27/23 System for USD/CHF --$10,000 to $1,100,000 in 2 years?

Did anyone stop out on this method this morning? At 8:00 A.m. Est. the closing price was 1.2394 on the hourly charts. So I placed a buy/stop order at 1.2421/1.2371 and a sell/stop order at 1.2371/1.2421. I placed a 50 pip limit on each (is this correct) and it stopped out before noon at -50 pips. Did anyone else try this?

Just speaking in general and not refering directly to the said system from Paul, but to me it seems the best way is to forget these formulaic approaches that try to force the market or in other words predict a move. Either you need to trade "what is" i.e. assess each trade in real time and all of the technical fundamental arguments that go with it, or you use systems that require specific criteria to be met. What do I know you might say? Well depending on how you look at it, I have had the fortune or misfortune to buy over a dozen trading systems since the start of the year and after assessing them all I feel anything that use known indicators to predict moves is flawed - at times you are getting so specific, waiting for so many things to fall in line that you may as well just trade on flow and sentiment. Systems that diversify you away from trend are probably the best in terms of outright performance, but such systems don't really suit the daytrader that simply trades spot.

That is all fine and well if you are a fulltime professional daytrader who can watch the display monitor all day long. The point of this type of system is to enable those of us who have to work at other jobs to "set and forget" to a greater or lesser extent, such as by checking the market at only a couple of times during each day.

Paul, thank you for your words of wisdom. Your advice that one should not risk more than 5% in the market at one time is good and it is advice that I have seen repeated by many respected sources. However I do not understand how you calculate the amount at risk (as applied to FOREX, where the enormous liquidity makes slippage negligible) as being the number of lots opened in your position. Is not the amount at risk the number of pips of your stop loss multiplied by the dollars/pip of your position? For example, if you have a $10,000 account and you trade 1 lot, that equals approximately $10 per pip. So a 50 pip stop loss limits your risk to $500, not $1000, which is only 5% of your total equity. Similarly, you can trade 5 mini lots with a stop loss of 100 pips, or 2 full lots with a stop loss of 25 pips, and still the maximum amount at risk is 5%. Am I missing something here? If so, please correct my misunderstanding.
Cheers,
Vince

I did the same as you... same result. By the way ... same result yesterday too. So now this system is down -100 for the week on my reckoning.
It is a good thing I am not using real $.

Actually the price went up to hit the buy entry around 10 am... then dropped like a stone to hit the buy stop at 11:30 for a - 50.

Off the record:
Coincidentally the buy stop was the same as the sell entry point so that was triggered when the price hit -50. But then the price rose at that point rather than going down. By the time I was able to check it there was an additional
-7 . This must be one of those two down weeks they mentioned.

LOU

Lou,
Are you using a 50 pip limit? The thread does not mention a limit it just says stop at 12:00. So you probally don't use one.

digetman,

Actually I made a hard copy of the post. The last sentence of the second paragraph says :" Set 50 pip stop losses"

Since I cant check my positions at noon I have been setting a 50 pip limit in order to get the 50 pips. But as I explained in my earlier post, the limit never came into play. I am checking an alternate charting pkg I have used before.. it might have a -- close at a specified time --- option. If this CHF system ever shows a profit and consistency like it is supposed to ... I will open a small accout with that charting pkg if I can set up a close at noon.

Are you aware of other systems that involve a "set and wait" approach. Other than Beau's. I can only trade in the Asian market, so I miss all the US and EUR fun.

LOU

That is three losses in a row for this system. It is down 150 pips on the week. Either it is waiting on one hell of a comeback or something is wrong. I backtested last week and it lost 118 pips. So far this week it is down 150 pips. Maybe this is one of those systems you should do the opposite of.

Digetman et al.

I apologize if my attempt to summarize my understanding of this system was unclear. There is no 50 pip limit. There is a 50 pip stop loss. You are supposed to monitor your entry periodically during the period of 8am -12noon Eastern Time. If you are up in the hour or so before 12 noon, but it does not look like you can reach the 50 pip target, you are supposed to take whatever profit you have, and then come back the next day to try for the remaining pips. Remember, the target is only 50 pips PER WEEK. That is, you have 5 days to get 50 pips of profit. So, you can take 10-20 pips per day once you reach that level. If you can get 50 in one day, great -- but that is NOT the objective on any one trade. Remember 50 pips PER WEEK.

so for every trade you have a 50 pip stop loss, yet your profit target for the week is only 50 pips??!?!

i hope i am misunderstanding something here

the risk-to-reward on each trade would be something like 5:1. in general, a good strategy will have a 1:3!!!!

