Simple exits.
Waffling on… The entry rules themselves are easy.

Once price reaches the Supply demand zone, we are on alert. Once the trend reversal point jumps in (non repainting by the way) we enter on the opening of the next candle.

Simple.

We then open up further positions if we get further reversal signs. The maximum I have seen is 3 in one ‘trade’. Why is this a good idea? Surely this is crazy?

What generally happens is that the buyers are coming in at the demand zone… the price shoots up, and then price starts to break down once we get to the supply zone. The sellers start coming in. we get our first signal… Price drops a little bit, but the buyers are still not done… so price goes a little bit higher (but still in our zone) the sellers stand there like Gandalf ‘You will not pass’… the buyers run a little bit scared… before the Balrog regroups… and price goes a tiny bit higher again ‘YOU SHALL NOT PASS’… queue the sellers coming in with a big bright light, and the price falls away… risk to reward is increased (better entry price) and we still have a low stop loss, but our upside has just doubled… and then tripled. What is even better the more that we get these signals, the more the battle will be won… think of a double top… the more a level is tested and rejected, the more likely the ‘pushers’ will run out of energy. Not always… but more likely… we have a greater EV.

The opposite is also true.

Despite what I said above, I prefer the approach of setting a set stop loss, and set take profit. These are set in stone with the exception of the trade management rules.

Trade management rules:

Once we hit 50% profit, the SL moves to +1 pip on a 15 min chart, +3 on a 1 hour chart and +5 pips on a 4 hour chart– we then get a guaranteed winner, and we do not have to panic about losing our full stop loss.

Once we are almost at full take profit, we can move the TP level to 50% of the trade.

At this point, the issue of losing all those green pips when you were 1 pip away is just not nice. I would rather take 100 pips than take the risk 95 pips... because we did not manage the trade.


Exit rules

This is more where to place your Take profit… I have thought long and hard about this, and it all depends what your tolerance is for risk and what you believe the actual reward is.

My exit is simple on a buy trade, you place TP at the BOTTOM of the rectangle of your supply level and vice versa for a sell trade.

You may be missing some of the move, but it is a safety zone. Why chase a couple of extra pips when it only represents a small portion of the trade. Eeking out those 1 or 2 pips will ultimately cause far too much grief in my opinion.

You may think that trailing above 50% Is better for your tolerance, but not for me. As I say, it is wings and roundabouts, but the reasons and rationale listed above should hopefully be clear as to why I want to trade in this way?


Bank management:

How do you approach your bank manager with all those dollars?

This is the least often reported part of forex, because so many people never make it to this stage.

Fair enough, Bank management is NOT that. It is a case of Bankroll management.

I have a preferred Bank roll management plan which I will share at a different date. This is a demo of the strategy, not the BR management side.

What Charts to trade on?

Any.

Yes, there are choppier charts… yes there are things that happen that affect your trades, yes you can mitigate these, but at the same time, it all depends on your tolerance for volatility.

I am testing on the 15 min, 1hour and 4 hour charts. The percentage of winners (as I say in back testing!) is fairly consistent across all timeframes.

What pairs? Any. Who gives a money’s uncle about what pairs… supply/demand is always consistent… it is down to you as a trader to read the charts, and what level of volatility you can withstand and trade profitably.

How many pairs to trade? Who cares? It is down to you as a trader and your tolerance.

I am currently looking at the EURUSD, USDCAD and GBPUSD. Why? Because these are the charts I like to trade on, with USDCAD being my favourite… why? Because who knows why? Is it really any of your business, and will it affect your trading decisions? Nope!

One thing I will say, is that the 1 hour and 4 hour charts will be traded all week, and the 15 mins chart will be traded only on a Thursday and Friday – as this is when I have the ability to trade these time frames. I want to get the number of trades in, as volume = reliability.


That is it basically….

