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Weekly 80/20 Setups

  • #281
  • Jun 12, 2008 4:02pm Jun 12, 2008 4:02pm
Quoting Flyjetz
I think instead of basing our risk size on average loss size, it ought to be based on max-drawdown. This is a stat that I have not been able to keep track of, with the exception of what is listed on the Zulutrade site.
Yes, I agree. I have been keeping track of the max drawdown on all the trades I record.
  • #282
  • Jun 12, 2008 4:18pm Jun 12, 2008 4:18pm
Quoting Flyjetz
I'm having a hard time comprehending exactly what you are saying here. If a 200-pip move has the potential to wipe out 29% of my capital, then all it would take is 689 pips to completely wipe out the account (100%/29% x 200 pips).

It would not take much to be on the wrong side of a currency like the GBPJPY and see this totally wiping out the account.
A 200-pip move would wipe out 29% of the capital, only if you were trading a single currency and using that sizing scheme. If you were trading 10 currencies, then a negative 200-pip move on one of the currencies would wipe out 2.9% of the account. With 10 currencies, you would only wipe out 29% of the capital if all 10 pairs had such a move, or if the average of the moves across all 10 pairs was -200 pips. If one of those 10 currency pairs had a positive 300-pip move, then you would gain 2.9*(300/200) = 4.35%, etc.

Furthermore, if you had a sequence of losing 29% three times in a row, BUT you had been compounding (resizing) according to that scheme, your account would not go bust: You would not lose 3*29% = 87%...In fact your account would be down to 71% of the original balance after the first 29% loss. The next loss would be 29% down from that, i.e. 71%*.71 = 50.41% of the original capital. After the third 29% loss, you capital would be reduced to 50.41%*.71 = 35.79% of the original capital, i.e. a total loss of 1 - .3579 = 64.2% of the original capital.

This sort of technique, resizing/compounding as frequently as possible, has the effect of amplifying a winning streak and dampening a losing streak.

Still, in the end, I agree with you in that we should be looking at the max-drawdown, not the average closed losing trade.
  • #283
  • Jun 13, 2008 8:41am Jun 13, 2008 8:41am
Quoting Flyjetz
My own curiosity got me thinking. According to the rules I laid out, I only trade in the direction of the trend. In other words, I only trade from 20% to 80% or 80% to 20%. The theory behind that is that I'm more likely to be on the right side of the trade more often that way. But in my mind, I always knew that the price corrects, otherwise, I would never get an entry. So maybe the 80/20 system is only living up to HALF its potential. I decided to start tracking what would happen if I traded back and forth between the 20% and 80% level. In other words, if I am long at 20%, I TP at 80%, and immediately go short until 20% is hit again. Imagine a ping pong ball bouncing back and forth between those two levels. Trades should happen about twice as often, and results should be just as successful.
Yes, this is very interesting.

I noticed that a few of my open trades this week (which are currently in the red) would have already posted a win if I had set up trades in both directions.

Perhaps we don't even need to wait for the first trade in the direction of the trend. We could just use the 20-week trend as a method of projecting the position and magnitude of the new weekly range. Within that range we can set up both long and short orders, without any directional bias. The TP orders can be slighting inside the 80/20 levels so that they get triggered before the reversal order is triggered.
  • #284
  • Jun 13, 2008 9:19am Jun 13, 2008 9:19am
Quoting mathematician
Yes, this is very interesting.

I noticed that a few of my open trades this week (which are currently in the red) would have already posted a win if I had set up trades in both directions.

Perhaps we don't even need to wait for the first trade in the direction of the trend. We could just use the 20-week trend as a method of projecting the position and magnitude of the new weekly range. Within that range we can set up both long and short orders, without any directional bias. The TP orders can be slighting inside the 80/20 levels so that they get triggered before the reversal order is triggered.
I'm seriously starting to consider implementing this. Anyone else have any thoughts on this?
  • #285
  • Jun 13, 2008 9:25am Jun 13, 2008 9:25am
Math,

