PMM: Price / Money Management

PMM: Price/Money Management


Note: This is a rather long preamble. The Method Narrative is posted later. I believe that my methodology, thought process, and personal angst is important to understanding how this method operates. I wanted to share with the reader. I believe in this method. To understand it is to understand yourself.


I’d like to open a new thread with something that I’ve been working on. I’ve had several inquiries from FF members, so I thought I’d post here, share the idea, and request…no, welcome…some feedback as to what path to take to perfect this method.

I’m not ready to post the method yet. I have things left to do (like corrected spelling, etc.) but I’m going to try to get it up Sunday Night Nov.30.

I’ve done a narrative of the method, as well as my thought process in arriving at my actions. Included, too, will be a summary…short version of the narrative. I’ll post account history, with brief explanation, too.


I’ve done testing on FX-SOL for 2 reasons:

1. I like the platform very much.
2. It allows a hedge….you can simultaneously buy & sell the same pair.

I should be on IBFX or something which supports MT-4 because MT-4 seems to be the universal vehicle for information exchange on this forum.


I’m not on IBFX because:

1. You can’t hedge the same pairs…they cancel out.
2. Punching in trades is tedious for me & subject to frequent error
3. Reviewing trades is not as straight-forward as with FX-SOL.

But, I’ll probably switch to IBFX soon, if I get a lot of participation on this thread because we might need to exchange information often & need to do so easily. And it would be available to everyone.

On IBFX, you can run 2 sub-accounts for the hedge thing, but that means once funded for live trading, one must keep an eye out for account balances & make transfers as necessary. Not the end of the world, I suppose.


This method is based loosely on Dreamliner’s Super Carry Trade Trading System.
Many FF members took part in testing his method and it appeared quite profitable for a while.
It was based on the GBP-JPY, but could be used on most any pair. His primary objective was the daily swap rate, then $ 22.00 per day for a regular account.( that’s $5700 per year in free interest, folks). He then developed a hybrid style of essentially grid trading and buying - in to losing positions to average down in order to get profitable on the inevitable rebound. It featured a sort of stepped grid creep getting you in then out every 10 or so pips. All was profit except for the last 2 positions, which were at the top of the spike, and they fell all the way down, collecting negative pips, unclosed. So you had to deal with that every day, day in & day out.

Dreamliners method was most impressively profitable for all of the spring ’08 and most of summer ’08. I did some testing on MS Excel of GBP-JPY data back to 1997. I programmed the spreadsheet to do all of the steps as if the method had been traded once daily, with only 1 basis position on a Long GBP-JPY, and never an increase in position size. Well, from Jan. 1, 1997 thru Feb.1 2008, on a mini account, margin of $100, the end result was something like +183,000 pips.
I took into account no account balance. If the thing went negative, I could see where & why. But, it always came back. So, with Dream Liner’s method, it’s a sure bet…except for account size.
That’s impractical. But had my curiosity up enough to look further.

I tried the SHORT side of GBP-JPY…….results not so good, but close. Within 40,000 pips. Not bad!

So I tried other pairs. Pretty much the same results. Various results, but virtually all pairs results landed in the stratosphere. I’m very very interested, now.

But, I had to figure a way to reduce the draw-downs. They were absolutely scary, at times. But as long as you “believed”, your position would always come back for a handsome profit…eventually.

Come late summer & early fall, several folks were testing this method. They were writing EA’s to trade it (which is when I lost interest in the thread & set off on my own research) and some were gone live & making some nice profits.

I can’t stand EA’s. The discussion quickly devolves from the method to perfecting the EA, and then to adjusting the method to allow the EA to work. VooDoo trading!!! Pure BS!

Then came the Carry Trade Collapse….never mind calling it an “un-wind”. I think everyone was blown-up from that one. I know there were some folks who were trading live in a pretty serious way…I really hope that they weren’t hurt too badly. It was like showing the candy to a child…..promising plenty more if they did such & such…..then never giving it to him/her. You know the type…

I’d participated in some trading strategies, and some of them blew-up. But, when this one un-raveled, it was just like someone ripped out my heart. Strange…especially when I realized that there were people in this LIVE and they had just taken a REAL hit. I’d corresponded with many of them through the development of the Dreamliner system. A lot of people contributed to that system. A lot of them put in some heavy duty work, too.

The topic which was central to discussions, around which all other discussions revolved, was the draw-down. It could wipe you out in a heartbeat. You needed infinite funds to trade the Super Carry Trade so to support the draw down, occasional as they were. If you have infinite funds, why trade Forex? US T-bills are so much more inviting!

I refined my Excel work. I focused on price movement and ATR relationships, statistical probability that something may repeat perform so many days in a row, etc. I narrowed down to looking at each pair separately and evaluating its price movement characteristics. Some currency pairs are “market makers” and others are “followers”. But these precarious positions can change from day to day. I got a good education of how momentum ripples through all the pairs, and their reaction as observed through what we perceive as volatility and price action.

