Forex Straddle System

I would like to share our trading Forex trading system, which is a concept borrowed from options trading. I was trading options years ago and I am the founder of optionslam.com but I have been addicted to Forex trading for many years now.

It will take a few posts to put together to complete illustrate our trading system. I will give a try to share here. At 10000 miles high, this is what our view is,

1. Our system contains many trades, mix with a battle between Long vs Short. They follow a strict set of rules. (similar to board game with freedom of turns) Our goal is to make sure one side will come out as a winner at certain point. Whichever side wins, we win.

2. MTF charts are used. Bigger time frame chart to evaluate trend/ranging. Smaller time frame chart is used to enter/exit trades. Basic rule is follow big chart, attack small chart.

3. Only a handful indicators are used. Mainly for reference only. Will provide real time examples. No historical data/movement can predict the future.

4. No Stop Loss. Long and short will save each other as long as they all follow same signal system. Key of our system to manipulate trades together based on the outcome of previous trades.

5. Multiple Currency will be used, for hedging and offset losses.

Disclaimer:

There is no guarantee of return for any given periods. With proper management of lot size, the risk is minimized but also return is limited.
Historical results is available but it doesn't mean anything for future.
The straddle concept can be tuned and modified to make better outcome.

Bottom Line:

No pressure, have some fun and make some profit.

G3song...
Sounds interesting. Im also trading without stoploss. I manage the trade with small lots... so that, even if a few trades go against our direction.. I don't sweat. Smaller lots.... smaller risk.. and returns also small. No stress!!!

waiting for further updates.. and thanks for the thread!!!

Hello,

Im interested. Ive been trying to mix and match in a similar manner with options and spot. But instead of a straddle I have attempted to use delta neutral positions as stop loss. Results are mixed as one of my major problems is exit point. Entries are usually very accurate but I am almost always exiting at incorrect times. Most likely i lack the correct rules. But i feel its a workable strategy. Looking forward to your further posts.

With the labor day coming, market is slow. Let's discuss and share a few philosophy points first. If you do not agree with those principles, there is no need to continue following this thread.

Principle #1: Ranging vs Trending is a million dollar puzzle that we will not try to resolve or predict. Trading method in ranging situation and trending situation is very different. The problem is that once we confirm it's trending or ranging, it can be too late and already in the making of converting to each other. This is similar to chicken vs egg puzzle. (Although scientists recently seem to confirm egg comes first.)

Principle #2: Technical Indicators are always mixed. Not a single indicator can predict the future. Same indicator in different time frame can show opposite signals , let alone we have hundreds of different indicators with different mathematics models. This doesn't mean we cannot use them. We just have to use indicators in a proper way. There is no need to spend time to find a holy grail to solve all the problems. I rather believe that market is heavily manipulated by Wall street, a place worse than casino.

Principle #3: No matter how you trade, the end result = close price - open price. This means buy low/sell high is always true, or the other way around, short high/long low is something we always want to follow. High/Low are all relatively speaking. High point in 1H chart can be low point in Weekly chart, even if they are exactly at the same price level.

Principle #4: There is no fundamental value in Forex trading as it's always come with a pair. The most recent price is a agreement between bid and ask and always reflect the market condition. There is no such thing called over-value or under-value here. To believe Tulip price only worth $10 when it was running at $200 is not recommended in Forex trading, even if you may be right.

Thanks for sharing! Please continue!

Managing Risk is the most important factor in Forex trading. Any system may lose all capital at one point is garbage, no matter how much return it may have brought in the past.

In order for our system to work, we need to meet following two rules.

1. At any time, we have enough capital/margin left to place another trade. This means if a signal coming up for either long/short and they met our hedging/straddle game plan, we will enter that trade without second thought.

2. At any time, we have enough capital/margin, so we do not force ourselves into a trade. This rule eliminate the fear that we have to cover our loss at any given point. We already said we do not set stop losses. I will discuss the reason in details in future thread. For now we focus on manage risks. Because we don't set stop loss, in case market goes the opposite direction from our net positions, we can still watch at sideway with calm and peace. Floating losses and draw down level should never be high.