Merlin, your reading comprehension skills remain intact. You set a 50 pip stop loss for each trade, and your target is 50 pips per week. I posted this system because the trader on moneytec who has been using it since January 2003 stated that he has grown his account from $10,000 to $70,000 by following these rules. Unless he is lying, this system works.

Regarding R/R ratio, it seems that reasonable minds could disagree on any sort of "magic" ratio. If you assume that a good strategy should have a 1:3 risk-to-reward ratio, aren't you implicitly assuming that the strategy has only a 33% average winning percentage? That is, for each win you can have 2 losses and still be profitable.

If the 27/23 System has an 88% win percentage (46 out of 52 weeks) as has been represented, then for every 7 wins you will have only 1 loss, which indicates a 6:1 risk-to-reward ratio. Hence, the 5:1 ratio is actually conservative for this strategy. Again, let me repeat my DISCLAIMER that I am taking the representations made about this system at face value.

To: VDeluca
Subject:More on Risk Mgt.

VDeluca's got it! If you set your stops and let them limit your losses, the risk limit is set by the maximum allowed losses, not by the entry amount. However, there are several aspects that confound this apparently simple approach--namely the difficulty of properly setting stops and balancing them with entry amount and profitability. First, let's focus on stops.

(1) If you set stops too small, you nearly always guarantee a loss.
(2) If you set stops too high, when you're on the wrong side of a trend, you lose more (and maybe too much, such as more than 2% of equity).
(3) If you are in the habit of adjusting your stops so you can "let your position ride just a litter more, because the chart will turn anytime now" most likely you still lack the discipline to succeed in forex (or other financial instruments) trading.

So, if you do not suffer from problem #3, the issue is, "How does one set the stop level?"

A lot has been written on the subject of risk and chance. Much of it by seasoned and successful traders, and even more by mathematically inclined gamblers. I was an IB for a local fx company (I only traded my own money). They had an excellent training program regarding introduction to forex and marketing (getting client/investors). The two areas in which they failed miserably were how to manage money and how to enter/exit positions. The advice they gave in class with great conviction and authority was, "After you make your entry, set you stop at 50 pips." Well, I've always been a good student who trusted the wisdom of instructors, so I followed their advice. I traded H1 charts and I lost nearly $2000 in three days because of problem #1. So as a good student, I have immersed myself in a 5-month intensive research effort. Here is what I've found regarding money (risk) management.

(a) It is preferable to set your stops based on the level of volatility of the chart, which you are trading; one size does not fit all. For example, the volatility could be measured from Average True Range (ATR[20]) as did the Turtles. (As noted in my previous note, I follow the Turtle system for entry size and stops.)

(b) If you find the computation of Turtles "N" too difficult, I would gladly send you an Excel spreadsheet that makes it a simple lookup.

(c) If you want an alternative to the Turtles risk management approach, try this formula:
Stop = (Price) +/- [(Equity) * (%Risk) / (Size of Entry Position) / (Leverage)]
for example, if your entry Price=$1.8321, Equity=$10,000, %Risk=2%, Entry Size=$1,000, Leverage=100:1,
then Stop = $1.8321 +/- 0.0020

That's only +/-20 pips because your entry is 10% of equity. If ATR~50 (typical for many H1 pairs), it is almost certain you would stop out, falling into problem #1.

So what can you do? the Turtles recommend stops at 2N, which is twice ATR. If ATR=50 pips, your Turtle stop would be 100 pips. But +/-100 pips represents 10% of your equity for a full lot, falling into problem #2 (risking more than 2% of equity).

So what can you do? You have two choices. First, reduce your position size to $100 (mini-lot instead of $1000) and keep your stop at 100 pips. You will no longer have either problem 1 or 2, but your trading system better deliver overall better than 2.0 reward/risk otherwise you're doomed anyway.

Second alternative is to change the chart period to reduce ATR. For example, if H1 gives ATR=50, try M30, ATR may be down to about 30. So if you kept your entry size to $1000 and your stop at 2N=2(ATR)=60 pips, your %Risk would be reduced to about 6%. You could change your chart to M15 and %Risk would be reduced further.

However, it would be more prudent to select the first alternative because your risk would be lower (near 1-2%)and you could maintain your trade at your preferred chart period (if you liked H1).

This example illustrates the interaction of volatility (which changes not only among pairs, but also day by day), entry size, %Risk, Equity, and Leverage (remember, leverage cuts two-ways!). Learn these concepts and you will be well served with a long trading life (if you don't take too much risk, have a good entry/exit system [>50% win/loss & >2.0 reward/risk], and have adequate capital).

