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Low Risk, High Reward Trading Experiment

  • #2,721
  • Edited 10:52am Jan 23, 2007 10:10am | Edited 10:52am
Monday January 23 at 11:00 ET

Exit Trade Experiment #325 Buy USD/JPY at 121.40 (or higher) to take min. 7 pips profit and re-enter long position at 121.00

Stop is 120.69
____________________________________________________________

Previous trade experiment:

Monday January 23 at 6:00 ET
Trade Experiment #325 Buy USD/JPY at 121.30
Stop is 121.09
Target is 122.00
Risk is 24 pips
Reward is 67 pip
Reward / Risk Ratio is 2.8

Confidence level: good
Accuracy: good
Reward / Risk Ratio : fair

For research purposes only.

Wave hypothesis: This is the fifth wave of the Fifth Wave according to our wave count.
  • #2,722
  • Jan 23, 2007 10:49am Jan 23, 2007 10:49am
Monday January 23 at 11:30 ET

Exit Trade Experiment #317B Sell GBP/USD at the price of 1.9840 (or lower) for a small loss of about 11 pips and re-enter short position at 1.9930

Stop is 1.9982
 __________________________________________________
__________________________________________________

Previous trade experiment:

Monday January 22 at 3:30 ET
Trade Experiment #317B Sell GBP/USD at 1.9833
Stop is 1.9883
Target is 1.9550
Risk is 54 pips
Reward is 279 pips
Reward / Risk Ratio is 5.2

 Confidence level: fair
Accuracy: good
Reward / Risk Ratio : good

For research purposes only.

Our wave hypothesis is that we are trading the Wave Four down of a larger upwards Wave One of an even larger WAVE FIVE.
__________________________________________________ _

Previous trade experiments:

We adjusted the target and exited Trade Experiment #317 Sell GBP/USD at 1.9760 at 1.9700 to consolidate 56 pips of profits. The interim low was at 1.9636, which is 64 pips lower, as the price dropped much more than expected.

Based on our current favorite wave hypothesis we see a trade opportunity to sell at 1.9766 with a conservative target at 1.9650.

Thursday January 18 at 20:00 ET
Trade Experiment #317A Sell GBP/USD at 1.9766
 Stop is 1.9806
Target is 1.9650
Risk is 44 pips
Reward is 112 pips
Reward / Risk Ratio is 2.5

 Confidence level: fair
Accuracy: fair
Reward / Risk Ratio : fair

For research purposes only.

Our wave hypothesis is that we are going down from our entry price in a Wave C of a Fourth Wave correction, and that GBP/USD will rise again to a new high at 1.9800 or above before a major correction downwards.

A long trade at the bottom of Wave C at about 1.9600 to 1.9650 up to 1.9800 or higher could be a good low risk / high reward trade.

p.s. - the interim low so far is 1.9697, still 47 pips from our "conservative target". A bullish UK consumer confidence report may have caused a shortened downwards Wave C. A person integrating fundamental analysis and announcement trading with my technical models would probably have exited this trade at 1.9700 to collect 62 pips of profit, with gratitude, considering the news.

UK Retail Sales (December) (9:30GMT; 4:30EST)
Actual: 1.1%
Expected: 0.5%
Previous: 0.2%%

How Did the Markets React?

UK Retail Sales handily beat expectations printing at 1.1% versus 0.5% forecast, but almost all the markets reacted negatively to the figure as the good news was well anticipated and profit taking overwhelmed the fundamentals. Bonds rose, the pound fell and equities corrected mildly. The health of the UK consumer is well established, but markets bid up most of the instruments in days prior to the release and traders used today’s results to lock in gains made this week.
  • #2,723
  • Edited 12:14pm Jan 23, 2007 11:23am | Edited 12:14pm
Monday January 23 at 12:00 ET

We expected one more wave up - to 97.70. But as it turns out the reversal point looks like it will be somewhat higher - at about 98.10

Therefore Exit Trade Experiment #320 Sell CHF/JPY at 97.85 - 97.95 and re-enter at 98.10

p.s. - price dropped to 97.80 to permit exit as advised shortly after signal was issued
_______________________________________________
_______________________________________________

Previous trade experiment:

Exit Trade Experiment #320 Sell CHF/JPY at 97.30 and re-enter at 97.70Monday January 22 at 18:00 ET

Exit Trade Experiment #320 Sell CHF/JPY at 97.30 and re-enter a short position at 97.70

We expect one more wave up. Exit for a 19 pip loss and re-enter at a price 40 pips higher, at 97.70. Raise stop to 98.06
____________________________________________
____________________________________________
Previous trade experiment:

Wednesday January 17 at 1:45 ET
Trade Experiment #320 Sell CHF/JPY at 97.20
Stop is 97.51
Target is 95.00
Risk is 40 pips
Reward is 211 pips
Reward / Risk Ratio is 5.3

Confidence level: good
Accuracy: good
Reward / Risk Ratio : good

For research purposes only.

