Important – Why systems are profitable (or not)

Hi David,

Maybe it's because I use a broker that aggregates all trades for a pair into a single averaged position, but points 1-4 are, well - obvious. Not always the nicest way to trade, as I'd often prefer being able to keep the trades separate, but when the broker does this you have no other way of looking at a position.

As to 5. RR, I have to agree - it's irrelevant to trading as it measures performance after the results are in. Similarly, expectancy is a performance measurement cooked up by Tharp to make his books seem more scientific / theoretical. Also only available after the fact. You can analyse any system and get the historical figures but I'm skeptical about using them as a basis for future trading.

-

I suspect that this could be a very useful concept. I can thumb suck means for pairs that are ranging EJ and GJ, but how does one handle trending currencies like EU and EG where any mean is south of the trend and may not to be reached for years if at all?

And what is long term? Months, years?

Finally, when you refer to government intervention are you suggesting that this intervention extends beyond the setting of interest rates and money supply?

I still have to look at all the links you've provided. Thanks for an interesting post.

David,

Thanks for introducing me to this thread.

The first system I tested performed best when the stop loss was around 400 pips for EUR/USD. I found other pairs had other optimal stop losses. When I started testing this I was told by other traders that that would be crazy to take a 400 pip Stop. I also found that large starting stops produced optimal, results with my dynamic exit, but I moved away from this approach at the advice of others.

I did some initial testing of the 50 pip take profit and 1,000 pip stop loss over 1.5 years worth of data the entry was taken in the direction of a 5 day trendline, with several variations. The average from every variation was a 95% win/loss rate over 21 pairs. EUR/USD did the best, with a Max Drawdown strategy pulling in over $90,000 in the period. Overall, though the system was a net loser. One or two 1,000 pip loses can be devistating. I assume part of that is the dependancy of my money management strategys dependancy on historical losses. Since there weren't any drawdowns until late, a single loss was large, wiping out most profits.

Still, some tweaking and I think this could be very profitable.

Dan

of course i have to post on this thread

this is the message i've preached for a year.... WHY DOES THE SYSTEM WORK? not "because of fibonacci's rule" but because there is something in reality giving you a REAL reason to trade.

at the end of the day, if you concede you don't have have edge, you can believe jacko:

"anybody can get lucky in this business"

and that is a true statement. i think its a hell of a lot better than playing scratchoff cards at speedway.

Not to be a stickler for scientific method, but you cannot prove that something does not work, you can only provide evidence to support a hypothesis. In order to "prove" that something doesn't exist, you'd have to test an infinate number of cases, which is not doable.

Dan

Dan, I'm not suggesting that a "wide SLs and tight TPs" approach is necessarily more profitable; I'm just saying that there's no reason why one shouldn't think outside the squares beyond the conventional "high RR" approach. At the end of the day, profit factor (or expectancy) is the product of both RR and win rate.

A system with an extremely high win rate and low RR would require a sizeable test sample, since, as you point out, losses are rare and you'd need enough of them to obtain any kind of statistical confidence.

David

aim small, miss small

This is my point of view.

As right now ... we can see the market is RANGING... or CHOPPY environment... lots of INDECISIVENESS. With all of these STAGFLATION problems. Are we out of the crisis yet... or in the middle of it... or might be just in the beginning of it

With choppy environment... having Huge SL with tight TP can be profitable... and we see lots of people talking about this and claiming that they are doing good with it.

Just wait untill the markets are TRENDING to one direction only. I bet... this topic of having HUGE SL and TIGHT TP will be distinguished... and at that time... no one will talk about it. It happen from time to time.... and then... when the market is CHOPPY again.... all this talk will flourish again.

The question is ... can you really survive LONG in this hazardous business by using this system for years to come?

As for me ... always MAXIMIZE PROFIT and MINIMIZE LOSS.

I always have tight SL with let the profit runs TP... and most of the time I always change my SL to BE or on the green whenever my trades making profit.