Recap and summary:

Supply/Demand areas (S/D)
Trend reversal points (TRP)
Price Reversal Zone (PRZ)


1. Draw in S/D levels

2. Price gets to Supply/Demand area it becomes a PRZ


3. When in the PRZ and TRP is triggered, we take a position. We take as many positions as we get signals for in the zone until we get stopped out, or price moves in our favour.


4. SL is place outside of the S/D level

5. TP is placed at the start of the opposite rectangle

6. Trade moved to B/E when price reached 50% to take profit

7. Trade moved to 50% profit when within a pip or two of TP level (adjusted for timeframe)


That is it… basically…

TE started to keep track.

First trade as an example on the GBPUSD 4h chart.

SL is at 80 pips, TP is at 130.

EURUSD 15 min just opened (lucky look at chart being able to trade it...)

11 pip SL, 40 pip TP.. 1:4 ratio - I am happy to take the risk on this...

Again, A really easy trade decision on the GBPUSD- this time the 15 min chart

Same area of structure as the 4 hour, just a little bit more honed in.

SL 14 pips, TP 17 pips, so a 1:1 ratio pretty much.

These trades are just to show the entries, but let's hope for some good profit all the same...

For those thinking about opening up multiple positions on the same chart, I am okay with this. My thought process is that I am taking smaller bit parts of a larger movement. 15 mins, are in and out, but is based on smaller intraday movements.

My MM is such that I will only be trading on 0.01 lots to begin with. As the risk tolerance moves up on each timeframe, the money management moves with it. So for instance I could be trading 0.5 lots on 15 min timeframe, but would still be trading 0.1 lots on 4 hour... this is bank building against timeframe not bankroll...

Ideally I would have 5K in the bank, and that would be split up accordingly across pairs and timeframes - volatility in one pair is different to others. As it is, I am trading with what I plan to start a live account with. The idea (which I have got MM spreadsheets for already, as I have previously used a similar MM system) is as the account grows, it will start being farmed out to the different pairs, and the individual pair MM kicks in. Just how I do it, but not neccesarily the right way to do it as a whole...

EURUSD trade now protected, hit 20 Pips profit, so we have a BE+1 pip or so profit.

50% profit hit, so again, this is now protected...

Taken out for a pip profit.

I should have been paying attention, as I should have moved the SL to 50%, as it was exactly 1 pip away from hitting TP... Oh well! haha! First profit on the board!

EURUSD 15min trade closed at full TP for 40 pips. Easy!

just noticed though that the explorer is showing trades from an ea I forgot I had running! really should have created a new account. I am going to leave them on, but they are not part of this system... hopefully a couple of hundred of trades and they will not matter anyway!

Dear rolandW,
Just want to thank you for sharing your approach. I think this is the first thread I have come across that even mentions bankroll, which is something that I have come across just 2 weeks ago also. I think it can also be directly related to traders being adequately funded or underfunded, which can be a downfall for some traders with a good strategy that may have an EV of >51% but just hit an unlucky loss streak or 2 hehe.

What I have come to learn is that in my opinion; starting and advanced traders should have a bankroll capital of 3-5 times the possible drawdown of the tested strategy. This means that if you use a SL of 50 pips and you can expect 6 losses in a row (-300 pips DD) that you need capital that can withstand at least 18 losses in a row (-900 pip DD), but expected value has to be positive.

Could you please share if you were using this same approach before or did you only start using it after you came back to trading recently?
Did you also learn anything else from playing poker that can be applied here or of some benefit?


Thanks again
Kind Regards,
Tzamo

Just want to thank you for sharing your approach. I think this is the first thread I have come across that even mentions bankroll, which is something that I have come across just 2 weeks ago also. I think it can also be directly related to traders being adequately funded or underfunded, which can be a downfall for some traders with a good strategy that may have an EV of >51% but just hit an unlucky loss streak or 2 hehe.