This is an attempt to trade the C Wave down of the Fourth Wave down of the Fifth large wave upwards of a very large upwards trend which began October 24, 2000. The current price of CHF/JPY is 97.20.

p.s. - recent high for CHF/JPY is 97.41, 21 pips above our entry price, and just 10 pips off our stop. The system generated high probability reversal point is actually 97.40, so I didn't do proper analysis prior to this entry. Stop should have been set or adjusted to 97.61.
  • #2,724
  • Jan 23, 2007 11:28am Jan 23, 2007 11:28am
Quoting itme
Monday January 23 at 11:30 ET

Exit Trade Experiment #317B Sell GBP/USD at the price of 1.9840 (or lower) for a small loss of about 11 pips and re-enter short position at 1.9930

Stop is 1.9982
__________________________________________________
__________________________________________________

Previous trade experiment:

Monday January 22 at 3:30 ET
Trade Experiment #317B Sell GBP/USD at 1.9833
Stop is 1.9883
Target is 1.9550
Risk is 54 pips
Reward is 279 pips
Reward / Risk Ratio is 5.2

Confidence level: fair
Accuracy: good
Reward / Risk Ratio : good

For research purposes only.

Our wave hypothesis is that we are trading the Wave Four down of a larger upwards Wave One of an even larger WAVE FIVE.
__________________________________________________ _

Previous trade experiments:

We adjusted the target and exited Trade Experiment #317 Sell GBP/USD at 1.9760 at 1.9700 to consolidate 56 pips of profits. The interim low was at 1.9636, which is 64 pips lower, as the price dropped much more than expected.

Based on our current favorite wave hypothesis we see a trade opportunity to sell at 1.9766 with a conservative target at 1.9650.

Thursday January 18 at 20:00 ET
Trade Experiment #317A Sell GBP/USD at 1.9766
Stop is 1.9806
Target is 1.9650
Risk is 44 pips
Reward is 112 pips
Reward / Risk Ratio is 2.5

Confidence level: fair
Accuracy: fair
Reward / Risk Ratio : fair

For research purposes only.

Our wave hypothesis is that we are going down from our entry price in a Wave C of a Fourth Wave correction, and that GBP/USD will rise again to a new high at 1.9800 or above before a major correction downwards.

A long trade at the bottom of Wave C at about 1.9600 to 1.9650 up to 1.9800 or higher could be a good low risk / high reward trade.

p.s. - the interim low so far is 1.9697, still 47 pips from our "conservative target". A bullish UK consumer confidence report may have caused a shortened downwards Wave C. A person integrating fundamental analysis and announcement trading with my technical models would probably have exited this trade at 1.9700 to collect 62 pips of profit, with gratitude, considering the news.

UK Retail Sales (December) (9:30GMT; 4:30EST)
Actual: 1.1%
Expected: 0.5%
Previous: 0.2%%

How Did the Markets React?

UK Retail Sales handily beat expectations printing at 1.1% versus 0.5% forecast, but almost all the markets reacted negatively to the figure as the good news was well anticipated and profit taking overwhelmed the fundamentals. Bonds rose, the pound fell and equities corrected mildly. The health of the UK consumer is well established, but markets bid up most of the instruments in days prior to the release and traders used today’s results to lock in gains made this week.
ITME,

not to be picky but you would have stopped out at 1.9911. The price went up to 1.9915. Raising the stops during the trade defeeats the purpose of low risk high reward entry and introduce additional risks such as the one above resulting in a bigger than projected capital exposuere and potential losses.
  • #2,725
  • Edited Jan 24, 2007 2:35am Jan 23, 2007 12:06pm | Edited Jan 24, 2007 2:35am
Quoting Lenny
ITME,

not to be picky but you would have stopped out at 1.9911. The price went up to 1.9915. Raising the stops during the trade defeeats the purpose of low risk high reward entry and introduce additional risks such as the one above resulting in a bigger than projected capital exposuere and potential losses.
You're not being picky. These are very real issues. Technically you're correct. We were stopped out at 1.9911. So as far as the trade experiment is concerned, it was unsuccessful. However, some, or many people following this process have been advised by me or have decided to enter these trades at various prices closer to the stop than the entry price. Some people are entering trades at my stop prices, not entry prices. So though technically our trade experiment was stopped out, without actually saying it explicitly, I implied slightly raising the stop, or re-entering the position by my statement " p.s. - interim high is 1.9914 . The pattern and configuration look very good for a reversal at about this price. We may see a double top to facilitate entry for short position at or near to 1.9914." People are applying the ideas here in a wide variety of ways.

Note that my system is notorious for placing stops exactly at the reversal point, or 5 pips or less short of the reversal point. We are trying to address this issue, but we haven't been very successful so far. Knowing this, many people enter their trades at or close to our stops, and place their stops in a very different place.

Regarding the issue of adjusting stops, this is a complex issue. Each person will have to make their own assessment. This is not a trading program or a signal service, more an advisory service doubling as a research project. Risk control is a complex mathematical issue, and depends on the precise trading system. Some people have or put in a margin of safety which they can employ to adjust stops where it is required. In principle, when a very high probability, high return trade opportunity arises when the price pattern unfolds above the original stop, then one can either adjust the stop, or enter a new trade. Sometimes it is better to adjust the stop than to exit the trade and risk losing out on a potentially good trade.

