Building an equity millipede

Hello Graeme,

Firstly, great Thread. The underlying concept of letting your profits run to such an extent that you can capture those profit "outliners/fat-tails" is something which I also strongly believe in.

However, as I am new to FX, I wonder whether you can answer a couple of questions for me.

1) When you close positions which have made gains (so that you can diversify), (i) what % of them do you close in relation to those that you keep running for the bigger gains, and (ii) how do you decide when to move a particular position to the next group?

For example, do you keep a running total of all the pips you have lost in the process of establishing those current legs and simply close those shorter legs which have accumulated enough pips to offset those losses?

Also, I'm assuming that the "top" group is the one which you will never normally exit, so as to capture those fat-tails!! By that I mean that the only way for the position to be exited is if the Mrkt retraces and gives back ALL gains and closes you out at BE. Is that correct?

2) According to your profile you also live in Australia. If that right, when you mention buying at the OPEN, which open are you actually referring to? Apologies for the basic question but Forex is new to me.

3) Again, according to your profile you are using FXCM as your broker. If so, may I ask why you are using Metatrader4 instead of FXCM's own trading Station platform for your trading?

I ask, as according to FXCM's information, some advantages between their own platform and MT4 is that on theirs you can (i) create Mrkt Range orders and (ii) partially close tickets, which I would have thought would be useful additions to a strategy such as yours.

Just interested in your thoughts especially as I'm also going to use FXCM and I need to decide which platform I should learn.

Kind Regards,
Chorlton

Good afternoon, all

Thank you for all the compliments. It makes my efforts worthwhile.

Im glad to hear/see that traders are trying out the exercise. My only request is for you to continue with the exercise as it is the best advice I can give.

Your insights will grow from:

unconscious gut feeling -> to good gut feeling -> to insight with reasons -> subconscious actions with plenty of reasoning

From the exercise you will find related discoveries:

1. Areas of demand/support
2. Mass areas of other traders interest
3. Market sentiments
4. Upskilling your focal interpretation to know when its a good momentum and a slow momentum
5. Greater picture of the higher timeframe

You may have heard some pros on this forum quoting one of the obvious preached principles and then you find they will acknowledge each other at such obvious comments. Most comments are in such riddles that is baffling to comprehend at most times. Other recipients often reply in acknowledgement however, whether they truly understand what is being said will be a distant second. Im not here to discuss the integrity of other traders, but I wish to take little of your time to acknowledge together with you in what they are quoting.

1. Trend is friend - one of the favourites preached.

Trend is the only thing that will make you growth/profit in forex. It is not your uber intelligence/indicator/ea in trading but the fact that market 'actually' moves for you to profit on the difference of movement. Without trend/movement you cannot make growth/profit. However, there are scalpers/short term traders whom are very skilled in taking profits from random market fluctuations and they have my respect for something I cannot do. However, since their profit/growth lies within increasing their capital balance by certain % and then increasing their lot size it is a completely different stress level. If you are a profitable short term trader I urge you to hold onto your positions a little longer and you will find that without your assistance, the market will grow your profits for you. I prefer to roll the ball down the hill but if you wish to continue pushing it up the hill that is your choice.

2. Buy when its up, sell when its down - another favourite.

Unfortunately, not many traders actually know the true secret to this sentence. You will be surprised how easy your trading will become if you just follow the flow. For example, I have introduced .00 entry system to show all traders that you can enter simply from any direction the price is coming from and enter.

Price is coming down from .00 above, then enter sell at .00 below.
Price is coming up from .00 below, then enter buy at .00 above.

I can assure you most of the professional/successful traders use lesser indicators, lesser rules than the unsuccesful. Some may not even look at charts all together.

These professionals know the importance of low risk entry, power of participation and growth from holding. 3 very important ingredients to successful trading career.

All they ever do is: enter with the flow, hold for growth and thats it.