So, I’ve come up with this method. I’ll Post Sunday PM after some necessary editing work.
I’ve worked it & flogged it since around March 2008. Sometimes throwing it aside in frustration.
What I’ve posted (later) really only came together a month or so ago, and then, I made a major adjustment in my SL policies. So, at the moment I haven’t much corroborating data to show that this may be a “go”. But I feel familiar enough with price action now, and after the last adjustment, the Method was all of a sudden doing what it was supposed & expected to do. So, I’m pretty comfortable with it right now.


This Method, called PMM Price-Money Management is just what it is.
Money management and reacting intelligently to what the market has done, not what it might do.
Cover your butt, minimize (or eliminate) your losses, and don’t worry about the profits.

I’m new to Forex trading. I’m no guru. I’m not setting-up to sell this. Hell, I don’t even know FOR SURE if the concept holds water. If it’s a keeper, then it will belong to the Forex Factory Community. If not…oh well….to the re-cycle bin, Robin!

I discovered this site, Forex Factory, in 2006 and I’d thought a beam of sunlight had shown on me from my PC screen. I have learned some incredible new things on here. I’ve gone beyond chasing the “Holy Grail” on the “Trading Systems” thread and now I really only follow certain people’s willingness & kindness to share what they’ve learned & have participated in subsequent discussion. I’m more oriented to gaining an overall understanding than just looking to be shown the latest new new thing, which will retire me in 3 months.

I’ve learned that this market has a pulse. It lives. It’s periodic table core elements are greed and fear. Human emotion runs this market. It doesn’t. How one can understand human response to stimulus, how one reacts with greed, how one reacts through fear, how one reacts to the reaction…how one responds to response….that’s the Forex market. That is what I’ve based PMM Method on. My observations of this market…and hundreds…thousands of mistakes….each of which bearing a lesson. It’s as much human psychology as it is financial wizardry.

I’ve run testing on demos since I discovered Forex. I opened a small demo account & blew that one up. I opened several other demo accounts & eventually blew them up. I opened a live micro account & blew that up too. All of my demo accounts’ balances have diminished into the ash heaps of “what could have been”. But still I keep slogging. You all know the drill.

I have probably a dozen demo accounts, each doing something different. From all of this I am learning & growing. The market is the market. If I can identify & then minimize my screw-ups, then I’ll be OK. And, thanks to the great leverage in Forex, probably I’ll wind-up better than OK.

There’s some great work on here. Great insight. FF people should be proud that they’ve been able to maintain the integrity of this site, and therefore it’s high quality. This is the Best Site on Planet Earth, according to Stocks & Commodities magazine. I hope that I may be able to contribute to this collection of good work and good will. I’ve gained so much from here. I’d like to give a little back.

This is a little something to share with my new friends on FF. I so deeply appreciate my experience on this site to date that words can not express. There is some very intelligent people and some very successful traders, too. From what I’ve seen, assistance, comment, advice, criticism is all freely given here. You folks can be firmly supportive, bluntly candid, brutally honest, extremely tolerant, but never purposefully mean or unkind. This community is really a class-act.

My thanks goes to Dreamliner and his Super Carry Trade Trading System, flawed as it turns out that it was, at least in my opinion, for making me think about what is really happening day to day in this Forex Market. It really opened my eyes to the possibilities which exist if one can approach with a wide-open mind and no pre-conceived notions. But, I think that is what it takes…everything happens for a reason, identify the reason, adjust accordingly, and keep moving. Take nothing to heart. Accept everything for its lessons. These are the fundamentals of personal growth.



Thanks for reading.

Peter O
West Bath, Maine
USA

PMM : Price/Money Management


Tools:

Platform: I use FX-Sol. I like it very much. But they’re apt to shut-down a demo account after 30 days. You can open another, but your data is lost.

IBFX is great, too. It’s free as well. As long as you use it, they’ll keep it open for you. Down-side, you need separate accounts to hedge a pair. You can’t both buy and sell a pair on the same account. Not the end of the world, and each account can have sub-accounts, so things aren’t so bad.



Charting components

ATR(20)



Chart Set-ups:

Phillip Nel’s 4 hr. MACD

4 hr Chart

EMA 8
EMA 21
SMA 89

SMA 200
EMA 365

MACD (5-13-1)




Fozzy Style Trading Technique:

EMA 28
RSI (8, Cl)
MA 8 of RSI 8
MACD (5-13-1)


ATR (20)



These 2 chart set-ups have nothing to do with the trading methodology. I use them to determine the trend direction. Phillip’s 4 hr. and Fozzy may signal well ahead of time of a trend change. I use these to determine my TP target.

I also use both Harold 4X’s 1-2-3 Method, The Key to the Mint, as well as Teb63’s Teb 2 Method.

And Jaroo keeps going a truly fascinating thread which feeds from a discussion from Peter Crowns, a trader from Great Brittan, who kindly and generously shared a wealth of information on just what the market really is all about, and some key characteristics which the market exhibits often to signal it’s real intent.