I think that there is something additional to this. Let’s face it, not everyone has the ability to start with £100,000, even if we had a nailed on strategy- I will get on to this below, but I think humans (certainly in this day and age) are looking for a quick fix. Starting with a £500 trading account is not going to net you a monthly income any time soon. On top of that, we don’t see the big picture. Out of all the threads on FF, how many are a) successful strategies b) sustainable strategies c) how many come across a successful strategy and trade it to even remote success? I am going to go out on a very short limb and say 99% of the above are failed. Why do we want to trade forex? To get rich. I don’t think anyone wants to get into forex on the promise of a lonely working life, hard work, long hours, and emotional roller-coastering. EV or not, I think sometimes, we just don’t like the mundane approach of it. I think EVERYONE is underfunded on their accounts, but at the same time that is not to say you cant be successful… just the riches are far far down the road, and the present, the return is pennies…

What I have come to learn is that in my opinion; starting and advanced traders should have a bankroll capital of 3-5 times the possible drawdown of the tested strategy. This means that if you use a SL of 50 pips and you can expect 6 losses in a row (-300 pips DD) that you need capital that can withstand at least 18 losses in a row (-900 pip DD), but expected value has to be positive.

I think you are true to a certain extent. But people over leverage themselves, in terms of using lot sizes that are too high, on the promise that if they use a bigger lot size, then they just need to get lucky once… or twice… or three times. Martingale strategies are the perfect example of this. As mentioned in the previous post, I was running an EA that was supposed to be a hedging robot. Sounded great (hence the Demo account hehe!) and it made 10% in 2 days… that was all fine and good, but it also had a floating loss of about 15%. Equity is king in this game. It is a loser long term.


Could you please share if you were using this same approach before or did you only start using it after you came back to trading recently?

I have been following another thread (usually at the top of trading strategies thread) called Ratios & Harmonics: a Different Way to Trade. Mr Pip constantly delivers in terms of his analysis and webinars (all free), however, I never had any success. However there were certain elements – sorry scratch that! His approach makes sense, and the analysis makes sense, but I cant apply it as well as he can (maybe a practice thing, or I am just not the same trader as Mr pip….) I took some elements and have been thinking, devising what elements DO work for me. So the supply/demand element is key, the structure element is key. You will be able to see that as part of my TP levels are at structure… I wonder why this is? The ironic thing is that I am trading against mr Pip. I am looking for resistance and retests of highs and lows and looking to take profits at the corrections, Mr pip takes trades at the corrections trading on the expectations.

Again, there is a certain irony to our trading methods… His analysis is based on order flow, and although his expectations are always perfectly clear – NSH/NSL, he also understands that if order flow approaches these levels and price slows down, the chances of the expectation happening fall in percentage terms – not that it wont, but a likelihood of a retracement or complex correction is more likely to happen. That is where I enter my trade. Because of my entries on this (as you have seen on the trades above as an example) my SL is usually quite tight, and the R:R is very generous. My trade place means that even If I am wrong, my SL in relation to my upside is small… With Mr Pips strategy, I just found that my SL was always relatively far away in relation to where it had to break through known resistance or support. Again, Mr Pip can trade it exceptionally well, and I can’t! This is a perfect example of one trader having an exceptionally profitable strategy, where another person (bad trader! LOL) cannot make it successful. It is not because of me, and it is certainly not Mr Pip’s strategy that I cannot trade it, it is just not my strategy… and does not suit me!

I understand that this is a bit of a long winded explanation, but thought is worthwhile. It is pretty automatic in terms of a trading methodology, but the reasons behind WHY it is simple, is because the thought process behind it holds true. I don’t get a signal, if structure gets broken.


Did you also learn anything else from playing poker that can be applied here or of some benefit?

Absolutely. Taking losses is the major thing. I only play cash games… so you sit down with X amount of dollars and you can top up as you lose hands. The thing about poker is, and especially with cash games, is that there are lots of small losses… you bet your equity, and you need to make sure that betting your equity is profitable over the long term. There is a concept called dynamic and static hand strength, and also implied odds. Basicallly, it means that with dynamic hand strength until all the cards are dealt you still have the potential of winning the hand AND getting all the money in if you make the best hand. Static hand strength is the opposite… You have the best hand and you are trying to make it unprofitable for your opponent to call and hit his hand. If he does not hit, you win every time…
Why does this matter? Because there are lots of small losses in Poker and you are trying to even these out with small wins… basically folding or getting your opponent to fold before the last card comes out, and if it does, you try to get all of the money in with the best hand and take a full stack.
What does this have to do with Trading???

