Low Risk, High Reward Trading Experiment

Dear Davidl,

Thanks for posting the interesting and thought-provoking article. It makes many important points. I especially like the "Golden Rule" of investing. I agree with virtually everything in this article, except for his concept of "expectancy" which is flawed. His mathematics are faulty. He adds together losses and profits as a multiple of risk and then averages them. He then asserts that this expectancy number will be the average gain per trade over many trades. This is not true. This is not how it works when one trades with a constant risk factor. The losses and gains aren't added together, they are multiplied by each other as one compounds one's losses and gains.

For instance, in his ten marble example, if the risk factor is a% (example: a = 5%) then the seven -1R marbles will produce a loss of capital of (1-a) to the seventh power. The one -5R losing marble will produce a loss of (1-5a), and the two winning marbles will produce gains of 1+10a twice, multiplied by each other, not added. The total change in capital will be (1-a) EXP 7 * (1-5a)*(1+10a) EXP 2

In this example, if a=5%, then the net change in capital will be 1.18 times initial capital, over the course of 10 trades, which represents an average gain of 1.67% per trade. However, Van Tharp's false theory says that one would earn .8R return per trade, which in this example would be .8*.05 = .04 = 4% per trade.

Dear Jacko,

I have no interest in investing the time and space here to engage in a lengthy debate for the following two reasons:

1) Your comments frequently incorporate assumptions which contradict many things that I have repeatedly stated and explained, indicating that you are either obtuse or being willfully argumentative. For example, I have addressed the issue of trailing stops. I have addressed the issue of the "performance" of my experimental trades. I have addressed the issue of the discrepancy between the "performance" of my experiments, and the performance of my mentor in his live trading program. I have frequently discussed the lessons that I have gleaned from my experiments. Almost all of your "questions" and "comments" incorporate hidden assumptions that are plainly false and are, in many cases, contradictory.

2) The combination of deep seated skepticism bordering on fanatical intolerance, combined with arrogant advise-giving indicates a character type which I don't prefer to associate with for obvious reasons in this particular endeavor. You assume that I need or want your advise in order to "improve my trading results". Yet you have no idea what my trading results are, nor have you even provided any evidence that you have properly evaluated the actual performance of the experimental trade signals that I have generated over the past 5 months, even though the "performance" of these experimental trade signals is only obliquely related to the actual "performance" of the trading system that I am in the process of developing. You have no idea what that trading system is, so you have no basis to evaluate its "performance".

Hostility, arrogance and prejudice plainly dominate your intellect, preventing you from thinking in a logical, fact based fashion. Good will, curiosity, appreciation and humility are the foundations of a healthy intellect. Cynicism, malice, arrogance and pride are the hallmarks of an unhealthy intellect that takes pleasure in destroying others to try to assume a dominant position, rather than improving oneself and helping others for mutual benefit.

Hi Itme,

Sad, glad, intrigued, disappointed etc etc that your experiment is nearly over - this has been a great thread to follow.

What do you plan for the post experiment era??

There comes a time to summarise one's findings, incorporate them into the best trading system one can muster, and put the invention to the test. And test the operator (the trader) in the process. Two weeks ago I threw together a trading protocol designed to maximise simplicity and objectivity, minimize subjectivity, and of course minimize risk and maximize gains. I backtested it over an arbitrary 10 day period on the EUR/USD, and the results were incredible. 100% successful trades, and over 75 pips per day profit - seven days a week. Of course each trade had a minimum of 4:1 reward : risk ratio. The backtesting was extremely time intensive because I was recording alot of data that could be analysed later to great advantage to improve the protocol. I want to extend the backtesting to a complete year, which could easily take me a full week of analysis, full time.

Depending on the results, I expect to implement this trading system (or a slightly modified and refined version), and make some money finally after all this work.

I am also planning to work with a team of people to develop a trading system and business plan to provide trading signals to people on a commercial basis. The plan at this preliminary stage is to do the requisite research and training to develop a qualified team of people that is competent to generate trade signals approximately weekly with a 2.5 :1 reward : risk ratio, and a 70% success rate, which if traded with a 15% risk factor would generate a rate of return on capital of roughly 15% per week. The compounded return would be about 1,000 to 1,500 times multiplication of capital per year.