Both Teb63 and Harold 4X shed much light on price movement characteristics in the short term. Gives me an idea for the range potential (ATR) Good ammunition.

The material entrusted to Jaroo, Peter Crowns’ insight, and subsequent discussion hence, is just plain good reading. The two threads are called No Free Lunch but all the Coffee you can Drink and DIBs: No Free Lunch continues… Anybody who’s serious about rising out of the multitudes of uninformed Forex “traders” needs to read these threads. I think being aware of what you don’t know is more important than what think that you do know. These threads won’t tell you anything that you don’t know, but they will certainly make you a bit humbler by pointing out your “wisdom embarrassments”. One’s understanding of this market called Forex and the people who trade it is never too deep. Everything is always changing. Always keep learning, but be sure to cull the wheat from the chaff. Jaroo’s work and Peter Crown’s gift to Forex Factory Community is Harvest - Ready Golden Wheat.

Phillip Nel’s Thread in itself is a valuable education. Go to the first post and look at the table of contents. Phillip has generously and selflessly shared this library of wisdom with us. He never tried to sell it. It’s well worth one’s time to just dive-in & start learning. Your own Forex trading skills will be the benefactor.

Use whatever you want for trend direction. Just be sure that you’re comfortable with it and it has a reasonably successful track-record.

Though this method is mostly mechanical and reactionary, there is a certain degree of discretion and subjectivity, especially affecting how you’re going to mitigate potential risk. The reason I cite the above trading methods is that one must be aware of the subjectivity of this method. In order to trade this successfully, you must have a clue and you’ve gotta have a grip on things.
And, this IS, after all, Forex!




Portfolio:


USD-CHF
EUR-USD
GBP-JPY
EUR-JPY
GBP-CHF



Entry:

At 0:00 GMT* open one (1) of each of the above pairs, both Long as well as Short. Yes, that’s right…both directions. So, you’ll have 10 open positions.
5 long and 5 short.

The Long/Short configuration is a Hedge. Your P/L will not change from this point onward. It should be just about equal to the cost of your spread.


Open these At-The-Market, initiating as quickly as possible.

Do not use any Stop Loss or TP at this point.

That’s it. You’re done. For now.


This will be the only time that you take this step, unless you choose to close all positions on Friday Afternoon, prior to the weekend break.
Sometimes I close-out, other times I allow to remain open over the weekend. I’m undecided at this point if there are advantages or disadvantages to either method. I suppose if you’ll sleep better, close them out.

It doesn’t really matter. Everything fundamentally hedges everything else. Your account is either in profit or in equity.

Personally, I don’t accept loss, or deficit positions, with this method unless the loss is averaged-down for a net gain. Sometimes, however, having had to suffer the continued and ever diminishing sub-standard performance of the USA Public School System, my arithmetic skills leave something to be desired at times, so you’ll see some occasional net deficits in my trading histories. Sometimes I re-put back through the process to try to recover the loss, and other times not. For this month, Nov. ’08, the first test month, I’ll gather these deficit positions and re-inject into the sysyem to recover those losses by Dec. 31. But I’m going to try to grab these and deal with them as they occur. At the moment, average-down hedging deficits represent 19% of net trading profit, and that is just unacceptable number. Don’t know what I’m talking about? Read on…..


One important thing to remember….each of those pairs, the long and the short MUST be regarded, considered, and handled as if they were separate positions and NOT as one side is the Hedge of the other side. The Hedge part is only a function to allow price movement without incurring loss…or gain for that matter.
The hedge locks-in a minimum loss & keeps it till you’re ready to deal with it.

* 0:00 GMT: (or what-ever time you choose, just be sure to do portfolio management at the same time each session) The time itself is not critical.
I choose 0:00 GMT because the platform begins a new bar on daily chart, it’s 6-7:00 P.M. EST & convenient for me, and the market hits a lull, usually, after the NY close, getting ready for Asian Open.

Sure you can.

Portfolio Management.


This method is reactionary to the market’s movements. If we choose to do nothing, no loss or gain is incurred, save for the spread, and that remains ever constant. We are managing or mitigating what the market has done.


There are 3 important steps here.
I will walk you through one position, start-to-finish. These steps are to be applied to ALL positions, all 10 of them, one at a time, and done as quickly as possible.


Beware when figuring your SL and TP targets. if the market is on “rock & roll”.
We want to get our entries as close to the index price as possible. Sometimes, when the market is moving quickly, by the time you get your average-down hedge SL & TP targets figured and then entered, the index price has moved out of range. Then you need to re-do, this costs spread, to get it right. Hence the need for expediency, but you can address each position, all 10 of them, one at a time with no troubles. They are fully independent of each other.

