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4 Hour Strategy (MACD)

  • #17,761
  • Nov 8, 2008 12:43pm Nov 8, 2008 12:43pm
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  • #17,762
  • Nov 9, 2008 7:27am Nov 9, 2008 7:27am
Thanks Phillip.

I appreciate that risk is an individual issue and that some will be more adventurous than others. We all have to be comfortable with the risk we take for each trade and not to jeopardise our accounts on one trade.

Also, I will take your advice and back trade to find an "edge".

However, I am still a little perplexed about splitting a trade to average down the stop loss risk. It seems a little illogical to me to do this. My understanding of stop loss is the price at which the trader thinks that the trade has failed. How can this be two different values?

Personally, if the stop loss (high or low of the signal candle) is 60 pips, I would much sooner reduce the amount I risk per pip and keep the full 60 pip stop loss than split the trade in two.

Maybe I am missing something here, but why set a 30 pip and 60 pip stop loss when there is a good chance that the 30 pip stop loss will be taken out (if the average retrace is 75%)? Surely it would be better to reduce the amount per pip and keep the full stop loss for that trade?
James The Beekeeper
  • #17,763
  • Nov 9, 2008 8:12am Nov 9, 2008 8:12am
Quoting edeyj999
Thanks Phillip.

I appreciate that risk is an individual issue and that some will be more adventurous than others. We all have to be comfortable with the risk we take for each trade and not to jeopardise our accounts on one trade.

Also, I will take your advice and back trade to find an "edge".

However, I am still a little perplexed about splitting a trade to average down the stop loss risk. It seems a little illogical to me to do this. My understanding of stop loss is the price at which the trader thinks that the trade has failed. How can this be two different values?

Personally, if the stop loss (high or low of the signal candle) is 60 pips, I would much sooner reduce the amount I risk...
I agree 100%. It is better to reduce the amount of risk in terms of position size than splitting up the stoploss. It is more of an emotional easing that I introduced this type of stoploss. When the candle is huge I found that 60pips are not so regularly taken out which is to big for most people emotionally(the last 2 months excluded) and that the price then does go in the direction anticipated. That will at least give you back the 30pips if it is lost. When the price does not take out the 30pips but goes in your favour then that is the time that pips is made.
I found that helped me to pull the trigger in stead of watching the price retrace 45pips and then go in my anticipated direction.
But the best way is still to reduce the position size to make the amount lost less painfull and tollerable.

Another thing is how many TC signals off the 21ema were given over an extended period of time, how many would have resulted in losses and how many in gains using the signal candle high/low as a stoploss placement and at least a 1:1 Risk:Reward ratio. If the TC signal proved to give you the edge on this scenario then the stoploss is of no issue as the odds is in your favour.
  • #17,764
  • Nov 9, 2008 9:24am Nov 9, 2008 9:24am
Thanks once again Phillip. I understand your reasoning and I feel more comfortable with the concept.

I just wanted to reinforce your reassurance that there are potential profitable signals from the system by sharing my analysis of what happened last week.

I looked at 10 currency pairs and only considered three type of MACD signals - Trend Continuous Pattern, Zero Break and Bounce Off Zero on the 4 hourly chart for each. No consideration of anything other than MACD signal (i.e. disregard trend lines, support/resistance, MA's etc). A win is if the candle following the signal candle shows any kind of profit (and vice versa for loss).

There were 30 MACD signals in total, 22 were wins and 8 losses. A 73% to 27% win to loss ratio - thats pretty good.

Obviously this sort of analysis would have to be over a more extensive period of time to prove or disprove the theory of just acting on the MACD. But I think at the very least it proves that there are planty of win signals from the system at the moment.
James The Beekeeper
  • #17,765
  • Nov 9, 2008 10:21am Nov 9, 2008 10:21am
Quoting edeyj999
Thanks once again Phillip. I understand your reasoning and I feel more comfortable with the concept.

I just wanted to reinforce your reassurance that there are potential profitable signals from the system by sharing my analysis of what happened last week.

I looked at 10 currency pairs and only considered three type of MACD signals - Trend Continuous Pattern, Zero Break and Bounce Off Zero on the 4 hourly chart for each. No consideration of anything other than MACD signal (i.e. disregard trend lines, support/resistance, MA's etc). A win is if the candle following the signal candle shows any kind of profit (and vice versa for loss).