As discussed above, some professional institutional traders stage into positions, adding lots as the trade continues to move in the wrong direction.

I am primarily studying my Q system and Elliott Wave patterns, etc. to learn how to predict reversal points. The trading system I am working on may not even involve entering a trade at the estimated reversal point, but may rather involve entering at the end of the second intermediate wave and the fourth intermediate wave. This is a much safer strategy. Also, we hope to trade with stops in the 20 to 30 pip range, because we can assess the Elliott Waves on the tiniest timeframe and try to precisely locate the reversal point. Furthermore, there are large areas of research which are still incomplete, which we hope will help us to improve our trend reversal identification - such as time cycle studies and distance travelled , both absolute and in proportion to previous wave lengths, studies. Also there are several incomplete studies in the patterns of the waves and candlesticks formed at reversal points that we expect to be helpful.
  • #2,726
  • Jan 23, 2007 1:59pm Jan 23, 2007 1:59pm
Quoting itme
You're not being picky. These are very real issues. Technically you're correct. We were stopped out at 1.9911. So as far as the trade experiment is concerned, it was unsuccessful. However, some, or many people following this process have been advised by me or have decided to enter these trades at various prices closer to the stop than the entry price. Some people are entering trades at my stop prices, not entry prices. So though technically our trade experiment was stopped out, without actually saying it explicitly, I implied slightly raising the stop, or re-entering the position by my statement " p.s. - interim high is 1.9914 . The pattern and configuration look very good for a reversal at about this price. We may see a double top to facilitate entry for short position at or near to 1.9914." People are applying the ideas here in a wide variety of ways.

Note that my system is notorious for placing stops exactly at the reversal point, or 5 pips or less short of the reversal point. We are trying to address this issue, but we haven't been very successful so far. Knowing this, many people enter their trades at or close to our stops, and place their stops in a very different place.

Regarding the issue of adjusting stops, this is a complex issue. Each person will have to make their own assessment. This is not a trading program or a signal service, more an advisory service doubling as a research project. Risk control is a complex mathematical issue, and depends on the precise trading system. Some people have or put in a margin of safety which they can employ to adjust stops where it is required. In principle, when a very high probability, high return trade opportunity arises when the price pattern unfolds above the original stop, then one can either adjust the stop, or enter a new trade. Sometimes it is better to adjust the stop than to exit the trade and risk losing out on a potentially good trade.

I am primarily studying my Q system and Elliott Wave patterns, etc. to learn how to predict reversal points. The trading system I am working on may not even involve entering a trade at the estimated reversal point, but may rather involve entering at the end of the second intermediate wave and the fourth intermediate wave. This is a much safer strategy. Also, we hope to trade with stops in the 20 to 30 pip range, because we can assess the Elliott Waves on the tiniest timeframe and try to precisely locate the reversal point. Furthermore, there are large areas of research which are still incomplete, which we hope will help us to improve our trend reversal identification - such as time cycle studies and distance travelled , both absolute and in proportion to previous wave lengths, studies. Also there are several incomplete studies in the patterns of the waves and candlesticks formed at reversal points that we expect to be helpful.
ITME.

I appreciate what you have been doing and like your thread.

My mere point was that your trading journal was recording a loss of 12 pips instead of 80 that would have been reported if you were adjusting your stop to 1.9911. If somehow that is not a legitimate loss then I must have missed something within your journal.

Also, just a slight observation. If you adjust your stops and rarely reach your longer term targets (in this case the target was over 200 pips away) how can we call those trades low risk and high reward? Our innitial RRR no matter how you calculated rarely ends up equal to the innital one.

I agree that one has to protect their profit with trailing stops and closing the trades or adjusting the stops when the setup changes but then RRR is meaningless from the start. Especially if we readjust the sops, which is the only measure of control one has entering a trade
  • #2,727
  • Edited Jan 24, 2007 11:26am Jan 23, 2007 7:31pm | Edited Jan 24, 2007 11:26am
Quoting Lenny
ITME.

I appreciate what you have been doing and like your thread.

My mere point was that your trading journal was recording a loss of 12 pips instead of 80 that would have been reported if you were adjusting your stop to 1.9911. If somehow that is not a legitimate loss then I must have missed something within your journal.

Also, just a slight observation. If you adjust your stops and rarely reach your longer term targets (in this case the target was over 200 pips away) how can we call those trades low risk and high reward? Our innitial RRR no matter how you calculated rarely ends up equal to the innital one.