With tight SL... if got hit never mind... I'll make another entry after that at a better price. The Entry point is important as I don't simply Enter the market in the middle of movement... always wait patiently at the SUPPORT or RESISTANT area. Over there the R&R Ratio is good.

From time to time I experiencing losing streak or series of SL got hit at BE. However, with only a few winning trades... that easily covering all the losing streak loses. When I am on the winning streak... wow weee.... the reward is HUGE!!!

With Huge SL and Tight TP.... accuracy of winning trade can be HIGH. But be careful .... Just imagine with one or two loses... that can easily wipe out the whole winning streak profit. With losing streak loses... the acc will go "KAPUT" in no time.

This is just my point of view as I am very happy with tight SL and HUGE TP. When I lose... I lose small small pips... but when I win... I profit BIG BIG pips. Hence, once has to to master on how to make an entry efficiently.

Chinese saying: "Small money don't go out... BIG money never come in".

In the end of the day... every human being being blessed with different kind of skills. Use the one that suits you and profiting to you. Don't follow others blindly.

There is also saying about that: "AIM for the Moon... if you miss... at least you'll landed upon the stars".

I am not sure if this applied to this business

Don't take this seriously... I am just trying to be funny about it.

When I think about it... perhaps the person doing the saying... at that time... no discovery about the "BLACK HOLE" yet.

Every REWARD comes with RISK.

Miss the moon... miss the stars... end up in the BLACK HOLE

Oh... I start to talk crap already... too exited about this coming week trading. I am signing out now.

Good Luck... Good Trade to all of us!

This strategy would require some work. Testing with max drawn down for a money strategy, a loss late, could wipe you out. Probably the two rules would be keep your account size small, and never go against the main trend. A couple of things I noticed was that the few losses realized were trades that last 2 or 3 months and most profitable trades were completed in 2 or 3 days.

My thoughts on trading after chasing this rat down the hole for 3 years is that conventional, thought on trading doesn't really work. So my goal here is discover those little gems of out of the box thinking. This is one of two I've read so far.

Every time, I've had an "out of the box thought" on trading Forex, I've goggled it and found detailed descriptions of the approach.

Dan

http://en.wikipedia.org/wiki/Stagflation

Hi David,

Great post many thanks ! I'm new to FF and I was just reading your posts regarding FX Titans Trading methods etc.

I was just wondering if you indeed trade using no stops nowadays ? like the way he mentions...

I don't suppose you know how FX Titan is getting on do you ? I'm pretty interested in this method of trading and would be keen to learn if he does any tutoring or private training etc ? if you could point me in the right direction I would be very gratefull.

Many thanks in advance.

Mark.

I definitely DON'T recommend trading without stops, or at least some kind of exit strategy. Risk management is perhaps the most important element in a trading methodology.

The point I was trying to make is that it is one's net position in the market, relative to price direction, that ultimately determines P/L, and that order types are nothing more than a vehicle for adjusting it. Hence the 'hedging' (offsetting orders) approaches used by FXTitan and StevieT could be replicated by more conventional order entry, with exactly the same result. Conversely, re stoplosses, opening a position of equal size in the opposite direction has the same effect as closing one's original position via a stoploss (except for the additional spread incurred, by the second position).

If you're interested in FXTitan's strategy, perhaps you could perform a forum search for his posts, or possibly contact him. The first hyperlink in post #1 will take you directly to his system thread.

As I mentioned in my private messages to you, I think I've traded longer than you to be fair, and certainly more with real money...so thanks for the advise, but really its not needed ! as for hedging, I completely disagree....

Yes you do pay an extra spread cost, but you get the advantage of market bias i.e been on the right side of price action when it actually makes its move propa....rather than lots of stop outs as the market whipsaws which is does constantly...

If your in a hedge position you can happerly sit through these moments without any incurred losses, other than the cost of doing business ( the spread ) if a person has to pay an additional pips or two in my view its actually well worth the advantage you gain from been correct on direction.

The only challenge people face, is when to kill the loser ! their are plently of responsable areas in which a person can kill a trade in the hope that they will get the follow through required to continue on into profit.