Yes, it is that simple. Sometimes the obvious sounds too plain but then you are choosing only to hear what you wish to hear. Traders fail cause they try to outthink, outsmart, outmove the market. No,no,no you cannot beat this market. Noboby has for centuries. There is no set parameter where you can implement on a constant random variables to achieve same results year by year. a.ka indicators/eas

3. Choose only one pair of currency and learn the characteristic - wrong

There is no such thing as characteristic of a pair of currency. Market is not a person or a lifeform, it moves on its on accord with/without its own agenda. Its a generic energy. For the last 4-5 years, traders loved eur/usd. Biggest liquidity, 3+ years of uptrend, hardly any major corrections, cheap spreads. They all considered eur/usd characteristic to be a passive, gentle, reliable. Then what happened last 2 years? Down 1 year, up 1 year (more or less). I see more reliability on gbp/aud downtrend than eur/usd (at the moment). Never get attached to one pair. You need to be selecting your currency pairs on a daily, weekly basis.

Alot of traders get confused and relate characteristic with volatility (especially jpy cross). Its 2 different things.

4. Hold them for growth - not a favourable one but its around this forum

Market grows your profits for you. All you can really do is plant your seeds and hope for the best. Market decides whether to reward you or not. And if not, then hopefully you control your risk and lose nothing or minimal.

I had few pms thanking me for the .00 entry system. They can see that just holding onto positions and controlling the risk/reward brings in profits already. There is more to the .00 entry system and it certainly has room for improvements. But the most important lesson from this system was to show you, how entering and holding, either buy and sell can/will grow your profits if you allow some time for growth.

Because market always moves, up and down, all we can ever do is enter and let it play out at the mercy of the markets.

One of the problems with .00 entry system is the inevitable drawdown. Every system/eas has drawdown. We have drawdowns cause the market fluctuates in a given range. Undecided where to go so moving 50pip up then 50 pip down then 50 pip up and so on for prolonged periods. I have yet to see a trader, trading successfully within the range bound with a scalping system yet. My respects to you if you can.

It is at this point I would like to give another advice today. This advice will sound vague to most traders at the moment as they have not reached that part of enlightment yet. But keep it somewhere in your learning mind and one day it will just dawn on you.

How do I avoid drawdowns?

I avoid the market as much as I can, in a sense.

It is very important not to over expose yourself to a certain pair of currency. Its like staring at the sun, you take just one look for few moments.

I do take every low risk entry given to me by the markets but my participation is almost 20 pairs of currency. Yes, i perform 7+ entries per day however never too much focus on one single pair. And one of the reason I dont focus too much on a given pair is that, there are periods of range which lasts for days. I can avoid the whole hassle of losses/drawdowns/breakeven by simply only entering what i can see, when i can see. This is very important.

Increased risk doesnt necessarily increase your reward. It means, do not try and stack multiple positions in one single day. You either tire yourself out or have multiple losses in a row as you are placing positions too close too each other and the market will simply gobble up any positions in an 'area.' However, I do stack positions aggressively sometimes when there is good movement but once again I do not try very hard. I prefer to focus on spreading my exposure in all pairs of currency which also spreads out my risk and my reward.

When you place gaps of hours/days between each position, yes, unfortunately you miss out on few golden opportunities but you also avoid 'all' or 'most' of the range periods. Think about it please. You only suffer the range of a pair of currency if you are trying to participate everyday, everytime on that particular pair.

You need to only participate on pairs of currency that are currently moving. When I know a pair of currency is trending more than usual this week, I stack positions heavily into that pair of currency. Then when actions dies down, I leave my legs behind and move on. Its mostly touch and go. I have mentioned few times in the earlier post that I never re-attempt a failed entry more than twice per day, rarely 3rd. I wish I had explained in more detail but when I fail my first entry (minimal loss from entry), I must have a very very very good reason for me to come back again for a 2nd re attempt.