This method was designed to be a set-it-and-forget-it system. So the Daily re-start at 0:00GMT is perfect for this. I hate sitting all day staring at a bar chart on a screen. I usually “dress” the portfolio 2 times a day. Once in the afternoon, at 0:00 GMT, after the close of NY session, but before the open of the Asian Session, and then again in the morning, 7:00 EST, just prior to NY open, after the Asian Close, and right in the middle of the London session.

40% of the portfolio involves JPY Yen transactions. Note that those are paired with either GBP or EUR. The Yen markets are particularly volatile during the Asian Session. The London session, when it kicks-in a bit later, may continue the Asian trend, and the GBP based securities will react accordingly, or the London Session is just as apt to reverse and do a mega-correction, but who knows…and with this method…who cares?.

But note that neither the USD nor the CHF is paired with the JPY. This is my attempt to separate volatility from “stability”*. Weather this theory holds any water is up for discussion, but it makes me feel better. But the group of pairs are major currencies, equally represented, spanning the 3 big exchanges, so I think that any booby traps hiding within will be minimal.


Once in the middle of the London Session, you can “dress” your portfolio to make adjustments in reaction to London response to Asian Sessions, and NY Session may or may not continue with what ever happened during London Session. Beware news, though. I do this at 7:00 A.M. EST. I HATE giving back profits. Go to your charts for a look-see.


* stability: This assumes you can honestly call the worthless piece of crap USD “Stable”. Stable…maybe. Worthless? Almost!





OK….. Portfolio Management.





Step 1.


Take your profits.

It’s 0:00GMT, and let’s say we’ve got L GBP-JPY + 250 (pips).

Immediately CLOSE that position


Now, immediately open a L GBP-JPY ATM (at the market).
Do not put-on a SL or TP



Step 2.

Hedge your position.

If L GBP-JPY (above) is + 250, that means that S GBP-JPY is about – 250, not counting for spread.

The S GBP-JPY is coming out & going to Position Management in the next step, so don’t worry about it right now.


Open a S GBP-JPY ATM But do not close the existing S GBP-JPY -250
Do not put-on a SL or TP


I like to simultaneously open both the new L & S. Helps to minimize the pip gap from the spread. At times, you can find yourself where both L & S are in negative territory. We don’t want to have to hedge both sides. This is excessive exposure & risk.




Quick review of steps 1 & 2:


At 0:00GMT, open both a long as well as a short GBP-JPY at the Market.

Next day, at 0:00 GMT, set aside either the long or short position, whichever is in negative pips. (loss)

Take the other position, which is in positive pips (profit) and close it.

Then open both a long as well as a short position ATM.

Repeat these steps for all other pairs, both long as well as short.


You are now done Step #2 and have set yourself up for the next day.
But, don’t go have a drink yet. You’ve got Position Management still to do, and this is the key to this whole thing.


NOTE: I’ve seen several arguments for NOT closing out the profitable side of the L & S Pairs. The driving force to these arguments seems to be savings on spread from opening a new position. MY take on this is this: The cost of the spread is minor compared to potential profits. Management of this (these) trades is less complicated if we can begin each session with a fresh pair. Don’t be caught stooping to gather pennies off the ground when there’s $100 bills flying over your head!! Never mind the trees, behold the forest!




Step # 3



Here we are going to take the negative positions and “average” them down to a more manageable number. Remember…we’re reacting to what the market HAS done, not attempting to predict what the market MIGHT do. We’ve reaped
( taken our profits in exchange for a few key-strokes)…now we must sow
(we need to do a little more work to kill those losses).


First, go to your transaction history and review the day’s hedged trades (from yesterday). If any closed in the negative (net loss), pull them out & see if we can do something about those losses. We HATE losses! Set them aside for now though.

Those which closed in profit, go find somebody to give you a high-five.
Forget about it. We don’t worry about profits. They take very good care of themselves.


Let’s go to the S GBP-JPY -250 that we set aside earlier.

I’ve done some simple statistical comparisons of all of the pairs on my MS Excel
I’ve looked at instances of the percentage that each pair will hit a certain percentage of it’s ATR (Average True Range), and also how many days in a row, statistically, that this is probable. I also look at the ratio of open – high and open-low and compare that with daily close changes, +/- momentum, as well as how ATR fits in there. You can get a pretty good feel of the trend and the volatility here. These items are important here. It’s the heart of the success of the system.

Looking mostly for price movement. Not really concerned which direction, but by how much in each direction in order to determine a reliable guess as to what might happen next session. Looking for how far the price might reach in either and both directions rather than where it might land.

This is a good time to have a look-see at Phillip Nell’s 4 hr. MACD chart and a Daily Fozzy chart. Ask yourself what the likelihood of a trend continuation or of a possible turn-around. Does the price activity in your Excel comparision study agree?

What we’re up to is attempting to weigh our exposure (number of positions) to the likelihood of catching some profit with this averaging-down, or do we just want to cash-out even & be done with it.

Let’s say that our daily ATR (20) is 200, and our 4 hr. ATR (20) is 125.

