The Trading System That Never Works

Hmm, i guess i said that wrong.

What i meant to say:

The psychology of a losing trading system that is winning when reversed is the same as the psychology of a winning system. The psychology is basically equivalent to the unconscious or conscious method that you utilize to figure out your trading system.

Therefore, why are you looking for a losing system when you could be looking for a winning system?

Guess some like to reinvent the wheel at somepoint, but the trouble usually starts when they start applying patents for the said "wheel", wonder if Bill Gates has any thoughts on this..

I guess my earlier post wasn't that helpful. But if you've been around this forum for as long as I have, you'd know that a thread about inverting losing systems pops up maybe half a dozen times each year.

Let me try to explain it another way. Suppose you're playing roulette and you bet on red every time. After a couple of hours you're down $100. So it would seem 'logical' that if you bet on black continuously for the next two hours, you'll win back the $100?

The reason that roulette can't be beaten is that there is a house edge (5.26% on tables with a 00) that will always prevail, if you play for long enough. Random games can not be beaten, no matter what system (whether staking, or gameplay-based) you use. Forex prices are not randomly generated, but the fact remains that very few systems are better than 50/50, and transaction costs (spread/swap/commissions etc) have the same effect as roulette's house edge. Since these costs apply to every trade, reducing the size of winners and increasing the size of losses, they have a significant cumulative effect. If you're trading 20 pip moves, for example, and the spread is 2 pips, then the 'house edge' against you is effectively 10%.

Or put another way, any forex strategy that fails to exploit a real market inefficiency is effectively generating random signals. Inverting a random signal generator will only create yet another random signal generator, which will therefore be equally ineffective.

If winning at forex was as easy as inverting a 'really bad' system, we would all be millionaires. But markets tend to 'evolve' in such a way as to close out inefficiencies, and to whatever extent this occurs, strategies must be flexible enough to adapt accordingly. Hence, although some strategies may be more 'robust' than others, there's no absolute guarantee that a system that's previously been profitable will continue to maintain its 'edge' indefinitely.

Here's an example of a strategy that offers potentially better odds than 50/50.

At the left of the white box, price has been falling for some time, and has created a conspicuous structural low. Price returns to that area at the right side of the white box. Wait until price falls below the lower side of the box, and then there is a clear reversal pattern (upward in this case, at the white arrow). This pattern offers some directional bias, and it has the logical backing that the 'professional' money may be using the stoplosses of buyers at the bottom size of the box to provide liquidity for their upward drive**. Price follows through accordingly, in this instance.

[EDIT]
**Let's explain a little further. The pro money has already decided that it will push price upward. Near the bottom of the box, many 'amateur' traders are anticipating a bounce upward from the previous swing low (at the left of the box), hence they will have their stoplosses (effectively sell orders) just below the box, exactly as the textbooks recommend. Knowing this, the pro money drives money south, below the box. Other amateurs will sell into this downside breakout. So now we have two groups of sell orders providing liquidity for anybody who wants to buy. The pros jump in, buying extensively around this lower low, and continuing to buy as price rises through the box, causing a strong upward move. Amateurs gradually look to buy into this move, driving price further upward, and as they do, the pros use this liquidity to start closing their buy positions, thus taking their (certain) profits.

The second screenshot shows an 'upside down' example of the same process. However, on many occasions price may not rise above the box high (example: the red arrow). This suggests that the pros may have obtained enough liquidity (i.e. for the volume of buy orders needed to meet their profit target) without having to create an upside fakeout. (In this case, you will not get to place an order, which at least means that you won't lose anything.)

This pro money strategy occurs repeatedly, causing this same price pattern to occur, on many different timeframes. The reason why it doesn't offer a significantly greater directional bias is that similar patterns occur, for a variety of other reasons, that can easily be mistaken for professional activity. There are ways of distinguishing the better setups, but I'll end this, at least for now. I've taken the thread significantly off topic already.

NO - because you forgot something: The spread. It the spread would be Zero - yes then it would work. However, if you reverse the strategy, it becomes completely different because of the spread.

The spread is the biggest enemy for every trader, mainly becuase many traders underestimate it. For example, if the spread is 0.00002 on EURUSD, that already puts you on a big disadvantage. When the spread is higher, for example 0.00008 or even 1 pip. the disadvantage gets even worse

I prefer higher time frame for get more accurate information. I use often use H4 and H12 time frame for day trading.