The more I think about your mathematical analysis, the more I think we need to determine individual risk allocations by currency pair. The 200-pip loss that you based your numbers off of was a good start for the AVERAGE pair. Unfortunately, pairs like GBPJPY range a LOT more than pairs like EURGBP. Over time, I think it is possible to determine the best risk/reward scenario for each pair traded, based on max drawdown, as we've both already agreed on. What do you think?
  • #286
  • Jun 13, 2008 2:02pm Jun 13, 2008 2:02pm
Quoting Flyjetz
Math,

The more I think about your mathematical analysis, the more I think we need to determine individual risk allocations by currency pair. The 200-pip loss that you based your numbers off of was a good start for the AVERAGE pair. Unfortunately, pairs like GBPJPY range a LOT more than pairs like EURGBP. Over time, I think it is possible to determine the best risk/reward scenario for each pair traded, based on max drawdown, as we've both already agreed on. What do you think?
Yes, absolutely. The more we can customize our experience, the better. The research I did was an overall average. It was based on data that came from trades across multiple currencies, therefore it is a good gauge for the average pair. Ideally we have a separate scheme for each currency pair, each with its own idiosyncrasies.

Lately, I've been thinking about the basket of currencies I'm trading. I think that I should diversify a lot more. I thought maybe I would trade the USD against a variety of currencies, e.g. GBPUSD, USDCHF, USDCAD, AUDUSD, USDNOK, USDPLN; then the EUR against the same set: EURGBP, EURCHF, EURCAD, EURAUD, EURNOK, EURPLN; finally some other crosses that don't involve the USD or the EUR, like GBPJPY, GBPCHF, CADJPY, AUDNZD...stuff like that.

I'm really not sure exactly what pairs I want to trade, but I'm pretty sure that I want to have a lot of diversity.
  • #287
  • Jun 13, 2008 2:21pm Jun 13, 2008 2:21pm
Quoting mathematician
Yes, absolutely. The more we can customize our experience, the better. The research I did was an overall average. It was based on data that came from trades across multiple currencies, therefore it is a good gauge for the average pair. Ideally we have a separate scheme for each currency pair, each with its own idiosyncrasies.

Lately, I've been thinking about the basket of currencies I'm trading. I think that I should diversify a lot more. I thought maybe I would trade the USD against a variety of currencies, e.g. GBPUSD, USDCHF, USDCAD, AUDUSD, USDNOK, USDPLN; then the EUR against the same set: EURGBP, EURCHF, EURCAD, EURAUD, EURNOK, EURPLN; finally some other crosses that don't involve the USD or the EUR, like GBPJPY, GBPCHF, CADJPY, AUDNZD...stuff like that.

I'm really not sure exactly what pairs I want to trade, but I'm pretty sure that I want to have a lot of diversity.
I trade all the pairs you mention except the USDPLN and EURPLN. Although the Polish Zloty has been appreciating nicely against both these pairs, the Oanda spread is ridiculous right now. I still follow both pairs and calculate 80/20 levels every week. Right now the weekly difference between 80 and 20 is 343 Pips on the EUR/PLN and 443 Pips on the USD/PLN. However, the spread is 150 pips. On a risk/reward basis, I'm not willing to PAY those odds. But the other currencies are all pretty nice. One thing you have to keep an eye on is the interest rate differentials being charged on each currency pair. If I decide to switch this system to trade BOTH directions, then that won't matter as much. But under my current system, I'm losing a small percentage of my capital to interest charges.

You might want to consider the USD/DKK and the USD/SGD. Both of those have been working well for me and the spread is not too bad. For the USD/DKK my 80/20 difference is 674 pips and the Oanda spread is 35 pips. For the USD/SGD my 80/20 difference is 97 pips and the Oanda spread is 4.5 pips.
  • #288
  • Jun 13, 2008 2:29pm Jun 13, 2008 2:29pm
Quoting mathematician
Yes, absolutely. The more we can customize our experience, the better. The research I did was an overall average. It was based on data that came from trades across multiple currencies, therefore it is a good gauge for the average pair. Ideally we have a separate scheme for each currency pair, each with its own idiosyncrasies.