Now, the most commen response to the statement is... " Why dont you just take the trade in those areas with a normal stoploss in place ? ".

Well, the truth is its simply easier to hedge and you have the added advange of the buffer zone you created through your winning position. Yes of course your net neutral and even down a few pips....however, unlike using a normal stoploss this does have its advantages...Because its possible not to get the direction correct at all when using a conventional stop.

So as a result you simply stay net negative on the wrong side of the market until your finally stopped out.

Now I dont know about you, but if I was asked which position I'd prefer to be in, either 1) on the rightside of the market by 20 pips managing the loss and hopefully continuing on into profit as I'm clearly already on the correct side, or 2) wrongside of the market, never on the rightside of the market and eventually losing and been stopped out for - 20 pips !

I think I'd know which side I'd rather try my luck from....

Trading isnt about how clever you think you are, its not a school exam where the brains take home the prizes, if you make profit you make profit end off story.

It matters not how you go about it, as clearly for the most part the vast marjority of people get it wrong using the normal so called correct methods of trading.

We all require price to follow through to make a profit nomatter what methods we use. Without this no one makes a dime !

So if you can gain even a slight advantage on market bias/direction then in my humble veiw its well worthwhile. But if thats what you believe, then thats what you believe....If I remember correctly your still demo trading after many years !? That might have something to do with your time spent on forums lecturing to people who I'd wager know more than you !

Thanks very much for the lessons, but frankly I don't need them. I'll be prop trading within the next few weeks, I simply saw the above post while surfing the net and found the ideas quite inteteresting and worth a look.

I've spent tens and tens of thousands on my forex education over the last 4 years or so, I'm never in a place in my own mind where learning ever stops.

Forex is a journey not a destination ! Regardless of what system a person uses, making a success in the forex is all about knowing what type of market your trading in.....if you know the markets trending, and your hedged for example, when you release your loser at a sensible place, you can expect your winner to continue on.....for how long ? nobody knows....but hopefully long enough to make you lots of money, should you try the same method in a sideways market, you'll get chopped to death !

Simple...

To many people look for the one system, that mechancial 1,2,3 approach and I'm afraid to tell you that that way of trading in my view simply cant work for any length of time, it may work for a period in a certian markets, but its all about knowing what market your in and using the correct tools for the job.

My friend is a pit trader at the CME and I can asure you, this is the way he trades and believes is the only way to make consistant money, and he's made plently of that !

Knowing what market your in makes the diiference...if your system doesnt work well in that market that day, either sit on your hands or trade small, then push like hell when the markets right for your method, or use a different method for that type of market.

Anyway, these are my only 2 ever posts on a forum in my life, and to be brutally honest they will be my last, you get the overwhelming feeling that alot of people here have good intentions to learn and findout information that will help them make consistant money, but the truth is its often a place where people who cant make a penny are spending all of their time lecturing newbies on how they see the market and how they are so right with their opinons..

If they were so clever they wouldn't spend all their time on forums ! PLEASE PLEASE PLEASE dont take advise from anyone with hundreds of posts, this doesnt mean they know what they are talking about, infact quite the opposite ! run a mile from these people because clearly they spend far to much time typing and NOT trading.

Good Day.

It was you who approached me with questions about whether I used stops, and asking for more info about FXTitan. All I did was attempt to answer to the best of my ability.

If you want to make a correlation between trading experience and number of posts, then that's your preroagtive. But there are forex millionaires who generously share their knowledge here, and some have a much higher post count than me.

Hedging (in the same pair) is nothing more than a feel-good strategy; a illusory panacea for folk who would rather pay additional costs than stomach losses. When you offset a position, it ultimately has exactly the same effect as if you were stopping yourself out of the position. And after you close one of the positions, then unless you have an analytical or statistical edge that tips the balance in your favor, you still only have a 50/50 probability of breaking even over the two trades. So you supposedly hedge the remaining position, and so on, all the time turning a blind eye to any unrealized losses that are accruing in your account........