I agree that one has to protect their profit with trailing stops and closing the trades or adjusting the stops when the setup changes but then RRR is meaningless from the start. Especially if we readjust the sops, which is the only measure of control one has entering a trade
#1) If you looked back, until recently I put in only trades with large RRR, and never exited prematurely. I either won or lost. There have been dozens and dozens of trades which were successful. Only recently have I started exiting trades prematurely, in what has been a strategy with mixed success. By doing so we have been able to enter trades without a strong likelihood of meeting their far off target, reassured by the certainty that the price would at least move a moderate distance in the right direction. These trades are like consolation prizes, or trades to keep practise, while waiting for the true good trades. We also exited several good trades prematurely due to this new strategy, designed to reduce the number of losing trades, but not to sabotage good trades.The purpose of exiting a trade very prematurely is to avoid a loss, and to secure a small gain, when it becomes evident that we are unlikely to have reached the end of a trend, and that there will likely be another impulse wave that will carry the price past our stop. Sometimes we exit a trade when the entry was a little premature, and we are just trying to adjust our entry to a more precise level. We do not consider these trades with small profits to be the goal of our system. They are failed attempts to find system compliant entries that happen to yield small profits as a byproduct. By exiting prematurely we secure a small profit, and avoid a major loss, and prepare for the next opportunity to enter the trade at what we hope to be the extremity of the trend.


#2) I don't consider pips relevant. That is one of the main points of my thread. You either lose by hitting the stop, in which case you lose your risk factor, or you win, in which case you earn your risk factor times your reward / risk ratio. Pips are irrelevant. They are a false and misleading barometer of "success". It matters not how far away the stop is, all that matters is the ratio of the reward size to the risk size. When I exited the trades before reaching the target, technically those trades are neither wins or losses. They are draws. They were trades entered in the hopes of capturing the beginning point of a large trend. But with GBP/USD and EUR/USD moving sideways in a Wave 4 formation, there haven't been any system compatible trades. So they were false entries. At least I thought they were.

#3) I have never recorded any losses or gains on the trade experiments, only on individual trades. The purpose of this thread is to learn and experiment.

#4) It has been difficult to find and capitalise on the minimum 5:1 RRR trades lately because we have been in a Wave 4 correction in GBP/USD and EUR/USD, while USD/JPY and USD/CAD have been rangebound, so the movements have not been very large. The market has been somewhat rangebound. Also the patterns have been hard for me to decipher. Also, I have stopped trying to follow 20 pairs, as the work load was too great and the time limitation caused a compromise in the quality of my analysis.

GBP/JPY has trended many hundreds of pips, but it is very difficult for me to predict with my system, as there are needed adjustments for that pair that I haven't yet formulated. I kept trying to predict its trend reversal points, and lost repeatedly. When I did call the top of the last huge downwards move, I got nervous and pulled out prematurely.

So I have entered trades that I felt confident that would move in the right direction solely for the purpose of practise and keeping engaged, knowing that the likelihood of them trending hundreds of pips was not too great. When I studied the patterns of wave movement further with a hypercritical eye according to my new higher standard of certainty, in several cases I have exited early. In many cases the original trade formulations were outstanding successes. This is all part of my objective and subjective learning process.

#5) As I have said before, my eventual goal is a 50% success rate with minimum 5:1 Reward / Risk Ratio. As I have said many times before, if I could win 50% of trades with a 5:1 RRR, then according to the Kelly Formula of Optimum Risk I could use a risk factor of .50-(1-.5)/5.0 = 40%, which means that the rate of return from my trading program will be astronomical.

This agrees with my more detailed studies on the matter.

If one employs the Itme Theorem of Gain on Capital from Short Term Investments, then the compound earnings on the trading program I just described will be very high.

In N trades, the return on capital will be:

Multiplier of Capital = (1-RM)^(N*(1-W%) ) * (RM*W/L)^ (N*W%)

If RM = W% - ( 1-W%)/( W/L),

then,

Multiplier of Capital = (1-(W% - ( 1-W%)/( W/L)))^(N*(1-W%) ) * ((W% - ( 1-W%)/( W/L))*W/L)^ (N*W%)

= ((1-W%+(1-W%)/(W/L))^(N*(1-W%) ) * ((W% * W/L + W%)^(N*W%)

In a trading program of 50 trades, then N=50, and with a 50% win rate ....

Then Multiplier of Capital = (.6)^25 * (3.0)^25 = 2.41 million times initial capital, with a 50% win rate. An initial capital of $1000 will grow to $2.41 billion in about 6 months.

A 30% win rate gives a return of 15 times capital in 50 trades.

A 20% win rate gives a return of only 20% in 50 trades.

So we are approximately breaking even with 1 out of 5 winning trades, and we make a healthy return with 30% winning trades.

When we achieve 50% winning trades, we become a billionaire very fast!
  • #2,728
  • Jan 24, 2007 3:50am Jan 24, 2007 3:50am
Wednesday January 24 at 4:45 ET

Trade Experiment #326 Sell GBP/JPY at 241.50 has already progressed 350 pips towards its target.

Adjust target to 237.30 (from 236.00, a rough estimate entered at the time of the trade)

_____________________________________
_____________________________________

Previous trade experiments:

Monday January 23 at 6:00 ET
Trade Experiment #326 Sell GBP/JPY at 241.50
Stop is 242.11
Target is 236.00
Risk is 70 pips
Reward is 540 pip
Reward / Risk Ratio is 7.7

Confidence level: fair
Accuracy: fair
Reward / Risk Ratio : good

For research purposes only.