You can enter 10 times frantically and suffer 8 losses and 2 winners. You hold onto 2 winners for growth and finally close +300 pips per position. +600 gross profit - 8 losses = approximately +350 pips net profit

Or

You can enter 4 times (at good momentum or spaced out) and suffer 3 losses and 1 winner. You hold onto 1 winner for growth and finally close at +300 pip. +300 - 3 losses = approximately +200 pips net profit

Scenario one had 20% win rate, scenario two had 25% win rate. Similar win rate however similar profit but two different stories with two different psyche levels.

The main difference between scenario 1 and 2 is the drawdown. You suffered 8 losses out of 10. This plays mind games on you. Since you lost 8 rounds, do you think you will be able to hold onto the winning 2 for growth? Most traders, after a consecutive 8 loss they try to recoup the losses by closing out their winning trades too early. Everyone should be guilty of this.

Furthermore, scenario 2 trader, plays all pairs and his other 1 or 2 positions that he slipped into other pair of currency at his leisure could bring in something.

See how he distrubutes his risk/stress on an even spread? Similar results, similar profits, half the stress, half the mind game.

This tactic of avoidance is also another risk control method and one of the more important one. Many professionals avoid the market in a sense.

Sincerely,

Graeme

It is at this point I would like to give another advice today. This advice will sound vague to most traders at the moment as they have not reached that part of enlightment yet. But keep it somewhere in your learning mind and one day it will just dawn on you.

How do I avoid drawdowns?

I avoid the market as much as I can, in a sense.

It is very important not to over expose yourself to a certain pair of currency. Its like staring at the sun, you take just one look for few moments.



Hi Graeme,

I know everyone is going to think I'm being negative by my posts and I am not being negative just trying to point out some of the difficulties that one may encounter when implementing your trading methodology. I'm presenting this chart and situation because I would like to start trading longer term and I find you have one of the most sound approaches I've seen in the forum.

Ok, with that said, I picked out a recent period where the GBPUSD traded in a range for about 2 weeks. This is a 4hr chart and you can see that price was in a 200 pip range for about 2 weeks. Now let's assume you decided to start trading with your methodology at position 1 and you entered long. My assumptions for this example are 1 lot traded, 100 pip SL, no set TP, once we get to +100 pips we move SL to BE and we enter (long/short) according to your "00" rule and follow the market.

If we take every long and short entry during the ranging period we end up with only position 12 long surviving. If we let position 12 run we would currently be sitting at about +500 pips. The other positions would have generated -900 pips so we have a net of -400 pips.

In your statement above you say to avoid the market to minimise drawdowns. The problem as I see it, is that most traders would not recognise a ranging market on a longer time frame chart until it was almost over. In this case when your at the hard right edge in "real time" you would have taken most of these trades and would have suffered the loses as noted. I don't think may traders would have identified this as a trading range until possibly position 5 or 6 occur. Even then alot of inexperienced traders still wouldn't see this as a trading range.

My question is do you have any specific things you look for to determine if a market is ranging? It's hard to avoid a situation if you don't recognise it in real time. Obviously the sooner you recognise the market is ranging the sooner you can adjust your entry strategy and avoid drawdowns and loses.

Good afternoon, ozziedave

Thank you for the detailed chart and the excellent question.

Ozziedave, I appreciate your input in this thread as you make the readers think. I certainly dont want to be someone just telling all what to do. I would prefer if everyone could think on their own and choose what is right and wrong. Please ask me anything in the future and no need to apologize.

Good detailed chart. Very well thought of.

1. It is very good for you to calculate realized loss and profit, but you focused your calculation on approximately 2 weeks of the market and not the following what happens. And that 2 weeks is also ranging. That is fine. Anyone can calculate one section of the market and it would look bad.

2. I can see that you dont take 2 positions at .00. I always take 2 positions, then 1, 12, 13 is alive all the way till end of that chart. Yes, i would lose -200 instead of -100 but it works out exponentially better. Also I take +100 pips here and there which helps at the end but most importantly it allows breathing space on the remaining position.