Anyway, however you trade it, it's possible to replicate any set of 'hedged' positions by placing orders that leave you either long only, short only, or out of the market altogether. By using the same price levels as the hedged positions, you make exactly the same number of pips, and you pay less spread and swap in the process. All of this has nothing to do with trading knowledge or experience; it's just simple math.

It's not about whether I'm right or wrong. The math speaks for itself. Take the blinkers off and you'll see it for yourself.

There are plenty of successful traders who use stoplosses.

No hard feelings. I wish you continued success with your trading.

Yes that is very true....I did ask you information regarding fxtitan, however it was the manner/tone in which you responded that came across rather arrogant considering I've been trading years.

But thanks for your response, no hard feeling...

However, I must take you to task on the Hedging comments you've made as they simply arent true...

Normally people who have never traded like this, generally give your response and its flat out not accurate.

Nothing to do with simple math I'm afraid to say...Firstly, I don't continue to hedge from the same position, so I'm NEVER constantly hedged.

The trade either worksout or it doesn't and I simply look for another entry. The reason for doing this is that I dont have to be exact with the entry.... so thats the first advantage over your thinking.

Secondly, I NEVER hedge overnight, so I NEVER pay a swap fee. Again a common comment which isnt true.

Simply put....

Clearly I understand you end up paying a couple of pips extra on a trade, why people always make this obvious statement is beyond me !? thats not the point !

Can I ask you the following question ???? if you were to get a headsup on market direction would you consider paying a couple more pips for that privilege ???

My answer would be yes, and lets be real, if you trade the gbp/yen for example as many people do onesided, it can cost you upto 8 pips !! so does a couple of extra pips really matter ??? I think not....

Again this is NOT about Math, yes it maybe true that it doesnt give you any cost advantage over simply taking one side of a trade ONCE, but this truely isnt about a feel good factor as you claim, nothing to do with it AT ALL.

Its about been on the correct side of the market, END OF STORY. Regardless of Math, the feel good factor, call it what you want, the simple bottomline is your correct on direction, you ARE on the rightside of the market, nomatter how you dress it up, thats just a fact.

The question remains, will the trade continue on in the same vain and make you money ? the answer is who knows ? but the point of hedge trading is to use the momentum in the market to hopefully get a profit, this IS an advange over taking a normal trade and NEVER seeing it take you into profit.

The trade goes something like this....

You enter the trade on the euro/usd hoping you got the entry exactly perfect then the following takes palce... -2 pip 2 seconds later, -4 pips 20 seconds later, - 15 pips and before you know it your out with a loss of - 20 pips in this example having NEVER EVER been on the correct side of price action !

As I said before, I know where I'd prefer to take my chances given the correct market conditions and if I had the choice it would be the following...

You enter a trade where you think price may break from, however the first move never really came to anything as it was a headfake on a breakout...normal circumstances I would now be taking my loss and undertaking my search for another perfect entry....but not when I'm hedged I wont !

so I stay with my trade, not worrying and panicing about getting the perfect entry as I can sit safely in my position until favourable market conditions..

Price looks to break again, but would you believe it !?!? its yet another headfake and the dam thing reverses AGAIN ! had I been one sided and traded as you suggest I would be AGAIN nursing another 20 pips loss for example !

But lucky for me, I'm hedged so that cost of doing business your so egor to mention is -4 pips on my hedged postions which is a dam site better than a 2/3 20 pip loss or 10 pip loss or 5 pip loss everytime you get faked !?! yes I may lose when I finally let go of my losing trade, but you might of had 2/3 fakeouts in this time so your math isnt correct given the right circumstances you'd lose more overhall.

So after 1 hour of price action whipsawing back and forth it finally breaks with conviction. This time I'm 20 pips positive on one side of the trade and appox 24 pips negative on the other.

Remember this has NOTHING to do with a feel good factor, or that I cant add up ! this is simply about been on the rightside of the market when the market decides to make its move propa.

I realise my negative trade, and take that loss in my account, no different to taking a loss using normal stops....However I do happen to now have another trade that IS on the correct side of price, the only question is ? will it continue.....?