So, do we think the market will move in our favor tomorrow by say 125 pips?

If we take out a S GBP-JPY, we will need a 125 pip move to BEP (break-even point).


1 S GBP-JPY -250
1 S GBP-JPY 0 - 250 pips
2 positions = -125 each
2 S GBP-JPY -250



If we only want to go for a 50 pip move to BEP:

-250 pips
50 = 5 positions



So, we need to ask ourselves if we want to risk trying to go the longer distance for BEP vs a shorter distance with greater exposure with more positions.
The more positions, the greater exposure if market is adverse to our needs.
But the greater the distance to go for BEP, the greater our chance of not hitting our BEP target.

This part is a judgement call on you. This is the subjective part of this system. You need to assess your own threshold for risk, and potential loss & ruin vs your own tolerance for living close to the edge and trying to squeeze every ounce of profit that you can. The returns on a successful averaged-down hedged position can be quite dramatic, but it can also take out your entire account very quickly.
Beware your Exposure. Beware your Exposure. Beware your Exposure.



This is what I would do…..

Look at the charts, both the 4 hr. MACD and Fozzy.
Both support a downward trend. (let’s say)
There is no Fozzy Cross in the works, but even if there were, the Cross would be against the trend, therefore, this kid would ignore it.

The 4 hr. MACD chart confirms a downward trend to continue.
Therefore, our -250 pips on the S GBP-JPY was probably a correction and should continue with the direction of the trend. If not, there is still a likelihood that Daily Price Action is going to be friendly for our purposes just the same.

The Daily ATR(20) is 200. The 4 hr. ATR (20) is 125.

I’m going to take our deficit of -250 and see how many times the 4hr. ATR is divisible into it.

250 divided by 125 is 2….that’s 2 positions for a 125 BEP.

Maybe I’ll add another, just for safety purposes.

250 divided by 3 is about 83 pips to BEP.

I’m more comfortable with this.
I can even extend a bit to get some extra profit with this.
So, I’ll tack on another 10 pips

So: I’m going to open 2 S GBP-JPY ATM
(that’s 2 new plus the existing one we’re going to average-down)

Put on a SL (stop loss) of Daily ATR (20) = 200
Now, put on a TP (Limit) of 93

Take the existing position , 1 S GBP-JPY -250
And put on a SL of 200 and a TP of 93

So, here’s what it looks like:

1 S GBP-JPY -250 SL 200 TP 93
2 S GBP-JPY 0 SL 200 TP 93

Total # of positions: 3
Total deficit: -250


If we hit our TP target:

93 pips X 3 positions = +279

Less: Deficit: -250

Net on position: +29


If we get stopped out:

-200 pips X 3 = -600

Less: Orig. Deficit: -250

Net new deficit: -850



NOTE: The only reason that I use SL at all is because of the added positions exposure. I figure if we don’t dump a position, it isn’t a loss yet. But its weighing on our available margin, etc. Need to make decision to cut & run or to fight. A triggered SL kind of limits our choices. In the above example, a -850 pip deficit can be easily mitigated the following day with 15 position with a 56 TP. The likelihood of GBP-JPY moving 56 pips to the good during the course of a trading day is pretty good. (Look at your work on the Excel sheets.) I might go so far as to put on a 25 position & looking for a 34 TP, the hell with any profit, let’s dump this thing after mitigating the losses and let’s move-on. It’s up to you.

The SL itself is placed at ATR because these positions need room to work. I wouldn’t use SL at all if it weren’t for the exposure. Nothing ticks me off more than looking at a chart & seeing my TP hit, but I was taken out for a loss due to a too-tight SL. Trading like that is akin to dawning a blindfold before you go skeet shooting! One needs to have at least some confidence in where the market is headed, and needs to trade accordingly.


These positions close themselves out. Either profit or loss. If a loss, you must re-access your net position & put it on again.

If it’s a gain, then congrats. Don’t worry about it again till it’s tax time!

Any averaged-down hedge positions from last session which are still alive, those that did not close out, either in profit or as a stopped-out loss must be added to the new position to be averaged-down, and those totaled to one single deficit number, then make your position – BEP- exposure decisions from there. Treat it as a separate average-down hedge. I do. Your exposure is increased, but with a tight TP, you should be able to get out whole in the first shot.


Now, finally, take any Average-down hedges from yesterday, which you set aside at the beginning of step #3 which closed out in the negative, be they either Longs or Shorts; there is no difference …losses are losses. We’re going to take a crack at eliminating the loss.

If the negative Average-down is a Long, then put it on here as a Short. Look at the total negative pips & determine your new number of positions. The object here is to finagle a TP that is really really tight. But mind your exposure with the number of positions. Take it in pieces if you have to. Spread it out to other hedged pairs if you need to.

Say that 2 days ago, at 0:00 GMT, you had 1 S GBP-JPY at -250.

In keeping consistent with the example above, you did the same thing, threw on 2 more positions, for a total of three, and then was subsequently stopped out.