Those two conditions are key to succeed using our trading method. Fear should never be a feeling we enter the market. Only relax and love brings profit.

For example, with every $1000 deposit and 1:200 margin, we recommend each lot size to be 0.01 to start first trade.

Luckily Forex trading can be scaled up easily without any floating/liquidity issue in stock market. But again if you really have lots of spare cash to invest, please make sure only allocate a small portion to Forex. Diversify is always the bible above everything else.

Before we talk about the battle between long and short, let's first talk about the thinking behind our strategy.

Concept 1: Army General vs Battle Captains.

If you are the army leader, you always look at the big map. You make decision on either attack Moscow/Berlin or turn south to circle Kiev. But if you are a battle field captain, you look at the detail small scale map to position your troops. Those two are very different roles.

We need to wear both those hats as a trader. We use bigger time frame chart, such as Day Chart to identify the current situation we are in. It can be trending or ranging depends on how you look at it. Then we go to smaller time frame, such as 4H or 1H to look for detail long/short entry based on the situation. We don't want to make our decision based on one chart frame only.

Concept 2: Instead of bet against market makers, we invest on gamblers to make sure we get a winner.

We would also love to position ourselves as outsiders of the trading game. For example, we act as a judger who referee a game of two boxers who battled out.

I let my left hand to act as a trader who always enter long positions and my right hand act as a trader who always enter short positions.

I make up rules so that one of two hands will come out as a clear winner. It doesn't matter which hand wins.

We will define an entry system which is fair to both sides, and clearly we need to block any side to go with All-In at any time.

Concept 3: Once first trade is in, all future trades will be dependant on the result of the previous trades.

We manage our account, not manage one trade only. We do not look for entry/exit of every single trade. Rather, we make our decisions only at when to close the board game of all trades with a profit. If no profit in sight, game continues.

The first priority and the only goal of our game is to make profit at certain point of the board game. We want to be able to complete one game and start a new one. The more game we complete, we accumulate more profit.

We saw many threads that members are arguing about long or short. There is no right or wrong of either direction. For every reason to enter a long, there is a reason to enter a short. We have so many different possible scenarios, depends on the timeframe, the historical positions, the indicator you rely on, long or short can both result winners at the end.

With those 3 concepts in our mind, you can actually design your own signal systems. We will share ours in next few posts.

So far you may think we only talked about boring stuff, but I hope eventually you will realize those concepts/philosophy are the actual reasons why we are making profit.

Now let's share our setup. We will use EU as example for now.

First we use Day chart to analyze the situation.



Two sets of indicators are used here,

1. 10 Day moving average/Heiken Ashi Smoothed
2. Bollinger Bands and Band Width.

We can clearly see that width has been shrinking and previous uptrend has been stopped at beginning of Aug.

Right now the black box showed the range where EU is trading within.

We only have three possible scenarios,

1. Rebound from 10 day moving average and going up, create a new up trend.
2. Continue to going down and eventually establish a down trend.
3. Continue to bounce within the box of itself.

In scenario #2 and #3, shorts will try to find a spot to enter.
In scenario #1, we will have to wait until Day chart confirm uptrend and then long will find a spot to enter.

We will analyze the entry points in 4H chart. But first thing first, let's dig deeper on why we choose those indicators.

Indicators in general are lagging, and many indicators are based on similar mathematics formula.

We liked Bollinger Band because it's purely based on statistics model. It provided a direct view of trending vs ranging. In a trending situation, price actions should move along at one side/edge of the band and continue to breaking new high/low points.

If price touched but bounced off edge of the band, normally it shows a weakness in that direction and move side ways. Like EU is doing right now.

We hope this is a simple enough setup for everyone.

waiting for further info...
Thanks

Now it's time to introduce the hedging board game between long and short.

We have been talking about no stop loss and no close of each trade. The reason is that Forex quotes is always in pair.

Long EU = Short UE.

At the same time, Close EU long = Open EU Short, this is because we continue to trade and do not close our account.

