The "You can't be serious" system

Instrument choice (focused on FX, here)

What follows is a “brief” note on some ground rules that traders should be aware of when choosing pairs. Oversimplified as usual. Apologies to the expert traders.

The most important traits I am looking for in a pair are: volatility, liquidity and correlation.

Volatility because we trade a momentum/breakout system. Liquidity because I need low spread (remember: spreads are costs, and the lower your timeframes, usually the higher your trading frequency, so, the higher your costs.) Correlation …..where do I start?

So, simply put, I look at the average excursion (range) in pips (ADR, or ATR, or whatever: you pick yours) and the lowest spread and then I check the correlation.
This is usually a compromise. For example, EU and UY are extremely liquid, but they are way down the volatility list. Why is this important? Because, in systems like this, having an instrument that on average moves 100 points is better than having one that moves 30. Depending on the risk management method you use, it may seem to make no difference: if you use fixed fractional it is always (say) 1%. Right? It is a bit trickier than that. I do not have time here to go deep into this, but think about, for instance, broker’’s fees. 1% risk is 1% risk, but if on one instrument you can “only” trade 5 lots and on another you can trade 15 lots, other things equal, the latter is 3 times more expensive. Let’s stop here for now.

Once you have identified a bunch of suitable instruments, you have to analyse their correlation.
The importance of correlation would deserve several chapters in any trading book. I won’t try it here. Let’s look at an example. According to one measurement of volatility (and ignoring liquidity,) in one of my tables I have these pairs on top: GBPNZD, GBPAUD, EURNZD, GBPCAD, GBPJPY. Notice anything peculiar? Yeup! GBP is in almost all of them. Now if you were using these instruments, you would have an exposure to GBP that is multiplied by 4 (unless you divide the regular risk on these pair by four!) If the Governor of the BoE comes out with a “strange statement” and the GBP moves a lot, 4 of your 5 pairs will be going in exactly the same direction. This makes no sense in risk management terms.

Another thing to remember is that the higher the time frame, the higher the correlation. For example, on Daily charts AUDUSD and NZDUSD have a correlation of 94 (they are basically the “same thing”.) If you look at the 15m correlation, it is 74. Still very high, but a quarter less. It is even less on 5 and 1m.

So, let’s have a look at “my 3 pairs”: GU/UC have a correlation of -58 on 15 m and -10 on 1H, GU/EA is 7 for 15m and 58 for 1H, UC/EA is -20 for 15m and 5 for 1H. You can do worse than this.
This is just scraping the surface, as usual.

I am sorry to complicate things further, but I can’t resist! For the more advanced traders, I should add that there are situations where using correlated pairs may make sense. I am tempted to ask if somebody wishes to venture an explanation of why this may be, but I have a feeling there would be no takers....

For those who are dying to know how the SMS applied on 1H would have performed last week but could not be bothered to find out for themselves, I have calculated (belatedly) the trades. Same settings and, crucially!, same warnings as I made in post #217 (page 11, I guess?)


Not as good as last week, but still not bad for doing nothing.
Let me know if you want to see charts. Hints: if you like rosy pictures, ask for the Dow. If you like horror stories, ask for the Gold.

Lol will you write in this hilarious form forever. loving the humor even more than well drawn explanation. You will make a good teacher.

Is there any reason why you choose only UC, GU and EA?

Efit- Sorry just saw the answer in your previous posts : correlation, volatility and liquidity.

HA! Skyf, thanks.
I will continue with my writing style. It amuses me and it helps to conceal that I know nothing about where markets are going!

Menu of the day: patience and discipline (and a bit more.)

You need loads of both. Period.
Trading is no casino entertainment. It is a proper job. It could be full time or part time, but make no mistake: everybody is out there to get your money, including me! So, it is serious. Identify your weaknesses and do something about it. Meditation, psychotherapy, pigeon shooting, eating garlic, smelling roses…whatever works for you!
One of the most common weaknesses is lack of discipline. Also, especially for some systems, lack of patience.
Let’s use an example.
This is USDCAD 15m on Friday and Monday.



On Friday, from London open (8am) till 1:30pm you have NOTHING to do but watching the pair ranging from PP to BRN. That is 5 and a half hours where you should be doing nothing but observing. Not easy at all. Many get distracted, which is among the best outcomes, because in so doing they may miss a good trade but at least they do no lose money. Many start fidgeting, “inventing” trades, or going down to 1m time frames to “exploit the range-constrained” market. Etc.

Then finally you enter short. But wait, it is over yet. You have been disciplined, stalking your prey ready to pounce and you have been rewarded with a breakout on a sell signal below BRN. But now you hit S1 and the market bounces. You then are one and a half hours in the trade that bounced several times at S1.