Here’s what it looks like:

1 S GBP-JPY -250 SL 200 TP: 93
2 S GBP-JPY 0 SL 200 TP 93

Average Deficit: - 83


Yesterday’s action brought:


1 S GBP-JPY -450 -450
2 S GBP-JPY -200 X 2 = -400

New net Deficit: -850


Here’s what I might do:

Or research gives us a sentiment that the market will probably continue down.
A look at our Excel sheets tells us that a daily price movement of at least 85 pips down is extremely probable. An even larger move in our favor is even a distinct possibility. But, 10 positions looking for an 85 pip move….. Decisions, Decisions!.

I would put on 12 positions, because your TP is now reduced to 73, like so:


12 S GBP-JPY SL 200 TP 73


If you win:

12 S GBP-JPY 0 = 0.00


If not:


12 S GBP-JPY -200 = -2400 pips
Add Orig. Deficit: -850

Total: -3250



TP at 73 & you’re out at 0 Profit…..and eliminated a -850 loss. Way to go!


Now…the “if not” scenario….

This is a big, big position and your risk is considerable. If you don’t do something about this (above), then your account just took a hell of a hit. Treat the daily price movement, ATR, and likelihood that it will continue like it was the Holy Grail. I wouldn’t even THINK of trying to squeeze any profit out of this one. Minimize or eliminate loss is the name of the game. Don’t tempt the Forex demons!


If price goes against you, you MUST average-down again. Statistically, one more go-around and you can wipe out this loss. But if you’re not really really careful, the loss will wipe you out. But…that’s Forex!


Here’s how I might approach this “disaster” up above:

In keeping with our example….

Our 4 hr MACD and our Fozzy charts, we’re reasonably certain that the trend will continue, or, at least resume.

The Excel numbers confirm favorable probability for price movement in our direction. We’re just looking for a daily low which will touch our target, what ever that may become, for just a brief nano-second or better. Just enough to trip those TP & get us out of this war zone.

Daily ATR (20) is still 200 4 hr. ATR (20) is still 125


I’m going to cut this into chunks because this is what we’re looking at…..

To average-down this position to the 4 hr ATR (20):

12 S GBP-JPY -3250 SL 200 TP 125
14 S GBP-JPY 0 200 125

Total: 26 -3250 200 125

26 positions with 125 TP will get us + 3250 , which would get to dead even.

But what if we’re not so sure about that 125 range movement?

If we get stopped out, here’s the wreckage:
_____
26 S GBP-JPY -3250 l
l
26 X 200 SL = -5200 l Don’t ever lose sight of this
l This ain’t good
Total -8400 ______l


If we want to average down to half the 4 hr. ATR, which is 63, we might decide that is more reasonable. But putting on such a trade needs 40 positions, not 20.
Lot of exposure there.

I would cut the thing in half:

13 S GBP-JPY -3250 (-250 X 13)


becomes:



6 S GBP-JPY -1625 ( -270 X 6)

6 S GBP-JPY -1625 ( -270 X 6)


Take one side of that and hedge it with 6 long GBP-JPY:


6 S GBP-JPY -1625 No SL No TP

6 L GBP-JPY 0 NO SL No TP


This takes the position and puts it in park. The loss is preserved, hedged by the Long off-set. It will keep till we come back to it later, another time.


Now, let’s tackle the other side….


We’re looking at:


6 S GBP-JPY -1625


4 hr, ATR is 125. That means we need 13 positions to BEP of 125..
But, we could also cut the range to BEP down to 65 with 25 positions. That’s less distance, more likelihood to hit, but what about exposure.?
This decision is for you alone to make. Personally….I’d go for it.

After successfully dispatching this one, go back to address the other. Keep on top of things, keep at it, you’ll be fine. This is really a continuing exercise in clean-up & put away.



This is a great example of why even a most mechanical method works differently for different people. The method is straight-forward, but you must conquer your own demons first before conquering Forex. Every one has their own unique demons. If every one would admit as such and pay heed, much of the “magic” associated with successful trading would disappear. If half of all traders were just mediocre traders, I submit that we’d have a kick-ass market on our hands and things would be a lot more exciting.


OK that’s pretty much it. Do this for each pair, both Long and Short.
If you’re careful & don’t get greedy, you’re going to make a TON of pips.

Good Luck.

This opens the avenue for close examination of minimum account size as well as maximum total position % to account size. This is the area I’m going to need help with. But, I believe that if you are cautious and conservative, keep a close eye on the stories your data are telling you, you’ll be OK and make a bunch of pips. I think this method, with some adjustment will be self-correcting and self-surviving, as long as it’s used as the tool it was meant to be used as.

For the moment, I’m favoring a 5% max total positions. But that’s without a lot of thought behind it. I need to get the exposure so as to max net profit, but have enough left for a massive loss, which through average-down, could subsequently fail to recover a few times in a row, thus rack’n & stackn’ the negative pips. Also known as exponential losses..



