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Roaving Hedge idea

  • #1
  • First Post: May 1, 2007 10:44am May 1, 2007 10:44am
I have been playing with an idea based on my original Martingale hedge (which Burgerking turned into an EA)

The newest idea is to enter 1 microlot long with a TP of 150 pips. If the price passes 50 pips long and then reverses back to the entry point, go short 2 microlots.

You would NOT go short 2 microlots if the price did not travel at least 50 pips..... instead you would go short 2 microlots if the price went 50 pips against you.

You continue adding additional positions (3, 4, 5, 6) based on the method described above until you net 150 pips... there is a lot of cancellation that will occur, so drawdown will be kept small.

This idea is very intriguiging at the moment. Just remember, you do not close any positions until you net 150 pips.... then close them all.

Tom
  • #2
  • May 1, 2007 10:59am May 1, 2007 10:59am
The problem with these kinds of ideas are the transaction costs and the small profits due to the capital you must have to back a martingale type system. If there is no "edge" to your system then you will make your small profits many times, but it's just a matter of time before the string of loss magnified by martingaling counters all profits. Then you are just left with a ton of transaction costs for the whole idea (transaction costs may seem small with your idea, but they will grow out of hand).

If on the other hand your system does have some "edge" over just random trading, you'd still be better off not martingaling because you can size your initial orders larger. Just suck up your losses and don't keep doubling up (unless you know statistically doubling up is a smart move).
  • #3
  • May 1, 2007 11:35am May 1, 2007 11:35am
This is not a martingale system. It does not double down. It hedges based on price action, which puts in a different catagory than grid systems. You will find that as the price moves, many positions will cancel for a net gain of zero.

As for transaction costs: trading the EURUSD at 2 pips/position keeps this idea very reasonable.

Also, the goal is 150 pips profit every trade. These are substantial wins, not petty 5 and 10 pippers.

I will post charts later to clarify entry/exits...
  • #4
  • May 1, 2007 11:38am May 1, 2007 11:38am
Honestly, I don't mean to pick on you here, but if you're intrigued by the idea, why don't you back-test the idea. Find some data points, and then get a test going. It shouldn't be too hard to do...time consuming, yes...but I guess I don't understand the real purpose of posting a trading idea like this if you haven't done your homework...unless you're looking for others to do the back-test for you. :-)

Quoting tdion
This is not a martingale system. It does not double down. It hedges based on price action, which puts in a different catagory than grid systems. You will find that as the price moves, many positions will cancel for a net gain of zero.

Also, the goal is 150 pips profit every trade. These are substantial wins, not petty 5 and 10 pippers.
  • #5
  • May 1, 2007 11:45am May 1, 2007 11:45am
I post what I think is interesting, and what might be interesting to others. No MrMikel I don't want anyone to backtest it.... I want to introduce a new idea that might be profitable.... and hope that another FF member finds a way to IMPROVE it.

I am an out-of-the-box thinker, and believe that collaboration is how great inventions come to exist.


I find threads like this far more interesting than the 500 threads regurgitating "self help" articles by Nielson and Livermore, which is where the majority of lemmings post their approval.

"GREAT POST"

"NICE ARTICLE"

blah blah blah. Those articles never help me, but innovators like james16, kharvell, alparsai, KevinE, and Burgerking are what I come to FF for.
  • #6
  • May 1, 2007 12:12pm May 1, 2007 12:12pm
Perhaps you just took what I said the wrong way. I didn't say anything about the validity of your thinking. I'm sure you think well...however, here's the thing...if you post ideas off the top of your head without doing some sort of semi-validation that the system could be viable, then you may lead other members down the path of eventually realizing a fatal flaw. Not that this would be a problem except for the fact that it may have been discovered sooner rather than later.

Think about it...how often have we seen threads that post ideas of MA cross-overs with various settings and confirmations without any real testing done (maybe a few forward test trades here and there, and some eye-balling), only to find that the system does horribly during a certain market? At least if there was some upfront homework done by the topic owner, perhaps those risks would have been identified at the beginning.