Lately, I've been thinking about the basket of currencies I'm trading. I think that I should diversify a lot more. I thought maybe I would trade the USD against a variety of currencies, e.g. GBPUSD, USDCHF, USDCAD, AUDUSD, USDNOK, USDPLN; then the EUR against the same set: EURGBP, EURCHF, EURCAD, EURAUD, EURNOK, EURPLN; finally some other crosses that don't involve the USD or the EUR, like GBPJPY, GBPCHF, CADJPY, AUDNZD...stuff like that.

I'm really not sure exactly what pairs I want to trade, but I'm pretty sure that I want to have a lot of diversity.
I'm currently using this system on the following pairs:

AUDJPY
AUDNZD
AUDUSD
CADJPY
CHFJPY
EURAUD
EURCAD
EURCHF
EURCZK
EURGBP
EURJPY
EURNOK
EURUSD
GBPCHF
GBPJPY
GBPUSD
NZDUSD
USDCAD
USDCHF
USDDKK
USDJPY
USDNOK
USDSGD
USDSGD
USDZAR
XAGUSD
XAUUSD

Tracking but not trading:
EURPLN (excessive spread)
EURTRY (excessive interest)
USDCNY (excessive spread and interest)
USDPLN (excessive spread)
USDTRY (excessive spread and interest)
USDTWD (excessive spread)
  • #289
  • Jun 13, 2008 5:22pm Jun 13, 2008 5:22pm
Quoting Flyjetz
...Over time, I think it is possible to determine the best risk/reward scenario for each pair traded, based on max drawdown...
I think the best solution to analyse and solve such problems is to use the MAE.

John Sweeney's books:

http://www.amazon.com/s/ref=nb_ss_gw...s=john+sweeney

Quote
Maximum Adverse Excursion
Analysing price fluctuations for trading management

or

Campaign Trading
Tactics and strategies to exploit the markets
  • #290
  • Jun 13, 2008 5:41pm Jun 13, 2008 5:41pm
The results for the first week are very bad...

A solution to avoid the losses would be to use a simple trend indicator in the H1 time frame (e.g. EMA 8 opens & EMA 5 Closes).
With a SL 0.20 ATR and reentry, you save a lot of pips!
To take entrys on both 80/20 levels with such an indicator, is better as to trade blindly (buy/sell, stop/limit) this levels.

Surely, this job make easy an EA in MT4.
Attached Image (click to enlarge)
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  • #291
  • Jun 14, 2008 8:05am Jun 14, 2008 8:05am
I've made the decision to start trading this system in both directions. I've updated the rules in Post #1.

I'll be posting next week's values soon.
  • #292
  • Jun 14, 2008 8:15am Jun 14, 2008 8:15am
To simplify my work on the weekend, I will no longer be listing where my trades are currently at. If you want that, you can scroll back through the thread and find it. I will simply be listing the 80/20 levels. Also, there is no longer a direction listed as we are now trading in both directions...

PAIR // 20% Level // 80% Level

GBP/JPY // 206.32 // 210.11
GBP/USD // 1.9488 // 1.9704
USD/JPY // 105.49 // 107.34
USD/CHF // 1.0419 // 1.0226
EUR/USD // 1.5504 // 1.5728
AUD/USD // 0.9448 // 0.9591
NZD/USD // 0.7501 // 0.7628
USD/CAD // 1.0180 // 1.0323
EUR/GBP // 0.7933 // 0.8025
EUR/JPY // 165.34 // 167.75
  • #293
  • Jun 15, 2008 9:41am Jun 15, 2008 9:41am
I looked up some 50-day correlations on various currency pairs. I got my data from mataf.net.

I found that every combination of two currency pairs from the following list have relatively low correlations.

EURUSD
GBPUSD
AUDUSD
USDCAD
EURJPY

They did not have data for some of the more exotic currencies. I am thinking of trading the above list and the following pairs, hoping that it will be fairly diversified to reduce exposure risk.

EURCZK
EURNOK
EURHUF
USDSGD
USDZAR
USDCNY
  • #294
  • Jun 15, 2008 9:44am Jun 15, 2008 9:44am
Has anyone traded USDCNY? Any comments about it?

I was just looking at the daily chart and it has been in a near perfect linear trend. I thought this currency pair would be a great candidate for this system since it uses a linear projection based on the past 20 weeks. I wouldn't be surprized if the 80/20 projections were right on the money most weeks.
  • #295
  • Jun 15, 2008 3:58pm Jun 15, 2008 3:58pm
Quoting mathematician
Has anyone traded USDCNY? Any comments about it?