There are other methods for setting %Risk and Entry Size. A very famous algorithm is known as the Kelly formula. Kelly was a mathematician for Bell Labs and he invented a formula in 1956 to predict the amount of noise on telephone lines. Professional gamblers quickly recognized the applicability of his formula to bet sizing. A simple application of the Kelly algorithm is given by Overholser, Ray (2000), "Money Management: Designing a Money Management Strategy," Technical Analysis of Stocks & Commodities, May 2000, p.38-46. The original Kelly paper (too much math and theory) and many other more useful money management references may be found at http://www.turtletrader.com/default.htm and http://www.turtletrader.com/money.html. While at that Web site, take a look at the Burke, Gibbons (2000), "Managing Your Money" article, which contains other bibliographies on Risk Mgt. Also, Ed Sekota has a refinement on how to define "at risk." All these and more can be found at the above Web pages.

I hope I've whetted your appetites so that you might take more interest in a boring but vital aspect of trading success. Remember, the three rules of trading: (1) Don't lose money, (2) Don't lose money, (3) If you must lose money, lose as little as possible! A broke trader is out of the market and all profit opportunities are wasted on a broke trader!

May the Trend be with you,
Paul Y. Shimada

p.s. To: VDeluca, I realized in your question that you consider 5% equity risk okay, and maybe 2% was too conservative. As my old friend Odd Job (Harold Sakata)used to say (as a Honolulu-based professional wrestler, not in his Goldfinger role), "Patience boy-san, patience!" Two points: (1) many of the top traders in Jack Schwager's "Market Wizards" limited themselves to 2% of equity; (2) try digging out your 8th grade math books and take a look at combinations, permutations, etc.--try computing the probability of losing 50% of your equity if you risk 5% for each trade; those are not odds on which most people would risk their hard-won savings. For example if you lost 10 trades in a row, you would immediately hit your 50% limit. What are the odds of losing 10 out of 15 trades, or 10 out of 20 trades? Maybe you're willing to lose 100%; how long would that take? Of course it gets more complicated if you factor in your win/loss and risk/reward factors. If you have traded long enough to have developed these factors, or if you can guess them, I have an Excel spreadsheet that graphically illustrates the probability of going broke. Hmm, that's a sobering thought.

p.s. To: Merlin Administrator, what do you think about a new thread focusing on Risk Mgt? I have seen too many colleagues with dead accounts and looking for other jobs because they were never taught Real Risk Mgt (they only learned "set your stops at 50 pips..."). I know it's a dull topic, how could we add some salsa? By the way, to answer your question, I've been in the U.S. stock market since 1959, the year of Sputnik and the dawn of our high-tech age. I've developed and won with Tech. Analysis in stocks, been immersed in forex 6 months, paid my fx newbie dues (lost 86% of $14K), developed and traded several complete fx trading systems, have coached many other fx traders, and this week I'm funding my newly opened UK-based fx account for a pool of personal and associates' private funds. It took me a while to change the beat from classical to heavy metal; they say 1 day of fx trading is equivalent to 20 days (1 calendar month) in NYSE. The methods are similar but updated (for the PC age) and recalibrated for much shorter cyclicity and overall higher routine volatility. Risk mangement, capitalization, and discipline are identical. So, I may be an fx neophyte, but I'm not a Tenderfoot. Anyway, retail fx is only 8 years old, so in a sense, we're all pioneers in a new and rapidly evolving game. Other than long-term profitability, my greatest concerns are (1) protecting fx newbies from fatally hurting themselves and others and (2) cleaning up the unethical fx operators, especially in developing countries where scams are a way of life, and where things too good to be true often appear as the only salvation available. I believe in knowledge, education, and continuous learning. I have and continue to be available to contribute my efforts toward these ends. Suggestions are welcome.

In fact it's not really 10% that is at risk, as the stop loss is placed at 50pips.
So risk would be less than 5%/trade (as CHF is traded)
In fact the 27/23 described on moneytec is trying to emulate the forex-mhv system, as most of the users from moneytec don't want to pay $500 and try to guess what the forex-mhv system is all about.
The forex-mhv system is a simple kiss system, but gives consistent profit. Bear in mind that you will have a losing week now and then.

For track record check
http://www.forex-mhv.com/trading_sig...ex_history.asp

Forex mhv website....200 bucks get you their 2 systems?
Is it worth it?

L

In case you are wondering about the meaning of the "171322182723" method, those are the 2 numbers for the various pairs that you add and subtract from the closing price to set the buy and sell entry orders. 17/13 is EUR/USD, 22/18 is GBP/USD, and 27/23 is USD/CHF.

If you change the time frame you are looking at to make the ATR correspond with the %risk you deem prudent, don't you also have to change your entry and exit strategy to the new time frame as well? Doesn't that necessarily mean that your profit target will be reduced as well? So, what would that accomplish?