3. Unfortunately, market doesnt stop at one segment of ones focal interpretation. In other words, I would comfortably have 3 more positions at 20 july, 22 july, 23 july (and week before?). Yes there would be few more losses in between and I wont forget them.

4. I wouldnt normally diversify for a loss or to breakeven (for that chart) however I dont normally just use .00 entries either. .00 entry system was just to show all that entering anyhow, anywhere can also produce profits/growth from holding.

5. I calculate roughly +2400 pip profit near end of july (if i diversified there), and my loss would be around -2200. Not a good result from a possible drawdown of -1800 in one scenario. However this result is worst case scenario. While you look at that particular area, I wonder what happened to the positions week just before or the week just after? Just one position before that range or one week more of growth would have changed the result spectacularly.

Just to let all readers know, just doing .00 entries will face drawdowns cause its just another mechanical system. The only reason I introduced this entry system is to get all traders started somewhere. I have requested that traders need to improve on .00 entries.

Perhaps add,

Taking only few random entries, spacing out your entries. Purposefully but sensibly. This is what I talked about in my previous post.

However, I can confidently say even just .00 entry system, I can pull out any period on any pair of currency and produce a profit when I calculate 2 months of data. Because you cannot lose with growth of main trend on your side. But, I dont do that cause the drawdowns are too much. This will play havoc on your emotions.

What i say next is very important for ozzietrader and readers. This is where you make the understanding or break..

In the above chart by ozziedave, I would have only taken 4-5 positions out of 13 listed. I could have all 4-5 losses in which case I would just have to continue on until I build my positions but I have dramatically stopped/stunned/reduced my drawdown in that range. I would only having 2-3 attempts within that range. Also, I do not use -100 pip stop loss, I would know very soon after I enter if price has stalled and not going towards my intended direction then I would stop out at whatever Im at (much less than -100). Furthermore, when I know a pair of currency is in range, I place it in 3rd priority. This is why you need to trade multiple currencies and only trade the pair that are currently moving for you.

For that particular chart, I would most likely have 4-5 positions before that range on good uptrend, 1-2 attempts during that range, 3-4 positions after that range. This is possible because im not super smart but its possible because Im not in a rush to build my positions in one single area. Im glad this post actually flows nicely from my previous post.

The main reason that particular trader failed in ozziedave's chart is because he tried frantically to make positions when market is telling him to step away.

Can everyone see why successful traders try and stay away from the markets?

Someone asked me how I can manage up to 20 pairs of currency. I only trade what I see, when I see. It diverges my time/risk/reward on an even spread.

Sincerely,

Graeme

Thought I would finish off today by explaining what I perceive to be ranging. This is just example

1. A trader sees a good momentum movement up, its from 50% fib, higher than open price, main trend is uptrend, and there is alot of participation. He has done this a thousand times.

2. You enter at nearest s/r. Can be .00 or any of your choice as it does not matter. It moves relatively easily into profit. Seen that many times before.

3. Something has gone wrong. Price suddenly stalled. Now price is having difficulty making higher high on 5min chart. Price slowing down, new sellers jumping aboard, now its making lower lows and moving into tight bound.

4. I exit now, -16 pips.

For me, this pair of currency is now ranging for me. Period. Im not wasting another 1 minute looking at this pair of currency wondering when it would start picking up speed again. I simply flick over to next pair of currency.

Next pair of currency is hot.

Alot of movements. Monthly/weekly downtrend is aligned, price is higher than open but its losing pressure. I want to see final gasps of buyers before I execute. Surprise, buyers cant penetrate the support. Good, where is my piggyback? Yes! Look at all these sellers climbing aboard, they must have loved that oversold RSI >90 and macd and channel and bollinger band. Execute! (and im probably on the soon-to-be wick of the daily candle). Price approaching open price of the day, lets wait for it, can it penetrate pivot resistance? Yes, with ease, I enter just below again. Yes, its moved 20 pips profit easily, uh? What is happening? Price stalled. Oh bollocks. Not enough sellers? Sigh.. Retrace up? I dont care, move sl to be and move on.