Wave hypothesis: This is the Fourth Wave correction according to our wave count.
  • #2,729
  • Jan 24, 2007 5:20am Jan 24, 2007 5:20am
Quoting itme
Wednesday January 24 at 4:45 ET

Trade Experiment #326 Sell GBP/JPY at 241.50 has already progressed 350 pips towards its target.

Adjust target to 237.30 (from 236.00, a rough estimate entered at the time of the trade)

Hi Itme, just curious whether you feel the wave count remains valid after the 233 pip rebound from a prior trendline. My perspective on this currently is: 240.30 has two wave endings here so that's pretty much the area it's fighting off currently.
237.00 would be the target projection if we proceed downwards from here.

Also it seems in the theory of my supersimplified cable count (the one I posted over at the other thread) we have have completed Wave 5 and done an ABC correction. First 100% normal wave c of that abc is over, if it becomes an 161.8% extended c it would hit the 1.9650 area roughly. I'm currently undecided whether GBPJPY and GBPUSD will continue to move down further and if we stay above 1.9735 level another 30 minutes I fear I'm looking at a possibly rising cable again....

Just wanted to hear your thoughts on this

Best regards,

SeekingLight
Trust price. Know yourself.
  • #2,730
  • Jan 24, 2007 11:11am Jan 24, 2007 11:11am
Wednesday January 24 at 12:00 ET

Trade Experiment #326 Sell GBP/JPY at 241.50 has already progressed 400 pips towards its target.

Adjust target to 237.60 (from 236.00, a rough estimate entered at the time of the trade, and a later estimate of travel, 237.30)

Based on the wave pattern, it is likely to bounce up substantially before finishing its downwards path.

_____________________________________
_____________________________________

Previous trade experiments:

Monday January 23 at 6:00 ET
Trade Experiment #326 Sell GBP/JPY at 241.50
Stop is 242.11
Target is 236.00
Risk is 70 pips
Reward is 540 pip
Reward / Risk Ratio is 7.7

Confidence level: fair
Accuracy: fair
Reward / Risk Ratio : good

For research purposes only.

Wave hypothesis: This is the Fourth Wave correction according to our wave count.
  • #2,731
  • Edited Jan 25, 2007 4:39am Jan 24, 2007 11:53am | Edited Jan 25, 2007 4:39am
On January 17 our system gave us a probable reversal point for CHF/JPY at 97.41. It did reverse here, but only 65 pips, and went to another high. After studying the wave pattern more, we recognised this and exited this position on Monday January 22 at 18:00 ET:

Exit Trade Experiment #320 Sell CHF/JPY at 97.30 and re-enter a short position at 97.70
We expect one more wave up. Exit for a 19 pip loss and re-enter at a price 40 pips higher, at 97.70. Raise stop to 98.06

This assessment was correct, as the trend high was 98.00

However, on Monday January 23 at 12:00 ET we saw that there would be another intermediate wave higher than the one that had already completed, so we exited for a small loss and advised a re-entry higher up (at about 98.10) to gain a more accurate entry price:

"We expected one more wave up - to 97.70. But as it turns out the reversal point looks like it will be somewhat higher - at about 98.10
Therefore Exit Trade Experiment #320 Sell CHF/JPY at 97.85 - 97.95 and re-enter at 98.10
p.s. - price dropped to 97.80 to permit exit as advised shortly after signal was issued"

Unfortunately the price fell 10 pips short of our revised entry price, so we missed out on this trade by "trying to get it perfect". This is in accordance with our new policy of "attempting to get it perfect" and therefore willingness to let many trade opportunities "slip through our fingers" by a few pips as a consequence.

p.s. - The price of CHF/JPY has subsequently fallen to an interim low of 96.32
_________________________________________________
_________________________________________________

Previous trade experiments:

Monday January 23 at 12:00 ET

We expected one more wave up - to 97.70. But as it turns out the reversal point looks like it will be somewhat higher - at about 98.10

Therefore Exit Trade Experiment #320 Sell CHF/JPY at 97.85 - 97.95 and re-enter at 98.10

p.s. - price dropped to 97.80 to permit exit as advised shortly after signal was issued
________________________________________
_______________________________________________

Previous trade experiment:

Exit Trade Experiment #320 Sell CHF/JPY at 97.30 and re-enter at 97.70
Monday January 22 at 18:00 ET

Exit Trade Experiment #320 Sell CHF/JPY at 97.30 and re-enter a short position at 97.70

We expect one more wave up. Exit for a 19 pip loss and re-enter at a price 40 pips higher, at 97.70. Raise stop to 98.06
____________________________________________
____________________________________________

Previous trade experiment:

Wednesday January 17 at 1:45 ET
Trade Experiment #320 Sell CHF/JPY at 97.20
Stop is 97.51
Target is 95.00
Risk is 40 pips
Reward is 211 pips
Reward / Risk Ratio is 5.3

Confidence level: good
Accuracy: good
Reward / Risk Ratio : good

For research purposes only.