There were 30 MACD signals in total, 22 were wins and 8...
When I did my original backtesting before going live testing the ratio was pretty close to what yours are showing. I got a figure of 70% to 30%. When I did some filtering like R:R ratio as well as trendlines and market rhythm I got to 90% win. What I also found is that the MACD does support news events more often than what it does not except for NFP and Interest rates. Therefore I excepted MACD signals even before the news was released as going to support the coming news. The last 3months due to other factors driving the markets might have skewed this.
  • #17,766
  • Nov 9, 2008 2:25pm Nov 9, 2008 2:25pm
hello edey and phillip,

I have also been backtesting and now currently forward testing with great results. I also agree that in my opinion I rather reduce my position sizing instead of averaging down. Especially in these times where volatility is huge. if my risk appetite allows me to get 4 lots with a 30 pips loss then if then candle is huge lets say 60 pips, i get in with 2 lots instead of 30 and still within my risk appetite. I also have been testing the Trend continuation patterns as well as bounce off zero. But I had a question about zero cross. can you briefly explain to me the criteria on that. I am a little lost on when to take that signal.
Keeping Life Simple
  • #17,767
  • Nov 9, 2008 2:27pm Nov 9, 2008 2:27pm
Hello phillip and Edey

just wanted to be more clear about my question from my last post. I am a little confused to see the zero break signal. can you help me a little to see this and how to identify one.

Thank you gents
Keeping Life Simple
  • #17,768
  • Nov 9, 2008 6:26pm Nov 9, 2008 6:26pm
Lots of gaps on the opening this evening. Swissie and cable look the 'cleanest' as far as rhythm goes. I've been trying to follow the fundamentals of things lately but it all comes down to a chart being a chart being a chart.
  • #17,769
  • Nov 9, 2008 6:31pm Nov 9, 2008 6:31pm
Hmmm, are other people using MIG Investments feed having issues? I haven't had a new bar since Friday close - should have had one about 1 1/2 hours ago, but nothing (feed is showing as connected)

Quoting Palmer
Lots of gaps on the opening this evening. Swissie and cable look the 'cleanest' as far as rhythm goes. I've been trying to follow the fundamentals of things lately but it all comes down to a chart being a chart being a chart.
  • #17,770
  • Nov 10, 2008 1:03am Nov 10, 2008 1:03am
Quoting BenStevo
Hmmm, are other people using MIG Investments feed having issues? I haven't had a new bar since Friday close - should have had one about 1 1/2 hours ago, but nothing (feed is showing as connected)
Yes, same here (and there was a problem with their data feed last week for a period). I have switched to FXDD temporarily and wait to see what happens.
James The Beekeeper
  • #17,771
  • Nov 10, 2008 1:04am Nov 10, 2008 1:04am
Quoting time1300
Hello phillip and Edey

just wanted to be more clear about my question from my last post. I am a little confused to see the zero break signal. can you help me a little to see this and how to identify one.

Thank you gents
Phillip may have a technical definition. I tend to look for no more than three bars of MACD above or below the zero line and with little penetration. Not very scientific but don't know if there is a better explanation.
James The Beekeeper
  • #17,772
  • Nov 10, 2008 1:38am Nov 10, 2008 1:38am
Thanks James,

I've just sent you a PM. Looks like we are back online again just in last few minutes. Gap openings...I guess they are false gaps in a way which are based on a half day of lost movement/data. Think I will wait till tomorrow for things to settle.


Quoting edeyj999
Yes, same here (and there was a problem with their data feed last week for a period). I have switched to FXDD temporarily and wait to see what happens.
  • #17,773
  • Nov 10, 2008 8:02am Nov 10, 2008 8:02am
Swissie might be setting up for a long entry....

Back later.
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  • #17,774
  • Nov 10, 2008 9:25am Nov 10, 2008 9:25am
hello phillip,

I had a question regarding how you calculate your R:R. lets say you enter with 2 lots and you have 2 different entries to minimize risk and you have to TP levels. do you average them out to get your R:R or do you favor one over the other. if you can clarify this for me would be great. I was looking at your table of trades you posted couple of pages back, the one on excel and the R:R question arose. some of your trades as well have two TP and I was wondering which one do you use to calculate R:R

Thank you Phillip
Keeping Life Simple
  • #17,775
  • Nov 10, 2008 9:28am Nov 10, 2008 9:28am
Quoting time1300
Hello phillip and Edey

just wanted to be more clear about my question from my last post. I am a little confused to see the zero break signal. can you help me a little to see this and how to identify one.