I'm not saying that your system isn't God's gift to traders or anything disparaging, really...I was merely, in my last post, hoping to prod you into doing some homework to see how much potential the system has. Regardless of whether or not the system does well in the past, my guess is that you'd get much more help if you could identify how well (or poorly) the system did in the past and identify the risks that may need to be overcome.

It was merely my suggestion...perhaps I just worded it wrong.

Quoting tdion
I post what I think is interesting, and what might be interesting to others. No MrMikel I don't want anyone to backtest it.... I want to introduce a new idea that might be profitable.... and hope that another FF member finds a way to IMPROVE it.

I am an out-of-the-box thinker, and believe that collaboration is how great inventions come to exist.


I find threads like this far more interesting than the 500 threads regurgitating "self help" articles by Nielson and Livermore, which is where the majority of lemmings post their approval.

"GREAT POST"

"NICE ARTICLE"

blah blah blah. Those articles never help me, but innovators like james16, kharvell, alparsai, KevinE, and Burgerking are what I come to FF for.
  • #7
  • May 1, 2007 12:25pm May 1, 2007 12:25pm
Quoting tdion
This is not a martingale system. It does not double down. It hedges based on price action, which puts in a different catagory than grid systems. You will find that as the price moves, many positions will cancel for a net gain of zero.

As for transaction costs: trading the EURUSD at 2 pips/position keeps this idea very reasonable.

Also, the goal is 150 pips profit every trade. These are substantial wins, not petty 5 and 10 pippers.

I will post charts later to clarify entry/exits...
The way I read it, if price goes against you 50 pips, you are doubling down. If it goes against you again, you continue to up your stake.

Trans action costs are 2 pips for the initial position, then ig oes against you and you have 2 + 4 = 6pips, it goes against you again.... It is ture you will make little profits, but you'll take the big hits too.

Since you have no reason to enter in the first place, how do you figure your target is 150 pips? Doesn't you system just mean you'll be back in after you hit 150 anyway? Unless there is some reason to be in or out, 150 is not really the target of your system. 50 pips is the real target. At 50 pips up you ratchet the system into profit, 50 pips down and you double up.

I guess the real question is how many losses in a row before you quit, or run out of capital?

I've done some backtests on this purely mechanical price action. I've found that statistical advatages are correlated to the transaction costs. You've got to come up with something to add to the mix which is meaningful. Something as simple as time of day could make your system viable. But just saying your going to trade randomly won't succeed.
  • #8
  • May 1, 2007 12:41pm May 1, 2007 12:41pm
50 pips is not the target. 50 pips is a threshhold, that after it passes, you will add the next position in the opposite direction at breakeven of the previous entry.

You do not double down in the system. Only the first entry is a double-down, the remaining entries will scale up by a single lot. (1, 2, 3, 4, 5)

The goal is to NET 150 pips based on the sum of all unrealized profit at any point in time. As I said before, a position that goes against you can have several contracts cancelling it out. Example: Long 5 could have short 2 and 4 cancelling it out, depending on where the entries takes place. This is why I call it a roaming hedge.... positions can enter anywhere.

This sound like pie-in-the-sky junk, but I will post some charts later to help clarify. Thanks for your input.

Quoting Keys
50 pips is the real target. At 50 pips up you ratchet the system into profit, 50 pips down and you double up..
  • #9
  • May 1, 2007 12:49pm May 1, 2007 12:49pm
Quoting tdion
You do not double down in the system. Only the first entry is a double-down, the remaining entries will scale up by a single lot. (1, 2, 3, 4, 5)
If you switch to scaling up by a single lot, you could hit you 150 pip "target" and end up lossing a bunch of money rather than make anything (depending on how many losses you take before quiting). Markets can range for a while.
  • #10
  • May 1, 2007 12:54pm May 1, 2007 12:54pm
The unrealized profit must be 150 pips cumulative of all open positions. Not 150 pips away from the first entry.

Quoting Keys
If you switch to scaling up by a single lot, you could hit you 150 pip "target" and end up lossing a bunch of money rather than make anything (depending on how many losses you take before quiting). Markets can range for a while.
  • #11
  • May 1, 2007 1:41pm May 1, 2007 1:41pm
TD,

I did some system math just to see how well this would work. To be honest, it seems to be pretty safe unless you just get a LONG period of ranging in which you have to pay lots of swaps.