What happens next is really down to each trader’s personality.
a) Some bail out at BE
b) Some take a small profit at S1
c) Some do half and half
d) Some may stay in as we still have a sell signal. They may take some more profit or get out at S1 at the close . Their risk attitude would have been kind of rewarded in this example, but other times they would be the worst off (that’s why keeping stats is vital, folks!)
e) Some traders may not have got in the short at all, as they thought it was not worth the risk (SL above PP and target at S1 : low RR)

Each of these options are not necessarily right or wrong: they are a reflection of your preferences and your personality. Find what you feel more comfortable with and test if it makes sense in economic terms.

Not exactly a relaxing day at the office.

Next day (well, on Monday) you are back. Please go back to the chart in my previous post. You cleverly avoid the short trap and then the pair ranges again. Here we go again.
Finally you have your BO on a long signal that breaks the resistance area. But today your patience is being rewarded. After a little battle, more buyers step in and move easily past R1, reaching a good enough target.

Now an interesting thought. Were you crap (can I use this technical term?) yesterday and a genius today? Nope! You followed a strategy, a plan and yesterday the market was not conducive, whilst today it was better suited to your strategy. And why did you follow your strategy? Hopefully because you have a good enough statistical evidence that it has worked, on average, rather well in the past. And by strategy I do not mean just buy here and sell there. I mean the strategy filtered and adapted to your trading style, be it aggressive, conservative, mad or boring.
And this is also where another aspect of discipline comes in: you should journal your trades, your signals and your "adaptations". If it works and you follow it with discipline and patience, you have a good chance of success. Obviously this depends on the assumption that the future will resemble the past. Unfortunately, we have no guarantee of it and we have to learn with this uncertainty.
Party-pooper, as usual, sorry, folks!

OK, I have talked enough
I leave you with a really bad looking example (we established already that marketing is not my thing!) to illustrate patience and discipline and frustration and choices.
This is GBPUSD 15m yesterday.
And as I have been "celebrated" as a teacher, I will leave here some homework, for the few brave folks who are interested. Have fun!

I find it hilarious too. Do keep it up. Phony how i come around more for the funny style than the "rich" content of your system as all i seem to remember here is MAaBufferHist, Price action and stop loss below S1 or R1 and be mindful of news, correlation and liquidity.Well done anyway

"Phony how i come around more for the funny style than the "rich" content of your system"

Are you kidding??? Were you not immediately impressed by my "magic" system? Was it because I failed to mention that I transformed a $50 account into a gazillion in 3 weeks?

"as all i seem to remember here is MAaBufferHist, Price action and stop loss below S1 or R1 and be mindful of news, correlation and liquidity"

Well, what else do you need for a "magic" system?

LOL.
Like a french class i once attended where the students were too busy catching fun soliloquizing and remixing french pronunciation from the teacher thän actually learning.

Well i think i understand where you are going to too quickly even with just a glance the chart (or i overate my capacity to grasp) to pay enough attention.

Now was it their stop loss at S1,R1 or theirs at Pv so we dont enter there or so we place tp there or what. Ahh i have to go re-read that for the 4th time and try not to be carried away by the funny lines in between.

Then somewhere in-between the comics here is talk of supply and demand along with ADR as deterrent to entry (was that their essence or not again now)? I really have to be more serious to imbibe here.

Forgive me I'm one of your dull student. Maybe once one has a system of his own he gets too comfortable (can it arrogant ad its effect) and becomes dull .

Monday I made no trade. Even for this UC, I did not trade.
capm, I used your image and added my comments on what I saw and what I was thinking while watching the UC chart. The 2 pin bars made me worried about going long there. So no trade done yesterday. Maybe I should have ignore these candles?

This was also another chart I watched yesterday but did not trade. I saw your point #2 and so I wanted to comment on it because I saw that as well and was tempted to place an order until I saw R1 not far away. The temptation was: R1 had been violated, price bounced a little from BRN 1.3900, and PP was just below BRN. But then I gave it a pass in order to be conservative.

As for #1, it was easier to identify it as a trade not to take, based on the distance it already moved without retracement, and the resistance marked by your green zone.

For #3, I might have taken it if it was 2 weeks ago, but this time, I think the potential distance was blocked by obstacles such as yesterday's low (I estimate 8 to 13 pips). Also no good place for SL placement, minimum I had to place it around 30+ pips, 2 to 3 (black) candles away.

Filtering trades this way, I think there would be much lesser trade I would be taking...

Hey Skyf, if you do have a tried and tested system you are happy with, do not change!

If you are interested in something new, or different (not sure there is anything new or different here, but anyway…) or for intellectual curiosity, by all means have a look. In which case I suggest you read back and extract the “content.” I know I made it long and difficult and perhaps I may regret it a bit now, but I needed to find a way to entertain myself too!

Anyway, let me know if there is something I can explain.
Ah, and as a teacher of mine used to say in times where political correctness was not invented yet: “there are no dull students, only lazy ones!”

Nitethinker, Thanks, as usual, for your contribution.
First of all, some of your comments are on the Asian session. What I did not mention in my choice of instruments is that if you trade the Asian session you may have more volatility with pairs involving JPY, AUD and NZD. USDCAD tends to be a bit quiet during those times. Having said that, I do not have enough stats for this issue.