Thank you gents
I personally like the Zerobreak to be not more then 4 bars.
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  • #17,776
  • Nov 10, 2008 9:36am Nov 10, 2008 9:36am
Economic boom - a fable..?
Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.

1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.

* The net asset of the country now = 3 dollars.

3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.

* A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
* Thus, the net asset of the country = 4 dollars.

4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.

* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars.
* The net asset of the country = 5 dollars. A bubble is building up.

(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.

* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.

* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.

(6) Everybody has made money and everybody felt happy and prosperous.

(7) One day an evil wind blew, and an evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more."

(8) A also thought the same way.

(9) Nobody wanted to buy land anymore.

* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating.
* The net asset of the country = 3 dollars again.

(10) So, who has stolen the 3 dollars from the country ? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B's net asset is still 2 dollars, his heart is palpitating.

(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.

* A owns the 2 coins, his net asset is 2 dollars.
* B is bankrupt, his net asset is 0 dollar. ( he lost everything )
* C got no choice but end up with a land worth only 1 dollar

* The net asset of the country = 3 dollars.

************ **End of the story; BUT ************ ********* ******

There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.

  • #17,777
  • Nov 10, 2008 10:47am Nov 10, 2008 10:47am
hello phillip,

I had a question regarding how you calculate your R:R. lets say you enter with 2 lots and you have 2 different entries to minimize risk and you have to TP levels. do you average them out to get your R:R or do you favor one over the other. if you can clarify this for me would be great. I was looking at your table of trades you posted couple of pages back, the one on excel and the R:R question arose. some of your trades as well have two TP and I was wondering which one do you use to calculate R:R

Thank you Phillip
Keeping Life Simple
  • #17,778
  • Edited 11:59am Nov 10, 2008 11:29am | Edited 11:59am
Quoting time1300
hello phillip,

I had a question regarding how you calculate your R:R. lets say you enter with 2 lots and you have 2 different entries to minimize risk and you have to TP levels. do you average them out to get your R:R or do you favor one over the other. if you can clarify this for me would be great. I was looking at your table of trades you posted couple of pages back, the one on excel and the R:R question arose. some of your trades as well have two TP and I was wondering which one do you use to calculate R:R

Thank you Phillip
I work the Risk:Reward ratio out according to what the graph tells me and not on the lots I entered. It tells me if the trade is worth it or not. I enter on that and then scale out with 2 profit takings and sometimes I let both run depending on the strength of the move. The R:R should worked out to the graphs take profit vs stoploss.

Edit
Then you must work out your own R:R according to your risk profile in terms of the stop you are going to use and how you are going to take profit.
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  • #17,779
  • Nov 10, 2008 1:11pm Nov 10, 2008 1:11pm
Quoting Phillip Nel
I personally like the Zerobreak to be not more then 4 bars.
Hi Phil,

since it is hard to tell a zerobreak from a bounce off the zero, I have noticed that if the color of the candle is not the same of the color of the line on the MACD, it is likely to be a zerobounce or a small break and turn back, otherwise it may be a zero break with change in direction...Am I right? Of course it has to be interpreted just as another signal that may confirm a certain strategy, just as you use candle patterns (doji, etc.) and not a stand alone signal to decide which way to enter...
On the attached graph today, there was a nice engulfing red candle and a chance to test the lower trend line...Please correct me if it was a wrong decision even if I made the pips...Thanks!
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  • #17,780
  • Nov 10, 2008 7:43pm Nov 10, 2008 7:43pm
Just an observation...

I posted earlier that the Swissie looked like it was ready for a move up and it put in a move. I did not take this trade, I was away from my 'desk'. The 1hr gave a +DM/-DM cross up with a strong bull candle. I have noticed in the past that when the 4hr rhythm is strong this is usually a reliable entry method. But, you can see that the 1hr candle has a range of about 60 pips and the close was at the high of the candle. I really don't like buying at the top of anything, even the close of a candle. This is where entering on a buy limit can really help. Either let the following candle retrace 1/3 or 1/2 and put your buy limit there. More that that and you might miss the entry because the 4hr rhythm is there and the trend wants to continue. Unless the candle has a smaller range, like 20 pips or so and the DM cross is there, I'm a little more comfortable with entering at the top and the stop is manageable along with the R:R.....
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