Stocism. What is that you may ask, or what does it have to do with trading? Let’s take the viewpoint that the market is completely random – I don’t believe that, but let’s say it is. You have NO say in whether it goes up or down, you either place a buy or sell and hope for the best. The ONLY way you can win, is to make LOTS of trades and have a TP bigger than a SL. You will also need to have masses of volumes to see if you are a winner. You have no control over anything other than how you manage your money. The good thing, is that you know you have a 50-50 chance of being right. The money management side should be easy.
So lets say the market is NOT random. Then there has to be some logic to it – as I explained my thought process above… regardless of whether you make ALL the right decisions, you can only stack the deck, or work the odds so many times… you WILL have losses. This most likely has nothing to do with your strategy, your analysis, or what you had for breakfast… but sometimes the market throws you a duff ball, and you lose it. Sometimes the market moves in your direction, on a massive spike, and you think that it is a sure thing, only to reverse and take you out at full SL.. it happens.

You just have to know that you made a decision that was above 51% EV at the time.

Just for fun, 2 very memorable hands.

As I said I played cash games (online) and used to play between 9-12 tables at a time.
I was dealt AA, and someone to act before me jammed all in on a full stack. It was an snap call. He had 94.. my odds at this point were about 90% to win the hand. The flop comes A25.. he had 1 card to hit… a 8% chance for him to win on the turn, a 4% on the river to win… guess what card came.

This is where stoicism comes in – I can not alter the way my opponents play, but I can know that 9 times out of 10, I am taking his money. Unfortunatley this was the 1 time… shit happens!

Next hand, I was playing the goliath poker tournament- a £125 entrance fee live tournament, about 9000 entrants.. played over 3 days (lots f day 1s, and then the players who get through day 1, all go in to one day 2.

I was through to the second day, and had a pretty good read on a player. I raised, He just jammed, and I called.

I had 99, he had 88. I was ahead, and was 82% ahead. On the flop came an 8 – I was then only 22% favourite to win the hand, a 9 came on the turn – he had one card to hit – I was ahead by about 98%, he hits an 8 on the river for quads to beat my FH.

Shit happens.

The same thought process happens in trading. You can only control so much, the rest is up to how you handle and react to it.

The other thing I have learnt is patience to see results. In my time of playing online poker, I have played about 1.5 million hands… I certainly did not win all of those hands…and I certainly could have played better, but it is your average that really matters, and your average win is surprisingly small… However, those small wins over lots and lots of hands adds up to a sizeable amount over time.

So a long winded answer, but hope this helps somewhat to some end! J

Another entry on the GBPUSD 4h.

A big spike on the opening this morning, but entry rules still say this is a good entry. SL 20 pips (or there abouts), and TP around the 190 mark. That risk reward sounds pretty good to me. We are at the top of the Supply zone, so we could easily be taken out, but we saw that there is still selling resistance, as we did not get taken out earlier on the original trade. We will see how this plays out.

2nd GBPUSD 4h trade SL is now moved to Break even after a big spike to the downside and hit the 50% profit level. The original GBPUSD order is still at the original SL price.

GBPUSD hedged on the 1 hour chart. A bit of unwillingness on the part of the buyers here to let the sellers really take over.

GBPJPY trade... this is similar to the GBPUSD trade, although I would be more confident in this one if it was not for the very big sell off juyst to the left. However, the 1:4 R:R ratio says that this could be a good one. A lot going for it apart from the Red candle...

Both the 1 hour trades were taken out at SL... not that either was a surprise, hopefully the GBPUSD can go on to hit the TP over the next day or two. GBPJPY had a lot going for it, but that big red candle was the issue, but the R:R was just too good to pass up.