This is an attempt to trade the C Wave down of the Fourth Wave down of the Fifth large wave upwards of a very large upwards trend which began October 24, 2000. The current price of CHF/JPY is 97.20.

p.s. - recent high for CHF/JPY is 97.41, 21 pips above our entry price, and just 10 pips off our stop. The system generated high probability reversal point is actually 97.40, so I didn't do proper analysis prior to this entry. Stop should have been set or adjusted to 97.61.
  • #2,732
  • Edited 3:27pm Jan 24, 2007 12:34pm | Edited 3:27pm
Story of a missed entry (close call).

On January 15, when the price of GBP/USD was only about 1.9600, and after the Bank of England unexpectedly raised its interest rate, which had already caused a large surge in price of GBP/USD, I said:

"GBP/USD is expected to continue its current uptrend to about 1.9700 before reversing for a Wave 4 reversal, carrying the price down to about 1.9550, before heading up to the ultimate high of about 1.9800 for the Wave 3 segment of this upwards pattern."

The top of the wave 3 was at exactly 1.9700, as predicted, and the bottom of wave 4 was at 1.9590, 40 pips higher than our predicted reversal point. The ultimate Wave C of Wave 4 trend high, however, was considerably higher than our estimate of 1.9800, as GBP/USD made a spectacular finish to this trend by shooting up 200 pips on January 22 / 23 to hit a high of 1.9914.

On Tuesday January 16 at 11:00 ET my trading system gave me this trade set-up, with a conservative target of 1.9750:

Trade Experiment #313 Buy GBP/USD at 1.9602
Stop is 1.9558
Target is 1.9750
Risk is 48 pips
Reward is 144 pips
Reward / Risk Ratio is 3.0
Confidence level: good
Accuracy: good
Reward / Risk Ratio : fair

On Monday January 22 at 7:30 ET, after the .25% interest rate hike and a two week rise in price of almost 650 pips, in attempting to determine the reversal point of the upwards Wave C trend, we said:

Quoting itme
Raise stop to 1.9911 (from 1.9882) for Trade Experiment #317B Sell GBP/USD at 1.9833

The wave count, wave proportion, and the fact that the price just came up to meet the January 15 upper trendline all favor the chance of a reversal at about 1.9880. We are also at a reversal point according to my Q system.

Also, FFAN analyst said, "Markets will be looking to attack the 2.00 level against the US dollar, but Sterling is increasingly at risk to a sharp corrective retreat back towards 1.9600 and offers poor value above 1.9850.......Sterling will, therefore, look to secure further support in the short term, but the currency will be very vulnerable to a sharp correction weaker if there are doubts over either the domestic interest rate expectations or the global confidence in carry trades.

p.s. - interim high is 1.9914 . The pattern and configuration look very good for a reversal at about this price. We may see a double top to facilitate entry for short position at or near to 1.9914.
There was no double top at 1.9914. That price was the one and only top. Often there is no second chance to enter at the precise top. Our stop had previously been adjusted to 1.9911 - just 3 pips short of the high point. At the time we made the above journal entry we could have advised entry to what we had waited a long time for - the anticipated large Wave 5 short trade - at the market price at the time, at about 1.9900, but we were striving for perfection. Thus technically we are not in this trade, due to an error of 3 pips in setting the stop. Thus our new "striving for perfection" policy cost us this rare large trend trade by a few pips.

The price subsequently fell 250 pips to an interim low of 1.9645. Plus there is more downside potential in this trend according to my system.

In addition to all the above, on Monday January 23 at 11:30 ET we said:

"Exit Trade Experiment #317B Sell GBP/USD at the price of 1.9840 (or lower) for a small loss of about 11 pips and re-enter short position at 1.9930......Stop is 1.9982"

The reason we did this was because the Elliott Wave count was quite irregular, and we felt that there was a good chance that the price movement would bounce at this point either to a failed fifth wave of the upwards trend or a second wave retracement of the new downwards trend to near the previous high. This often happens. However, in this case it didn't.

Of course, the basic spirit of this trading experiment up to now has been to determine a probable reversal point with a good Reward : Risk Ratio, and to commit to the position - ie. - accept the pros and cons of the position, and let the trade run its course and either hit the stop or hit the target in hopes that it is, in fact, the turning point of the trend. (In addition, we always allowed for small adjustments one way or another to the profit target when we were approaching it, but they were rarely required.)

Up until this point our original general strategy has proved to be quite successful, as we have hit our target many times, even though the Elliott Wave pattern was often confusing or inconclusive at the time of entry. We simply asked ourself - "based on our past experience, is this a credible or viable pattern for reversal?" We are now seeking for a balance between the earlier, simple method of "going for it 100% with no chance to back out" (and accepting the inevitable risks), and the new effort to reduce the number of losses by bailing out judiciously of dangerous trades in a winning position.