Monday October 9 3:00 ET

The wave count that formed the basis of Trade Signal #200 Buy EUR/CAD at 1.4170 was obviously incorrect. Because I started the count at the wrong point, I ended at the wrong point, mistaking the bottom of Wave B for the bottom of Wave C on what I believe is a corrective wave. Our targetting system gives us the region of 1.4050 to 1.4080 as the probable reversal zone which would be the entry point for the long trade with a target at about 1.4340.
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Previous trade signal:

Friday October 6 2006 at 12:3 ET

We think EUR/CAD may have completed the downwards "b" segment of an upwards "abc" corrective wave. The upwards "c" segment should now follow, targetting our earlier predicted high region of 1.4340 to 1.4370
Trade Signal #200 Buy EUR/CAD at 1.4170
Stop is 1.4134
Target is 1.4340
Risk is 46 pips
Reward is 160 pips
Reward : Risk ratio is 3.7 to 1

For research purposes only.
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Monday October 9 3:00 ET

We believe that EUR/USD is engaged in an upwards Wave 4 that could take it up into the region of 1.2650 to 1.2675

If the wave count looks clear, then there would be a trade opportunity somewhere in that zone down to a lower target at about 1.2550, to finish the downwards trend since September 22. Then a good opportunity to buy EUR/USD would occur.

Monday October 9 3:15 ET

Trade Signal #201 Buy USD/CAD at 1.1202

Stop is 1.1179

Target is 1.1315

Risk is 26 pips
Reward is 108 pips
Reward : Risk ratio is 4.1 to 1

For research purposes only.

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Good we have a new signal provider

To be honest Im a bit surprised that you are also going to sell signals because I always thought this was an experiment not oriented to business.

But If you decided to do this, I think you are one of those which at least proved a valid way of trading before.

good luck

cheers

The concept of a recreational forex trader has crossed my mind, but considering the time and cost of developing the skill to trade the forex profitably, I conjecture that at least 98% of traders trade for profit. The desire to generate signals is out of the question for all but a tiny majority of traders, as their systems are not conducive to the requirements. Once one has developed such skill, then a variety of factors will shape the decision to either trade as an individual, join a professional trading environment and manage capital, or provide educational, mentoring, or other services to the trading community. The character and values of the individual will be included in these factors.

It seems to me that being able to make a millionaire out of a large number of people with an initial capital investment of only $1,000 in about a year requiring only five minutes a week of time would be a worthy contribution to society. What do you think, trucco? Would it be better to not provide that service if one could?

Do you have a time frame in place to when you might start this new endeavor? Also will you notify the individuals that have been participating in your thread the opportunity to participate in this signal service per say?

Thanks, Monarch

I agree, I would welcome the opportunity to learn and teach new trading strategies. I have been watching this thread from the beginning and have been demo-ing the trading signals with impressive results. I would welcome somekind of trading alerts system that you might have available.

Hi itme,

The idea of being able to make rich many people is great, but in fact I feel it is not very realistic.

In a general way Im always a bit skeptical with signal sellers, because I find it an easy way to make lots of money without any risk.
I would find it a correct business if who sells signal would also assume the responsability to give back the cost of the service if the net pip sum is negative.
I dont see any product in the world that doesnt include a warranty about his functionality, quality.

In addition to this, we all know that behind forex there is a big interest, from banks, rich people, and i dont know who else.
Im not even interested to know who is behind this, but I know for sure that any kind of trading, gambling, casino is made to make very rich who controls this,and it will always be like this.
This said, making many traders to make milions is just impossible.
As soon as you try it, your system, if works, will fail, and you will fail with it.
So, as the forex machine will ALWAYS allow to few partecipants to take some money home, why should you spend this possibility you have found for yourself with selling something that will turn also against you ?

I'd like to underline that Im not talking about you, you didnt even start to sell anything, this is a general discussion, and I really respect you in this forum.

Thanks,

Trucco

[quote=itme]Monday October 9 3:15 ET

Trade Signal #201 Buy USD/CAD at 1.1202

Stop is 1.1179

Target is 1.1315

Risk is 26 pips
Reward is 108 pips
Reward : Risk ratio is 4.1 to 1

For research purposes only.

As I've said, I'm new to your thread ItMe-now my broker had this priced @ 37 at this time. Could you please explain? Did u have another price someplace else, or are you saying to buy IF the price goes down to 02...buyin at 37 obviously seems wrong, as it definately upsets the risk/reward ratio...thanks<!-- / message --><!-- / message -->

Thanks, Trucco. You make a good point. What we might do is pre-select who we make into millionaires. Only people in need, or people with good values. Then we will only make about 1,000 millionaires each year, to prevent our project from rocking the boat. The people could let us trade their accounts, so if their accounts got too large, we could set them free. We needn't provide a guarantee. No financial investments that offer the possibility of high returns are guaranteed to succeed.