Once you realize this, you can eliminate individual trade closure rules in our plan.

We treat all actions as enter brand new positions. We can close the board game with profit only situations. (We will discuss game closing rules)

For now let's focus on the game plan of each side. Instead of asking yourself: Do I long here/short here?

What you should be looking for, is where is the next long entry and where is the next short entry?

Both sides should always be actively looking for next entry. For whatever the reason we long, we use the same reason to short. (Just reverse the maths)

However, we don't have to follow the traditional board game of take turns. Instead, we want to make sure:

1. In a strong up trending situation, our system should see more Long entries than Short. Otherwise, this system is no good.

2. If one side is trapped and losing money, he cannot add to his positions if he already has same or more positions than opposite.

Rule #1 is relatively easy. Our next few posts can easily design one and you can design yourself with your own preferred indicators.

Rule #2 means we do not apply "Average Down" trading in Forex. This rule is key in our system to make sure only winners are allow to add more positions.

Rule #2 actually agrees with Rule #1 as in a strong trending situation, the other side should be staying quiet. Rule #2 will also eliminate repeated mistakes in a ranging situation when both sides should simply hold the position.

Next we will focus on our Entry rules.

Again let's use EU as it's the most popular pair to trade.

Take a look at our 4H chart. We draw daily bollinger band + 4H bollinger band on 4H, along with 10 day moving average and Heiken Ashi.

Personally I don't like too much indicators on the chart. And to be honest Heiken Ashi is only to make it pretty at the end.

Based on our view on daily chart, we were expecting three scenarios. The #1 scenario of turning back to up trend never happened.

Now the only way for price to move is to hit the bottom of daily band, which is where it is now.


The bullish bounce we see here is certainly a valid entry for long side. Possible future movements:

#1 Bounce from here all the way to daily top band (we short at top band)
#2 Establish a down trend with next wave and continue to move down ( we will see shorts with trending play)
#3. Ranging in between band edge without any direction. (we do nothing)

Where is the next entry for short? Wait to see a top forming up near the top 4H bollinger band.

Where is the next entry for long? Only if current position is making profit and next wave stays above current one. If we are losing money with this long entry, Long lost his chance and have to wait for short to enter.

The chart example you saw in the last post is a perfect illustration of Ranging situation. Our method is simply short at top of daily band and long and bottom of daily band.


If you pay attention to the red arrow where we indicates the short position, there are a few technical reasons behind it,

1. On day chart, it's ranging (Band width flat)
2. Heiken Ashi turns Red (bear signal)
3. Off the top of both Daily band and 4H band. (bear signal)

Note that this entry is NOT valid in a strong trending situation. Trending is actually our best friend to trade, which we will explain our approach in future posts.

Let's see how ranging play work out first.

When range play fails, band width has to expand and trend is starting to establish. And obviously our band play will show floating loss.

But if range situation doesn't change, it's also easy profit by trade from both sides of the band edge.

To compare the ranging situation, let's take a look at a typical trending chart.

Again we use daily chart as our direction template.

This is a clear uptrend chart. It has the following characters,

1. Price stays above 10 day moving average
2. Band width is expanding.
3. Each wave(heiken ashi color change) created a new high.

During this period, any long entry is safe and will see more or less profit at the end.

Our game plan in this situation is quite simple. Keep adding long positions in 4H chart at every bounce.

So far we have illustrated our setup.

In big picture, we see two patterns: trending vs ranging. Each pattern can convert to other at any time.

In small frame, we see either long or short and play a hedging game between two sides.

Let's review why we don't have stop loss in our play: we hate to chase any trend at any time.

Buy low and Sell high is always valid if we want to get any profit.

Stop loss trades actually means we do the other way around.

Next few threads, we will focus on how to deal with situation when we are wrong.

There are only two possible scenario that our trades go wrong:

1. We enter the last wave of the trend and got caught on ranging or trend reversal.
2. We enter the trade as a range play but suddenly it started to trending.

All other scenarios, we just need to let the our trade run. (of course, it's simple saying than actually doing, but remember we do not exit individual trades)