People with a hyper-critical and pessimistic frame of mind may see this recent near miss of a good price movement as a FAILURE, however, I see this as just another successful experiment (ie - opportunity to learn) in a long and exciting road towards evolving a trading system by which I can become a billionaire in a few months. It is all a matter of perspective.
  • #2,733
  • Edited 4:09pm Jan 24, 2007 1:41pm | Edited 4:09pm
Wednesday January 24 at 2:30 ET

USD/CHF will likely correct down now to about 1.2440 and then proceed on upwards to about 1.2550 to 1.2600. Current price is 1.2490.

GBP/USD will correct upwards now to about 1.9725 from its current price of 1.9670 and then carry on downwards to about 1.9585.

EUR/USD will correct upwards now to about 1.2980 from its current price of 1.2955 and then carry on downwards to about 1.2780 to 1.2840. A failed fifth wave down would stop at about 1.2880.

USD/JPY will likely correct down now to about 120.60 to 120.70 and then proceed on upwards to about 122.00 to 123.25. Current price is 121.00.

This is a general outlook only, and very approximate, not a trade recommendation or trade experiment, based on Elliott Wave theory as I currently understand and apply it. I do this to practise my prediction methods, and to anticipate future favorable trade set-ups.

Note: On January 15 we said:

"Prediction for USD/JPY for Monday 4:00 ET

USD/JPY will likely descend from its current price at 120.50 to about 120.00 (or a bit lower) in a wave C of a downwards Wave 4 and then continue its long uptrend to a high of about 121.50 to 122.00."

In fact, USD/JPY fell only to 120.22 instead of 120.00 in the Wave C of a downwards Wave 4, because of its bullish trend, and it is seemingly well on its way to a high of 122.00 or higher, with an interim high of 121.80.
  • #2,734
  • Jan 24, 2007 2:12pm Jan 24, 2007 2:12pm
why do you think GBP/USD will correct to 1.9725?
  • #2,735
  • Jan 24, 2007 2:29pm Jan 24, 2007 2:29pm
Wednesday January 24 at 3:30 ET

Trade Experiment #327 Sell USD/CHF at 1.2490

Stop is 1.2503

Target is 1.2440

Risk is 17 pips

Reward is 46 pips

Reward / Risk Ratio is 2.7

Confidence level: fair
Accuracy: good
Reward / Risk Ratio : fair

For research purposes only.

Wave hypothesis: This is the Fourth Wave correction of an uptrend according to our wave count.
  • #2,736
  • Edited Jan 25, 2007 2:46am Jan 24, 2007 2:48pm | Edited Jan 25, 2007 2:46am
Quoting Wallboroff
why do you think GBP/USD will correct to 1.9725?
Trending markets often retrace in a wave 4 during the Asian session. Also, according to my count, we are due for an upwards wave 4 correction of this downtrend, which can carry the price up to between 1.9725 and 1.9800. It I was short, I might consider taking my profits and waiting for a good re-entry opportunity.

Also, the GBP news today was pretty good:

Wed.1/24
4:30 GBPGDP q/q (p) http://www.forexfactory.com/images/m...mpact_high.gif 0.8% 0.7% 0.7%
4:30 GBPBOE Meeting Minutes http://www.forexfactory.com/images/m...mpact_high.gif 5-4 8-1 9-0
4:30 GBPIndex of Services 3m/3m http://www.forexfactory.com/images/m...impact_low.gif 1.0% 0.9% 0.8%http://www.forexfactory.com/images/m...us_revised.gif

p.s. - GBP/USD just corrected up to 1.9732
  • #2,737
  • Jan 24, 2007 3:42pm Jan 24, 2007 3:42pm
how do you know that this is the end of wave a of wav-4?
  • #2,738
  • Edited 9:56pm Jan 24, 2007 3:53pm | Edited 9:56pm
Quoting Wallboroff
how do you know that this is the end of wave a of wav-4?
What do you mean by "this"?

It is notoriously difficult to determine the end of Wave A, Wave B and Wave C of Wave 4, because the waves are very meandering during the slack time of the day. It takes great skill, and I think requires alot of study and practise. I don't think most people will ever be able to do it with consistency.

It is best to wait for many hours and try to determine the top (or bottom) of Wave C of Wave 4 employing all the tools in your toolbox that you can bring to bear on the question, and then take a short position (assuming a downtrend). The Fourth Wave often corrects up to or slightly past the end of the Wave 3, but not always. At or near to the beginning of the London Session there is often a relatively rapid move of 40 to 80 pips in the direction of the corrrective wave which is the fifth wave of Wave C, and leads to the beginning of the new impulse wave. This is sometimes correlated with a news release, but not necessarily.

By practising and studying it is possible to count the waves even during the slack time when the market is range bound. Also fibonaccis, trend lines, time cycle techniques and various kinds of geometrising are helpful to determine the tops and bottoms of the waves. This is a deep and difficult science. The problem with trading the corrective waves, as far as I am concerned, is that I notice that they vary in size and proportion of the previous impulse wave a considerable amount depending on the strength of the trend and possibly other factors as well.