The chances in my opinion are greater that we will get some further momentum follow through simply because the market has infact made a break for that area...will I make money ??? who knows...thats not really the point I'm trying to make. Yes it may cost me a few pips more to take this trade, and if you simply looked at the math your right, it would cost me a few pips more to trade in this manner, but what I personally do know from experience is that you could have taken more losses in those same set of circumstances, you could of suffered a greater amount of losses from simply getting the entry wrong, where you lose 10/20 pips I wouldnt of got fakedout, so your costs would infact be higher.

Hedgers arent the be all and end all, if you use this method on a choppy market you will get butchered ! however, if you use this method in a trending market you can make money providing the market keeps going.

Hedging is NOT the Holy Grail, far from it, as anyone whos traded long enough knows theirs no such thing, but Hedgers tend to get a bad press and an unfair negative response to their ideas generally by people who've never traded in this manner, I dont care if people use this method or not, but what I do care about is when it gets slagged off and the reason people give in response simply isnt true.

Just so we are fully clear....

Personally I dont hedge from the same place over and over again, Second I dont hold a trade overnight so no swap costs. Third it would cost me alot more in pips to be fakedout 2/3 times than it does to place a hedge so I would say its actually cheaper !

And finally

Fourth, this is NOT a feel good factor for been 20 pips up etc its simply a FACT that you ARE on the rightside of price, unlike a loss situation using normal stops. Its possible NEVER in that entire trade to ever be on the rightside of the market, you need to get your entry exactly right at that seconds, in that moment ! not so if your hedged ! once your on the rightside, the question now remains will it continue ??

Who knows....but I know where I'd prefer to be sitting to findout.

Yes of course people make money using normal stops, thats not what this is about...this is about clearing up untruths about hedging.

Regarding Millionaire Traders with more posts then your goodself, I truly hope you've seen there bank statements before fully believeing what you hear.

And on that note I'll end my rant ! hopefully people wont be so quick to slate momentum hedgers in the future as I think I've done a decent job of dispelling your myths surrounding the subject. Or maybe I havent, but the truth is now out there lol.

May I wish you every success in the future.

Regards.

It is bassicaly very simple....forget the rules!

What are you reading about almost everytime you look at some thread!??
Trend is your friend, always use a stop loss, dont hedge....
......blahblahblahhhh...... over and over again!!!

Trend is not your friend.....why.....If we knew to accurately read the trend, we will be all profitable using this "simple rule"!
Always use a stoploss......why should I give a permision to my broker to take away my money.....Ill rather decide that on my own when is the right time to give my money away!!!
Hedging doesnt work.....most of this part is true, but than try antihdeging/scaling cos that works!

What drives the indicators.....PRICE & VOLUME.....this 2 variables is above all indicators cos they are driving them....so they lag!
Dont use a bunch of indicators and cry how all of your trades are going against you as soon as you jump in them!

Think for a moment about this.

Regards

Of this discussion, the points highlighted are:

1) Small TP with huge SL and big TP with small SL can be used interchangeably in ranging and trending markets. However, the question is whether is it possible to time the market to mark the beginning of trending/ranging market because it is during this transitionary periods that traders lose money, most caught off guard.

2) Different strategies are needed for different marker behavior, no single strategy/system can work all the time.

I believe in selective automation of trading. Most of the times (at least in my automated trading) the neural network employed can detect the subtle signs before any period changes. However it still requires monitoring as it is not perfect. These signals of 'market behavior change' can be used to select the best strategy for the particular market, be it ranging/trending.

The PNN based networks work well for this purpose and I really hope more studies/discussion can be made on this. Perhaps due to the complex programming required, there is poor response. But certainly it works, just look at Better in the automated trading championship 2007.

Whoever interested please join the discussions on PNN in mql4 forums.

I'm very sorry if I sounded arrogant in my earlier post. It certainly wasn't intended.

Many thanks for taking the trouble to post such a detailed reply.

Please let me try to understand your hedging method. If I've misunderstood, then please correct me.