In other words, if your trading system is based on daily support and resistance pivot points, your stop should be reflective of the average DAILY move of the currency pair. If you switch to the 30 minute chart so that ATR is reduced, how does that help your strategy, unless you also use 30 minute support and resistance calculations? But if you do, it seems to me that your profit target has to go down, which puts you right back in the same situation you were in before vis-a-vis the winning percentage of the system.

Paul, thanks for a grear post and thanks for taking the time to post it for everyones benefit. I will have to read it a couple of times to absorb it. I am of the "set stop at 50 pips...." type as that is what is taught in most courses. I would be interested in learning more about risk management as long as it is not overly complicated and would be interested in any data/ss that you have on this subject as mentioned.

Regards. Seadog

I asked MHV or whoever about their system's compatibility with Asian Session and a couple of hours in US a.m. session. They had a one word answer.

No.


Lou

Right On!
Paul Y. Shimada

All your comments and observations are correct. Items #D&E below specifically address your quandary. Following are some comments from another thread with additions after item #D.

REGARDING STOP LOSS SETTING:

A. What was period of the chart you were trading, M1, M15, M30, H1, H4? 30 pips may or may not be appropriate. Consider using setting your stops based on some measure of volatility. If you use standard unchanging stops, you may stop out excessively in volatile markets, and not often enough in slow markets. I use N=2*ATR(20) as did the Turtles.

B. If you are not using a trend following system for entry/exit, your risk/reward should be very close >=0.5. Remember, your stop reflects your potential risk. What are your expected rewards in pips—are you a scalper, short-term pattern trader, or trend follower? So your stop (a.k.a. risk) which may necessitate either increase/decrease of stop level, and/or changing chart period.

If you are using a trend follower system or any other “always in the market,” which continuously alternates from long to short to long …, you may not be using stops if you can tolerate the floating losses.

C. Consider that your stop represents your “equity at risk.” As such, equity at risk should generally not exceed 1% to 2% per trade. This is a very important money management concept.

D. Summary: your stop should be a balance among volatility, risk/reward, and 1% equity at risk. Stop setting is not as trivial as it may seem at first glance.

E. The solution is to improve your trading system so that your risk/reward to >=0.5. To achieve that, you would probably trade longer period charts, like H1, H4 because the volatility is higher and the trends are longer. Note that ATR does not increase linearly with chart period; chart period increases faster than ATR. Thus, if you use stop=2N=2*ATR, your stop (risk) increases less in proportion to your potential gains (longer trends) as you increase chart period!

You must discover for yourselves the sweet-spot chart period for your favorite pair that can balance volatility, risk/reward, and 1% equity. [Note that the Turtles used daily charts for entry, exit, and stops.] Unfortunately, the difficulty of trend following systems is the necessity of 24/5 chart watching. I use M30, H1, and H4 and use a team for 24/5 chart watching so I will catch every opportunity good and bad.

The Turtles discovered that only a handful of entries over a year were responsible for their net annual profitability; I do not want to miss any of that handful. Trading Robots is an alternative to team trading. So far, I am developing our team's MetaTrader Robot, but it will only serve to alert the chart watcher--so far, I have insufficient trust in both the robot and the robot-broker interaction.

PRESENT STATE OF THE ART IN TRADING ROBOTS

1. There is a thread in Yahoo Forex that describes the results and efforts of a programmer who apparently has successfully pulled of fully automated trading. He uses MetaTrader for data feed and to generate buy/sell signals, and VB plus a broker-supplied API to convert the signals into trade execution. It's complex, somewhat kludged, but it does apparently work! Unfortunately, it only works for FXCM and it is not yet for sale.

2. Alternatively, CMS offers software that should do the job with more style; their only problem is a yet not adequately matured system, according to their users.

3. TradeStation has been aggressively advertising the new Forex accounts and Trading Robot capabilities. I am sure most already know of the gotchas with TradeSystem--mainly their monthly charge and relatively higher minimum trade size. I have no information or feedback regarding their new foray into retail Forex (with Reynolds), nor do I know about the performance/quirks of their robot. Otherwise, TradeStation is certainly the Cadillac of back-testers and custom indicators/systems.

4. Of course, MetaTrader offers software that has been widely used for what they call "Expert Systems," a.k.a. robot traders. The level of programming skills required is similar to Basic. The primary caveat is MetaTrader only works with second and third tier brokers who use MetaTrader Quote Server Software (see MetaQuotes.com). Most of them are in Russia, Mediterranean, and Southeast Asia. Most of them have higher spreads and other gotchas in addition to being non-USA. However, their widespread use and free demo accounts, make them the current system of choice for no-cost homebrew trading robots.

May the Trend be with you,
Paul Y. Shimada