Performance…….Account size aside. Trading 1 mini lot per (10 Total )
Draw-down went as high as 7300, but that was in the first week. I hadn’t yet refined my SL levels enough. I then closed-out & re-started anew and have done fabulously ever since. That close-out cost 683 pips, so my deficit hedged net losses are actually overstated by over half due to that event.

Since 11/17/08 Net Profit is 8457pips

DD between 1000-2500

Profit from daily action: 6846

Profit from Avg, Dn: 1971

Current unrealized P/L (-1375)

Current Margin Used 2392


I’ll sharpen these figures a bit for November, & include more concise analysis.
I’m going to have to switch to IBFX, I just know it.
I like their in-depth report format.

I’ve got a full boat of average-down hedge going through the weekend. When I get those liquidated, I’ll just switch to IBFX & go from there.

.


PM me on Forex Factory to “Peter O” if you have any questions.

I allowed this instruction to ramble on a bit because I wanted to share as much of the thought process as I could. Though, as I’ve said, this is a mechanical system, still one must be extremely careful and deliberate with each step.

So far, the returns have been quite dramatic. I’m forward testing & plan to go live in mid-January. I will share forward testing progress here.

Hi bilbss,

I wish you'd tell me how to, with out the 2 sub-accounts.
I'm already on to that.

Thanks.

Peter O.

I've had an IBFX account for about three years.
You can open up longs and shorts on the same pair as much as you want. They don't cancel each other.

There's no special way to do it.
Open one position then open the other.

OK, I'll try as soon as they open.

Thanks for taking the time billbss.

Hmmmm.... this sounds too easy.
I wonder what I was up to before???

No idea... it is easy as pie. haha

Totally not my style but very well written and I'm intrigued. I'm up for something different and I'll start testing this, please keep us updated on your progress

Here's where things sit going into the week:

1 L USD-CHF -24
1 S USD-CHF -145 SL 188 TP 47
2 S USD-CHF +17
1 S USD-CHF +14 SL 188 TP 47


1 S EUR-USD +66
1 L EUR-USD -265 SL 137 TP 138
1 L EUR-USD -72
1 L EUR-USD - 42 SL 137 TP 138
1 L EUR-USD -63 SL 137 TP 138

1 L EUR-JPY -88
1 S EUR-JPY +78
1 S EUR-JPY -87 SL 121 TP 180
1 S EUR-JPY -246 SL 121 TP 180

1 L GBP-JPY -45
1 S GBP-JPY +28

1 L GBP-CHF -57
1 S GBP-CHF +34

Between Sunday open and 0:00GMT Monday, 5 averaged-down hedged GBP-CHF closed for +202, which was a surprise. A gift from PMM! Thanks


Current Acct. Bal: 8659
Unrealized P/L: -864
Margin Used: -1592

Say Pete,

I have a question and I'm sure i'm not the only one here that the thought occurred.
Please forgive what will possibly be viewed as an ignorant question but I must ask:

Senario I)

What if on Day One (for example only) G/J was at let's say 150.00
and you went long AND short.
Next day at the same time the mkt has moved maybe 2%, about 300 pips to a price of 147.00
You close your short for a +300 profit, have a -300 on the long. You look at the daily pivot and
it looks like it will come in at 148.50 and some other indicator tells you the market is going higher.
You calculate and buy one additional lot at 147.00 with an average of the two at 148.50 for B/E.
A few hours later market hits 148.50. You close the longs at B/E and whoopie you celebrate.

Senario II)

Instead of a long and a short, if for some reason I could not find a way to take a piece of the -300 pip down to 147.00,
(let's say because I was a complete numbskull or a had some broad over or whatever)
I look at the price at the same time of day, see the same pivot, see the same indicator, same motivation to be long,
so I buy 2 contracts at 147.00, wait for the 148.50 pivot, as in the example above, use a reasonable stop
and when the 148.50 pivot hits, same as above I get out with 150 X 2 = +300 pips.

My question is, doesn't this have the same end result as going both ways and having to pay both spreads ??

I realize this is such a simple question that I must be missing the entire point, and so I ask your indulgence.

Overnight, EUR-JPY AD hedge closed in neg -603
I'm going to leave it and deal with it on new daily candle.

USD-CHF AD Hedge closed for a net of + 24


Here's the new set-up:

1 L USD-CHF -34
1 S USD-CHF +27

Leave this alone.