OK, I think this is your rationale. The diagram below assumes a downtrending market (the red line is price). The 'conventional' trader (me) believes that price will continue to fall, so I go short at point A, but the market whipsaws, and I get faked out, and my stoploss at B gets hit. I try to go short again at C, and get whipsawed and stopped out at D (another fakeout). Then I enter at E, and (to use your words) "the market breaks with conviction" at F, and then (hopefully) follows through to G. So I made (say) 20 pip losses on each of my first two trades, and a win (let's say 70 pips) on the third trade.

Now, if I understand your hedging strategy correctly, you would have both long and short positions at A, with no stoplosses. You would close your long position at F, and bank the 70 pips on your short when the market reaches G.

The net result of the above scenario is that you're +70 (less 2 x spread) while I'm +30 (less 3 x spread). Is that what you mean? If so, then I agree with you 100% – at least, that's if I trade that way.

But the key is "break with conviction" – both of us have to make the same decision, and let's assuming we're equally skilled at making it, so we both decide that occurs at F.

What happens if I don't put any trade on until this break occurs? In other words, while you are hedged, I'm simply out of the market, which replicates your net position mathematically. When price reaches F we will both be at +0, and when price follows through to G, we both exit with an overall P/L of +70, except that you pay the spread twice (given that you must close your second position at some point), while I pay it only once.

Now, supposing the market doesn't follow through to G, then, unless you re-hedge (and you have to make a decision where to do so, exactly the same as if you were to exit using a stoploss) or have some kind of exit strategy, then you potentially face unlimited loss to point H and beyond, while I simply get stopped out at (say) point J.

The point I'm trying to make is this. I can replicate your hedged positions by simply staying out of the market (and paying no spread). We both have to make the same decision as to when price is "breaking with conviction", which means taking a net position short, and being exposed to whatever risk our exit strategies permit.

In order to compare apples with apples, I'm assuming the same level of analytical skill between the (hypothetical) 'you' and 'me'. If you're not willing to close your hedged long position at A or C, then why should I go short at those points?

To summarize, and extrapolate a little further, to (hopefully) cover every possible scenario:
-- whenever you are hedged, I am out of the market (net position = zero in both cases, same P/L)
-- if you close your hedged long trade, I simply open a short position (now we are both net short, catching the same price move, hence same P/L)
-- if you close your hedged short trade, I simply open a long position (now we are both net long, catching the same price move, hence same P/L)
-- we both have to close our open trades at some point. That's the same issue for both of us
-- if/when you re-hedge, I simply close my long/short position (now we are both back at the same net zero position)
-- end result is that I catch exactly the same pips, but pay less spread. (I also pay less swap than any traders who do happen to keep hedged positions open overnight). Why pay these extra costs when you don't have to?

Maybe I've misunderstood the way that you hedge, and drawn the diagram wrongly. But the math (and the ability to replicate the net position without hedging) remains the same, no matter how simple or complex the scenario is. Whether hedged or not, the trader has to make the same decision when to go net long or short, and it's how accurately this decision is made around the price movement that determines the P/L. So I would (very respectfully) argue that it's ultimately the analysis (i.e. knowledge of market behavior and probabilities) that provides the winning edge, not the hedge itself.

I have only been at this 3 years, so you might well be more experienced than me, and your friend at CME even more so. Honestly, I have no problem with that; it's just that I would prefer to discuss trading methodology. Anyway, I really believe that hedging is a math rather than a 'trading knowledge' issue, for the reasons that I've given.

I hope this post doesn't sound arrogant or condescending in any way. There are a lot of folk who post here, and believe that hedging offers a real advantage, but I can't see what they're getting at. If I'm missing something, then please explain what it is. I'm very willing to eat humble pie, especially if the lesson means that my bottom line will improve.

Why hedge a breakout of a range?

Either pick a favorable direction and side and trade the range from the extreme edge, or wait for the range to break and enter on the pull back.

Both require patience for the market to provide the entry, sounds like your jumping the gun and trying to force the trade, instead of letting the market come to you.

jmho, fwiw.