Move on to next pair..

Holly Molly? I missed this action. Its already moved 100 pips in one hour. Dang nabbit! I spent 30minutes on the crap first pair of currency. Plenty of space between R1 and Pivot. Enter at .00 going up, good momentum but could be better. Can we breach mid channel? Traders love that, RSI rising sharply, so is macd, heh heh who am i going to piggyback on? Lets put a buy stop at next .50. Boom, im in. Scanning, scanning, hmm all looks good, ema just crossed over (traders love that), i love the slope too. God this momentum is fabulous im already +35 pips ahead. Move sl to be. I will wait until .00 since I entered at .50 and I will enter with hard stop loss 25 on both positions so I lose nothing. OK 2nd position in, uh.. what is this. Price stalled at resistance. Let it be? no, I will close 2nd out at -10 pips and let the other ride it out.

A failed entry for me, is a sign that market is ranging. It doesnt matter if market is really ranging or not. All i need to do is keeping moving around the pairs of currencies. I hope the above comical approach will be lighter to your understanding.

I had alot of fun typing out the above and its similar to what I do everyday in the markets. I trade what i see, when i see. You only know your progress when few weeks later there are still positions alive in your journal. There is no reason why this happens. Make it happen and it will happen.

Sincerely,

Graeme

IMO The underlying message in this and other similar posts is simply GOLD !!

If I may, I'd like to add some observations.

One of the main issue that most will face when trying to emulate this is that of drawdowns and low win-rates. One way to deal with this is to understand WHY a particular method (including the Entry condition) works and the only way (other than backtesting which may not be possible depending on the type of entry method) is plenty of screen time, which is something Graeme has mentioned in numerous posts.

Although I am new to Forex, the same concept applies to Equity trading and as a result, I shall also be undergoing Graeme's exercise of practicing entries in forex.

One other point I'd like to make is that if one is planning on trading with a long-term view with the intention of holding positions long-term to capture the high R:R's then one must keep that timeframe in mind when it comes to assessing the suitability of a strategy.

IMO there is little benefit in assessing the drawdown over a short period (such as a few weeks) if the intention is to hold for much longer.

To try to expand on this I'd like to tell a quick story. I was once at a seminar where a graph of a system's drawdown & Equity was displayed. According to the graph (which displayed about 8 weeks of results) the equity kept on falling. My instant reaction and others in the room was why are you showing me the results of a losing system !!??!! However, when the graph was resized to cover the last 5 years of trading data, the Equity curve actually was moving very steadily in the upward direction albeit with some dips along the way. The lesson for everyone was that if you have a system with a positive edge, then one should focus on the bigger picture.......

Just my 2cents,
Chorlton

I just deleted my post temporarilly as I have noticed a minor mistake in my chart. I will post it again in a few mins time once I have corrected it. Thanks.

Ok , here is the post again which I deleted earlier due to some mistakes where I recorded 2 losing trades as breakevens.

Following Ozziedave's chart examples, I have decided to present a chart of the EU showing trades for the last 2 months, from the beginning of June to end of July. The trades were taken using the "00" numbers Strategy as presented here by Graeme. 2 positions were opened for each trade, 1 position closed at +100 and the remaining position left with SL untouched. Please read up the strategy presented by Graeme a few posts back for a better understanding.

This chart example is just to show the potential of what is being presented here by Graeme.

There were 38 trades in total for the period that I backtested.