Here's the reason why:

As you oscillate past 50 pips and come back to neutral, adding positions in the opposite direction will lower the number of pips required to reach your target of 150 pips.

So, your trades looks like this:
1 long, margin required = $100.00 (GBP/USD), 150 pips to target
2 short (1 net short), margin required = $200.00, 150 pips to target
3 long (2 net long), margin required = $400.00, 75 pips to target
4 short (2 net short), margin required = $600.00, 75 pips to target
5 long (3 net long), margin required = $900.00, 50 pips to target
6 short (3 net short), margin required = $1200.00, 50 pips to target

After the 6th trade, because of your rules, you won't trade a higher size...

Assuming no swap, your Return on Margin is at WORST 12.5% per trade.

Now, the only thing I can think of that would be the problem that you haven't covered (I think) is what happens if you buy and immediately, the trade goes against you? If that were the case, then I'd assume you'd find the neutral line 50 pips below the entry...in which case, you'd still be fine...you'd just have to make 50 more pips to offset the first 50 pip loss or something.

The only other risk is holding a position for a very long time and you were paying swaps on the bulk of the trades.

So, the question I have is, do you have a plan of attack if your initial trade drops against you immediately (never hits 50 pips going long, but starts losing money right away)? Also, do you have a time-in-force plan as well?
Attached File(s)
File Type: zip TDion System Math.zip   4 KB | 393 downloads
  • #12
  • May 1, 2007 2:28pm May 1, 2007 2:28pm
TD,

OK, I think I may have found the risk in this method, and it has to do with determining when actually start the grid.

Let's call the neutral line, X.

You buy 1 lot at X and the price reverses 50 pips. If you don't hedge at X-50, then you'll keep losing. So you short 2 at X-50, but the price comes back to X...so now your losses keep increasing if you keep this up.

The problem above represents the fact that at first, X is technically undefined...it's not until you "lock" 50 pips of profit that you define X.

My idea to overcome this risk would be the following modification to the rule:
1) Buy 1 lot at price X
2) If you reach X+50, X becomes officially the neutral line
3) If you reach X-50, then short 1 lot
4) Do NOTHING else until you reach X-100 or X+100
5) If you reach X-100, then X-50 becomes the neutral line, you close your LONG position, and start your grid.
6) If you reach X+100 before you reach X-100, then X+50 becomes the neutral line, you close your SHORT position and you start your grid.

This means that your max gain is 50 pips, but this would be the worst case scenario, and it overcomes the risk of not being able to start a clean grid.

So the remaining risks would be:
1) swaps
2) gaps
3) spreads (which can be overcome by adding the spread to the pips taken)
4) slippage
5) disconnects (either client or server sides)
  • #13
  • May 2, 2007 12:35pm May 2, 2007 12:35pm
Total bummer...I was able to find the fatal flaw in this system:

the "bounce" off of neutral kills this system.

So, here's the problem...you open 1 lot long...the price goes up 50 pips then goes back down to neutral, so you open 2 lots short...you are now 1 lot net short...but instead of continuing down, the price goes back up (and never comes back to neutral)...the fatal flaw is that you're 1 lot net short while the price continues upwards, and since you didn't buy 3 lots on the way back up because the shorts never reached the threshold, you're stuck.

The problem is, you can't just buy in opposite directions when the line hits neutral either because you can still suffer the zero-line bounce, meaning your price hits neutral, you open the order in the opposite direction and it immediately bounces up.

I'm not sure this system is viable.
  • #14
  • Last Post: Edited 5:39pm May 2, 2007 4:34pm | Edited 5:39pm
I've revised the idea. You just open a single lot at every new 50 pip threshhold.... there is no scaling up.

Red dots are shorts, green are long.

The TP here is 150 pips (you net 122 after spreads, 14 positions X 2), max DD is 300.... This is the recent EURUSD sideways market....

Shoot a hole through this. We need worst case scanarios to figure out what sort of drawdown can be expected.


IDEA) A safer way to do this is to close all trades at breakeven (if too many positions open,) and start over again at the point where all trades closed. This is only idea, the point being to protect the account from drawing down if the prices reverses back into the center of the consolidation.

Needs more refining....
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