You mentioned pin bars. I do pay attention to pin bars, especially if they coincide with some other important point or obstacle. So, for example, while I make a note of the first one (bear pin bar, point 1), I am taking much more notice of any pin-ish bar that happen on the green support area.

On your point 3, we should be roughly in the same (reversed) position. Only this time it is 1pm London time (when the US FX session starts). That pin bar there could be due to new orders coming in at the start of the US session. In fact, there is no follow up (see how the bears did not manage to push the market back down from that green resistance area.)
I am not saying your analysis is wrong. Just that there is a higher probability that with new "energy" the bulls may finally break the lock. After a bit of a battle they did.
You could indeed enter above the high of the pin bar, but in that case, as you pointed out, there is an obstacle (R1) very close.

So, your conservative (shall we call it "prudent"?) attitude was correct. You may have missed a trade, but so what? If it is against your nature you would have hated that trade all the time. Even if it made money! Because it would have showed you were "wrong" in thinking prudently!

I would like to use this example to highlight another important general point.
Someone, on a similar occasion, not on this forum, pointed out that there were good opportunities for some swings inside the ranges. If you look at the range between the lower and medium green areas, for example, it should not have been difficult to get some scalps from bounces on the areas.
It is a valid point, in general. However, it need to be made clear that in doing so, YOU WOULD NOT BE TRADING THIS SYSTEM! You would be trading a different one, different rules, different philosophy, etc.
Doing so is very dangerous, especially if you are still learning. Focus on one system and learn how it works! Do not get distracted.
Also, if you take trades that do not belong to the system, how can you collect data on it? And hoe would those trades affect your emotions (and subsequent trading?)
Just saying.

Finally, I knew I could count on my "favourite student" to do his homework!
Well done, Nitethinker. Thank you again.
Also, as you can see if you step away for a moment: that chart looks ugly. I would think twice before venturing anything in there, especially after the big rally of about half the ADR.
Actually, I wanted to use that example to see if we could have performed some advanced "magic" but I have no time now. I am sure there will be other occasions.

Hey, look! My "magic" system has "correctly predicted" the big equities drop!
And my "superior analytical skills" got me to get out at the best possible time!

..and the secret is...... trend and momentum? while using a trend and momentum system? and a bit of PA to fine tune trade management?
Remember this when markets will be choppy and "the system does not work"!
"Magic luck" and stats!

DAX, poster picture:


Dow, did not turn out perfect, but good enough (I'd better omit this and show DAX only!)


By the way, try to look left and see why those green areas were drawn there....

Ah, also, today it is the last day of June, which means last day of second quarter and last day of first half. Traditionally such days are a bit crazy, with loads of volume changing hands, as fund managers "clean up" their positions, realise some profits etc. etc.

Having said that, traditions are not really the thing in today's madness, so I am not so sure.

Anyway, like an old dog, I was expecting some excitement today. Perhaps more in the afternoon?

Well, it was indeed a bit crazy for equities, but nothing special in these days.
By the way, interesting the decoupling of DAX and Dow. The former dropped much more this morning and recovered only about half of the drop. The latter not only recovered the losses, but it printed a good rally to end up much higher.
Notice also how it stopped at R1. It is re-testing it now. And how about the 2:30 pm London time (NYSE open) candle? 160 points in 15 min? That had probably something to do with end of quarter too. Fascinating!

But I am here to show a different example. We saw this morning how “magic” the system is in the right market conditions. But what happens when market conditions are not “right”?
Let’s use USDCAD 15 m.



As you can see, trade 1 started well, but there was no follow up: momentum stopped. Bad sign. It even stopped 3 points from R1 (although that would not have probably been my target.) Out at BE.

See? No momentum, no “magic”. All simple systems, whatever they are, are like this. It’s just that usually their developers (or sellers) do not show you this side. Apologies if I am deflating your dreams.

With some knowledge of PA we can limit the downside and try to get into the trades that have the higher probability of success. That may mean missing some opportunities, but I personally do not care. You may have a different attitude.

So, let's look at trade 2. The market has a much better momentum now, but the problem of this simple system is that it may be slow for these "fast" reversals. So, by the time you have sell signal it is already late.

(incidentally, you can try a faster combination of MA or MA slope parameters. The problem is that you would trade much more and you would be chopped to pieces in choppy markets. Every solution generates its own problem. But do not take my word for it: try and test it yourself!)

Not only that: the signal is right on a former resistance area and not too far from Pivot point.
Not only that: in a few bars there will be important US news, then Canadian news, and then oil news (CAD could be quite sensitive to oil prices.)
So, the best course of action would be to avoid this unnecessary risk. That is difficult. You would have been sitting there from this morning watching this b***d and all you have to show for is a scratch trade and pass! This is one of the reasons why I suggest, if you can, to trade a portfolio of instruments.