Also, the corrective waves are, by definition, smaller than the impulse waves, so the reward:risk ratio is likely to be less favorable. Trading corrective waves involves catching smaller trends, which requires greater accuracy in the entry, thus reducing the risk, which is necessary if a high RRR is to be attained with a smaller reward.

I have been studying and practising this analytical skill of slack time trend reversal prediction for about two years, and find that over half of the time the pattern develops in a fashion that is amenable to accurate analysis leading to a qualified trend reversal prediction. I would estimate that if I spend alot of time, was well rested, and work very hard at it, then I can succeed in making an accurate, successful prediction of the reversal price during the corrective wave over 50% of the time. I have already succeeded in this hundreds of times, in practise accounts. Trial and error has taught me a few things. But there are many, many things that I have yet to learn, and many unanswered questions and lines of research.

Some people specialise in trading the corrective waves, especially if they live in time zones where their trading day puts them in a situation where that is the phase of the market they typically are awake for.
  • #2,739
  • Jan 24, 2007 4:06pm Jan 24, 2007 4:06pm
thatīs right. i thought you would give me a clue for the "why" you know?

itīs still tricky for me to say when one wave has ended and where the next wave might start.

iīll go to bed, have a nice one.

cheers
  • #2,740
  • Edited Jan 25, 2007 3:51am Jan 24, 2007 6:40pm | Edited Jan 25, 2007 3:51am
GBP/CHF update for Wednesday January 24

On January 22 we predicted that GBP/CHF would reach the top of either Wave 3 or the third wave of Wave 3 at between 2.4750 and 2.4800. In fact the reversal price (top of Wave 3) was 2.4755.

Our high probability reversal values at the time were 2.4747, 2.4767, 2.4780, and 2.4800. So a short trade taken at 2.4747 could have survived with a high probability with a stop at 2.4825.

A conservative target for this trade would have been 2.4550, which would have given it a risk of 93 pips and a reward of 182, and a RRR of 2.0. The interim (and possible ultimate) actual low was 2.4518, so the trade would have succeeded. But although this trade would have succeeded, it had relatively low strategic merit (RRR<5.0).

It has subsequently completed Wave A of Wave 4 and wave a of Wave B. Wave C may or may not go lower than the bottom of Wave A. At the bottom of Wave C, wherever it is, which may be 2.4500, there may be an opportunity for a low risk / high reward trade up to the top of the trend at 2.4800 or higher.

p.s. - GBP/CHF has fallen to a new low of 2.4500, forming a possible mishapen A-B-C upwards and a 1-2-3 of a Wave C down, and part of a wave 4 up. It is generally range bound between 2.4500 and 2.4600.
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Previous comments and trade experiments:

GBP/CHF update for Monday January 22

GBP/CHF seems to be headed up towards 2.4750 - 2.4800, at which point it will correct in what we count as the fourth wave of the expanded third wave, usually a shallow a-b-c zigzag, after which it should rise again to about 2.4825 or higher
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___________________________________________

Previous comments and trade experiments:

We have exited Trade Experiment #322 Sell GBP/CHF for 50 pips profit
______________________

Dragon Slayer, are you long GBP/CHF still? It's coming down, but how far is hard to tell. According to our signals so far, we are out of this trade with 50 pips of profit. The current price is 2.4619. It might be wise to exit soon in anticipation of a further rise.

On the other hand, the recent rise to 2.4685 could represent a failed fifth wave, in which case it is downwards from here. I don't know at this point.

Friday January 19 at 13:30 ET

GBP/CHF fell to 2.4580, 5 pips below our revised target, at 4:15 ET on January 19, 2007 hitting our revised target and earning about 50 pips of profit.
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__________________________________________________ _

Previous trade signals:

Thursday January 18 at 20:00 ET

Re: Trade Experiment #322 Sell GBP/CHF at 2.4650
Adjust stop to 2.4705
Adjust target to 2.4585

The recent low is 2.4535. We anticipate one more pulse upwards to a new high at approximately 2.4825. So we will exit at a strategic opportunity at approximately 2.4585 to earn 50 pips of profit.
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__________________________________________________ __

Thursday January 18 at 3:30 ET
Trade Experiment #322 Sell GBP/CHF at 2.4650
Stop is 2.4751
Target #1 is 2.4000
Risk is 116 pips
Reward is 635 pips
Reward / Risk Ratio is 5.6

Confidence level: fair
Accuracy: fair
Reward / Risk Ratio : fair

For research purposes only.

p.s. - The recent high on GBP/CHF is 2.4687. The wave pattern is very steep and narrow, so it is difficult to assess the completion of the wave pattern. It could rise to 2.4725 if GBP/USD springs back up while USD/CHF stays up near its recent high. USD/CHF is at a recent high of 1.2519, after having jumped up 89 pips in 6 hours.

p.p.s - GBP/CHF fell to 2.4580, 5 pips below our revised target, at 4:15 ET on January 19, 2007 hitting our revised target and earning about 50 pips of profit.
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