I was just looking at the daily chart and it has been in a near perfect linear trend. I thought this currency pair would be a great candidate for this system since it uses a linear projection based on the past 20 weeks. I wouldn't be surprized if the 80/20 projections were right on the money most weeks.
Two things about this pair. First of all, it is nearly in a perfect line, because the Chinese are controlling the rate of appreciation. The weekly candles are very tight and not a lot of pips to be gathered between 80 and 20. Finally, Oanda (and most other brokers) have very high negative interest rates if you trade the CNY. You'll be tying up a lot of margin, with Oanda taking most of the profit.
  • #296
  • Jun 15, 2008 11:37pm Jun 15, 2008 11:37pm
Quoting Flyjetz
Two things about this pair. First of all, it is nearly in a perfect line, because the Chinese are controlling the rate of appreciation. The weekly candles are very tight and not a lot of pips to be gathered between 80 and 20. Finally, Oanda (and most other brokers) have very high negative interest rates if you trade the CNY. You'll be tying up a lot of margin, with Oanda taking most of the profit.
I see that CNY has a lower rate than USD. So going short in USDCNY would cost interest. On the other hand, long trades would be making interest.

I guess I'll stay away from this one for now.
  • #297
  • Edited 3:29am Jun 16, 2008 2:33am | Edited 3:29am
hello folks,

firstly, Flyjetz, thank you so much for sharing your stystem.

I`m new to forex after trading stocks for 10 years.

I`m very impressed with your results so far; more so because its a mechanical system.

Forgive my ignorance, but I can`t see spreads being a problem in some pairs, because you`re in and out with limit orders.

Earlier you really needed a trend to get your pips, but now your are trading both ways, is a trending pair not needed so much anymore?

Do you really need to trade that many pairs to spread the risk? I wonder if it would just be enough especially if you still needed trending pairs to look for the best uptrending and downtrending pairs to neutralize the USD like buying USD/JPY or USD/GBP(uptrend) and selling USD/MXN or USD/CZK for down trend.

The same for EUR/GBP/CHF/AUD pairs.
That way you would trade 10 pairs all together.

Before I embark on further analysis, I wondered if you`ve already thought about this and I would love to hear your opinion.

btw I calculate the slope by comparing the 1st candle mid point with the 20th midpoint and divide that figure by 19.

now you trade in both directions. say we have an uptrending pair. would you wait for the 20% level to be hit to buy like before and short at 80% for the retracement?
or if that uptrending pair is above the 80% price at the beginning of the week would you short it once it reaches the 80% mark?

For a downtrending pair if price at the beginning of the week at say 98%, would it be wiser to have your order sitting at 90%?

hope you dont mind all these questions.

thank you for your time.
  • #298
  • Jun 16, 2008 8:54am Jun 16, 2008 8:54am
Quoting mathematician
I see that CNY has a lower rate than USD. So going short in USDCNY would cost interest. On the other hand, long trades would be making interest.

I guess I'll stay away from this one for now.
Exactly. Going long USDCNY when the Chinese are appreciating their currency will be a losing trade, long term. What ticks me off is that Oanda has set these rates artificially in their favor. Borrowing the USD at 2% interest to buy the CNY (which I think is at 8-9%) should be the ideal carry trade. But Oanda won't allow it with the way they are artificially setting the interest rate on this pair.
  • #299
  • Jun 16, 2008 9:15am Jun 16, 2008 9:15am
Quoting yonnie
hello folks,

firstly, Flyjetz, thank you so much for sharing your stystem.
You're welcome!!

Quoting yonnie
I`m new to forex after trading stocks for 10 years.
Sounds a lot like me!!

Quoting yonnie
I`m very impressed with your results so far; more so because its a mechanical system.

Forgive my ignorance, but I can`t see spreads being a problem in some pairs, because you`re in and out with limit orders.
Regardless of the limit orders, you still buy at the BID and sell at the ASK. In other words, the average price ((Bid + Ask)/2) will have to move lower than your limit to trigger a buy, and higher than your limit to trigger a sell. Think of it also this way...every time you trigger a new trade, you immediately show a loss on that trade, since getting out immediately would cost you the spread.