1 S GBP-JPY +586 Close & re-open

1 S GBP-JPY -9
1 L GBP-JPY -586 SL 300 TP 135
5 L GBP-JPY -9 SL 300 TP 135
1 L GBP-JPY -9

1 S GBP-CHF +486 Close & re-open

1 S GBP-CHF -5
1 L GBP-CHF -489 SL 300 TP 122
4 L GBP-CHF -5 SL 300 TP 122
1 L GBP-CHF

1 S EUR-USD +102 Close & re-open

1 S EUR-USD -3
1 L EUR-USD -78 SL 227 TP 71
1 L EUR-USD -111 SL 227 TP 71
1 L EUR-USD -108 SL 227 TP 71
1 L EUR-USD -304 SL 227 TP 71
6 L EUR-USD -3 SL 227 TP 71
1 L EUR-USD -3

1 S EUR-JPY + 276 Close & re-open

1 S EUR-JPY -12
1 L EUR-JPY -285 SL 382 TP 101
3 L EUR-JPY -12 SL 382 TP 101
1 L EUR-JPY -12

That's it for now. Need to address the deficit AD Hedge at EOD.

Summary for today, so far:

Profits from AD: -327 (net)
Profit from reg. pos.: +1450

Acct Bal : 9483
Unreal P/L: -2167
Margin: -4067

Got to keep an eye on the margin. It's starting to creep up.
I must beware a growing P/L at cost of margin.

Hi Toshi,

Thanks for reading & thanks for your input. I appreciate your question.
I'll answer as I understand it. If it I didn't understand the question, please ask again...

Your question deals with the core of the works of this method.


Yes, it is the same as going both ways, long as well as short, and yes, you must pay spread in both directions.
By the time you punch your position in & it apprars on the screen, those spreads are gone, gone, gone! So never a factor after initial initiating of the position.
You'll take an equal position Long & Short at the same time. This locks in your loss to just the spread. The market can move 150 pips...or 1500 pips, and you are still out only the spread..so far.
Now, you think the market is going to bounce back, say.
So you dump your profitable side, and open an idenical position. You've just locked in a 150 loss, and taken a 150 profit.
Now, buy another position as the negative -150.
Your AD Hedge now requires only 75 to BEP. If it goes 150, you'll have eliminated 150 deficit, made 150 in pips, and had banked 150 in pips before.
Your other side now shows -150, but you deal with that as a seperate transaction. Bottom line...you're net +150 to the good.

I hope I've answered your question. Please ask away. I know that this is complicated & convoluted. The input is good for me to think things through.

Thanks

Peter O.

Since Sunday evening when I first decided to demo this concept, my demo account is up 1988 pips. No losses so far....doubling up each negative side and have not had to go beyond 4 contracts yet.

Sure would like to see some discussion on this thread.

Hi Jcorp,

Since Sunday PM, I've got my butt kicked. Mini- un-wind.
But am trying a different approach to average down...decreasing range & increase exposure. I lost about 8000 pips, about 5-6 previous day's worth,
but that was my decision to just liquidate & begin with fresh pairs position.
Mon was a non-day, Tue. back to normal, & Wed was OK. Overnight all average-down hedges closed in the good, but net was between 40-100 per, reflecting the new conservative approach., Tue, & Wed was Ok.

So I dumped about 8000 pips, but have gained back 2400 of them in a couple of days.
Still a work in process. That's why I posted it here.

Beware, though, on the doubling-up....if the market doesn't hit your target & heads in the other direction, your exponentially exposed. I'm trying to refine a technique for freezing large portions with a hedge to deal with loss on a manageable size position.

Thanks for your interest.

Peter O

Through the week, the method has behaved like a good little method. Able to gain back half of what I lost in the first part. Not bad for only 2 days.

Unless something unwinds, this is live a pip vacuum...just sucking them up, about 65-70% are keepers, in that they are AD hedge clear.

Thinking of something along the lines if a AD hedge stops out, don't re-put it on. Exposure is suicidal. If you hit to the good, you look like Warren Buffett.
If you hit to the bad...you look like Donald Trump.

Maybe, one strike & I'm out on that. Put them in a common "deficit bank", assess the size of it each day, and hack away at reducing the bal each day, bit by bit. Maybe treat it like any other pair, or an additional pair. Shadow which-ever pair is behaving the best at the time.

Peter O

Going over the past 3 complete weeks:

Take the unwind of Mon-Tue out.
that was a direct compounded loss of: -10650

Just like it never happened...neither gain nor loss.
Because it is this which I'm trying to prevent, or at least minimize.

Now, net gain from non-AD Hedge: wk 1&2 - +8457
3 - +4692(net)

From AD Hedge: 1&2 - + 1133
3 - + 1392

Loss to AD Hedge 1&2 -1129
3 -1129

I'm almost thinking to just let-go the deficit position after the first round AD hedge. Still leaves a 4:1 P/L ratio. Not too shabby for Forex. Can't abandon entirely, though. Still cancels out a loss of 1100+. I know that some round 2 AD hedge are profitable. But, how many? What about round 3, etc.

The worst was a 6 th round, 6 position GBP-JPY, SL for -5406. Needless to say, I was less than impressed.

Maybe to draw the line after round one....if deficit, dump it. I'll have to see the stats on all round 2's. My spidey sense tells me round three is off the table & that I'm headed down the right part to resolve this connundrum.

Peter O