Yes, Newstrader, buy only if the price descends to the entry price. Better yet, buy when it descends far below the entry price, if you can. And only buy if other criteria that you have confidence in confirm this signal. And place the stop further away to be even safer. And get out sooner. All these are ways to either increase the probability of success, at the cost of reducing the profitability of the trade or by increasing the risk of missing the boat.

Thanks ItMe-that's what I thought regarding the USD/CAD signal-now a question about this one:

EUR/USD was trading arounf 2700 all day without much movement. Does this indicate to buy IF the price goes down to 2550? The 2650-75 region sems to have passed. Thanks again for the explanation.

First of, we need to distinguish between my casual "predictions" and formal trade signals. Predictions are for practice from my point of view, to learn, and for the readers for interest sake primarily, and for educational value. Only formal trade signals constitute actual tradable setups that have been confirmed and analysed to meet system criteria (at least theoretically - in fact for a variety of factors we still expect to make a few errors, but we are working on reducing the number). When we develop our skill in analysing Elliott Waves and other methods, then our predictions will get better and better - more reliable and accurate. In the meantime, the experimental "trade signals" are situations of relatively high probability that our prediction is accurate, within the specifications of the entry price, stop and target. The present goal is about 50% accurate signals. We are not quite there yet.

If this was a real, bona fide signal service provided by a competent company with the resources to source and confirm quality signals employing a system that had been thoroughly backtested and thus possessing known past performance specifications, then in general one would only follow the directions in the trade signals exactly as specified. Any deviation would alter the performance of the trading system, presumeably for the worse. For instance, waiting to get in at a better price would presumably result in alot of trade opportunities being lost, while the ones entered into would have a better reward:risk ratio if the stop was kept the same, or if the stop was moved to maintain the same risk, that would probably result in a higher win : loss ratio, but fewer trades.

In this case, I believe that the EUR/USD will rise before it goes down to 1.2550, based on Elliott Wave theory and my careful observation of price movement patterns for the past two years full time. This rise to 1.2650 to 1.2675 will confirm my hypothetical wave count, and provide an entry price which meets our reward:risk criteria. If it doesn't rise too much but falls earlier, then this could invalidate our wave count, and the situation would have to be re-assessed. In all probability the wave count would remain the same, however, and the only difference might be that the entry point for the buy trade might change.

Each time we make a trade signal, we factor in all the previous price movement data in quite a complex way to zero in on the most probable price reversal value. The more recent the prediction, the more data and the more accurate and reliable the prediction is likely to be.

Carefull on euro$

It is looking heavy and not wanting to make a cross of pivot and ma's yet. Let it retest the low or even poke a little lower. Then look for a long entry.

I agree with your projection but many times the eur$ will make a false break down then leap back up.

look for hourly close above 1.2597.Then when look at next candle to break above previous.

just to add my 2 cents so nobody gets overzelous and takes a premature long. Gets there s/l hit just to wach it go to the target after.

Dave

Thanks, David. You are perfectly right. It's good to hear confirmation based on different methods. If it is probable or likely that the market may do something, then don't enter a trade that presumes it won't do that thing. In this case, general knowledge as well as Elliott Wave theory indicate that is likely to go down another time and either test the same lows, or go a bit lower. So the careful trade strategy should be to take the worst case scenario for a long trade - a drop below the previous low, and make that a precondition of entering a long trade. The stop would have to be placed below the recent low anyways - about 10 pips for the EUR/USD. By following a cautious strategy one may not take as many trades, but the trades one does enter will succeed more often, have lower risk and have a much higher potential for reward.

Hello Itme,

GBP reached 1.8635 .. nice placement of your stop
You also did say on the 10th that GBPUSD may still go down to 1.8645. Another great call ..

The question now is .. this wave that's coming that provided trading signal #199 .. what count is it? and should the profit target be moved ??

At the moment .. the GBPUSD is at 1.8660 .. so a target of 1.8960 represents .. 300 pips .. and using the current stop of 1.8633 .. would equal a risk reward of 1 : 11.1111 (a very attractive low risk high reward trade)

Also on the subject of wave counts .. is it possible for you to incorporate the wave count into your formal signals ?