Quoting yonnie
Earlier you really needed a trend to get your pips, but now your are trading both ways, is a trending pair not needed so much anymore?
That's not necessarily true. This system has been successfull because it identifies countertrends. It enters trades when the short term trend is counter to the long term trend. If you've read my posts over the last week, you will see that I debated trading in both directions. It goes against my fundamantal beliefs to do so. However, no trade in the direction of the trend will ever be triggered without first going against the trend. Why not capture the profit from both moves? In limited forward testing (about 2.5 months worth), it has been more profitable to trade in both directions. If I find that this success does not continue, I will quickly move the system back to it's original form of trading only in the direction of the longer term trend.

Quoting yonnie
Do you really need to trade that many pairs to spread the risk? I wonder if it would just be enough especially if you still needed trending pairs to look for the best uptrending and downtrending pairs to neutralize the USD like buying USD/JPY or USD/GBP(uptrend) and selling USD/MXN or USD/CZK for down trend.

The same for EUR/GBP/CHF/AUD pairs.
That way you would trade 10 pairs all together.
The long-term success of this system (and any system for that matter) comes first and foremost from risk management. I cannot beat that dead horse enough. I've mentioned several methods that I use to manage risk. In a nutshell, here they are again:

1) Initial trade size as a small percentage of overall capital (currently using anywhere from 0.5% to 1.5% at 50:1 leverage)
2) Monitor single currency exposure so as not to be too long or too short a single currency. When I find that I am too short the USD (for example), I double up on my trades that favor the USD (like short the GBPUSD).
3) Trade several pairs.
4) Monitor margin used versus margin available. Mine typically runs around 10%.
5) Don't trade pairs that have high spreads when compared to predicted candle size.
6) Monitor interest rates so that your trades are not being gobbled up by negative interest.

Quoting yonnie
Before I embark on further analysis, I wondered if you`ve already thought about this and I would love to hear your opinion.

btw I calculate the slope by comparing the 1st candle mid point with the 20th midpoint and divide that figure by 19.
Mathematically, that should yield approximately the same slope as my system.

Quoting yonnie
now you trade in both directions. say we have an uptrending pair. would you wait for the 20% level to be hit to buy like before and short at 80% for the retracement?
or if that uptrending pair is above the 80% price at the beginning of the week would you short it once it reaches the 80% mark?

For a downtrending pair if price at the beginning of the week at say 98%, would it be wiser to have your order sitting at 90%?

hope you dont mind all these questions.

thank you for your time.
If you are not in a currency, and the current price is outside the 80/20 range, I enter in the direction that yields the most profit. For example, let's say the USDJPY is at 108.00 and the calculated 80/20 levels are 106.00 and 102.00. I would enter a market sell order at 108.00 with a TP of 102.00. I would also enter a LIMIT BUY order at 102.00 with a TP of 106.00. Once you are in a currency, you are in for good. You just need to constantly update your 80/20 levels, and remember to enter new limit buy/sell orders everytime you TP a trade. I hope that makes sense. Good luck!
  • #300
  • Edited 8:52pm Jun 16, 2008 8:28pm | Edited 8:52pm
thank you Flyjetz for your elaborate reply......

so there is no difference between up or down trending pairs anymore. you always push the button once price hits 20 or 80%.

in your example above, USD/JPY wouldn`t you have a market sell order at 106.00 being at the 80% level in stead of 108.00?

it seems to me that the biggest losses will come from STRONG trending pairs, which wont come back to your entry price.
Example is EUR/USD, where you short at 80% gunning for 20%, for the pair to turn around and resume the trend past 1.60 and beyond.

the biggest profits will come from ranging/mildly trending pairs with long candles which move VIGOROUSLY up and down the weekly candle.

If this is true then by the trading results you will find the better pairs and place higher bets on those, but still with an eye on money management and correlation.

for pairs with a high spread it might be worthwhile to examine if say 25/75% is a better level if the length of the weekly candle is sufficient.

just a few things I`ve been thinking about.
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