The Breakdown of the trades are as follows.:

Assuming we close all positions at the round number of 1.3000

7 Breakevens
(Trades nos 5,6,7,12,14,28,& 32)

20 losing trades @-200 = -4000 pips
(Trades nos 1,2,3,4,8,13,15,16,17,21,22,24,25,29,30,31,33,34,35,&38)

11winning positions as follows :

Trade 9 from 1.1900 = +1100
Trade 10 from 1.2000 = +1000
Trade 11 from 1.2100 = +900
Trade 18 from 1.2200 = +800
Trade 19 from 1.2300 = +700
Trade 20 from 1.2400 = +600
Trade 23 from 1.2500 = +500
Trade 26 from 1.2600 = +400
Trade 27 from 1.2700 = +300
Trade 36 from 1.2800 = +200
Trade 37 from 1.2900 = +100

Total winning pips = +6600

Therefore the result for the 2 month period (no spreads,etc taken into account) = +6600 - 4000 = +2600

The above is just an example from trading a very mechanical method with the "00" numbers. There are drawdowns which some won't be able to stomach but the end result shows the power of holding on to your winners and going for the long tails. I am sure with better entry methods, the result would be much more impressive with less drawdown.

Thanks again Graeme for your teachings here. Very much appreciated.

Pips from 1 postion closed at +100, did you count ??

Hi xman.

Yes the pips from closed positions at +100 were all accounted for. They are the ones that give you the risk free trades.

Bak

Oh, yes yes I see now, I was to quick, sorry

No need to apologise xman.

Bak

@ Bak

If you have a time, can you do it from 15.04.2010 till today, to see what is a profit on V shape off chart.

Thanks and regardes.

I am in the process of doing the last 2 months for GU. Perhaps somebody can take on that task while I am doing GU. It's a very mechanical method. The entries and exits are pre-defined, so it shouldn't take one too long to backtest.

Bak

Hi Bakuli,

Thanks for the breakdown of the EU chart. I was going to do something like that but you beat me to it.

Good evening, all

Thank you very much for the contribution and the backtesting.

Impressive analysis and kudos for everyones contribution.

If I add a honest review of the analysis,

1. Drawdown is too big. I would never allow such drawdowns and to let all new readers know that when I first introduced .00 entry system I informed all of such drawdowns. Hope everyone see the importance of holding onto your positions and better discretionary entry skills. Even after enduring almost -4000 pips in one scenario, market will grow your remaining positions and it gets bigger and faster the longer you hold.

2. +2600 net pips for 2 months is too large. This was achievable cause of the 'unnecessary' over risk we take by doing every .00 entry mechanically. If everyone can please reflect to my early post of today when I explain the importance of ignoring the market on given times you will definitely, reduce that drawdown by at least half + your perfect entry skills = your drawdowns will be minimal.

Edit: I just noticed this net profit is larger than my expectation as there was no diversification in the middle. My current statistic shows that each position is currently bringing in 37 net pips per week. Please consider this figure in your expectations.

3. I hope for the sake of all readers that they did not implement .00 entry system as it is.

Please allow me to show all the power of ignoring the market and how it saves your capital/stress/risk.

Anyone here please choose any 7 pairs of currency.

First reply will get the chance to choose

Sincerely,

Graeme

Thanks for your post Graeme. Can we have EU please?> Thanks alot.

Bak

Hi Graeme,

7 pairs I would trade, GBPUSD, EURUSD, AUDUSD, USDCAD. EURJPY, AUDJPY, EURAUD.

I misread and only gave EU, lol. Your choice of 7 looks great.

Good evening, Chorlton

Thank you for your question. Apologies that I missed it somehow.

1. I diversify when there was enough growth of the current group and the direction of the market is uncertain. I will diversify to replenish my trade capital and add realized profit to ensure a smooth growing equity. I will always hold largest legs of the group and move them to the group before on the higher level. No set %, diversification is the easier part of my trading.

2. For myself, open of daily candle is 9am sydney time (open of asian market). Im not sure if this differs from other traders in other timezome.

3. Mt4 is the first that I encountered. I havent tried anything else but I have everything I need in mt4. Thank you for the additional information on the other platform, I will keep in mind and one day try it out.

Thank you for great questions

Sincerely,

Graeme