Low Risk, High Reward Trading Experiment

note: the afternoon GBP/USD trade performed well. The price went straight up to 1.8727 before reversing. The reward was 80 pips (minus about 5 pips spread, equals 75 pips profit) , and the risk only 12 pips, including the spread. That makes a reward : risk ratio of 6.25 to 1. With a risk factor of 10%, in a 200:1 mini-account, the return on total capital would be 62% through this trade. Do that once a day, and you will be rich quite soon!

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Hey, if you want to have fun, then try buying GBP/USD now at 1.8620, and hold till 1.8700

Jump out if it goes below1.8613

Wednesday 5/10/2006 7:15 ET

TS #31

Sell USD/CHF at 1.2190 to 1.2200

Stop at 1.2203

Target is 1.2131

Reward is min. 54 pips

Risk is max. 18 pips

Reward : Risk ratio is 3 to 1

Note: On a 200:1 mini account with a 10% risk factor, return on investment if the trade is successful, is 30%.

For testing purposes only. Trade at your own risk.

TS #31 If opportunity presents, Re-enter Sell USD/CHF at 1.2205 Wednesday 5/10/2006 10:00 ET

TS #31 Revised

Sell USD/CHF at 1.2205 to 1.2216

Stop at 1.2224

Target is 1.2131

Reward is min. 68 pips

Risk is max. 24 pips

Reward : Risk ratio is min. 2.8 to 1

Note: On a 200:1 mini account with a 10% risk factor, return on investment if the trade is successful, is 28%.

For testing purposes only. Trade at your own risk.

Wednesday 5/10/2006 11:45

TS#32 Sell USD/JPY at 110.67

Target is 109.50

Stop is 110.78

Reward is 113 pips

Risk is 15 pips

Reward : Risk ratio is 7.5 to 1

For testing purposes only.

Wednesday 5/10/2006 12:30 ET

TS#33

Buy EUR/USD at 1.2780 to 1.2785

Target 1.2838

Stop 1.2769

Reward 58 pips

Risk 14 pips

Reward : Risk ratio is 4 to 1

For testing only.

Wednesday May 19 15:30 ET

Revision to TS#30 selling GBP/USD as copied below:

Move up Stop Loss to 1.8648 to protect profits

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TS #30 Buy GBP/USD at 1.8600 Wednesday 5/10/2006 6:45 ET
Trade Signal #30
Buy GBP/USD at 1.8600 to 1.8610
Stop at 1.8580
Target is 1.8738
Reward is 123 pips min.
Risk is max. 35 pips
Reward : Risk ratio is 3.5 to 1

I dont think this revesion is even needed, its pretty obvious that during news like FOMC and others, prices spike in both directions. What is more important is the trend continues in your direction, the direction which you predicted before the news even after the event. And in your case it definately is.

Wednesday 5/10/2005 17:00

TS#34 Buy GBP/USD at 1.8630 to 1.8635

Target 1.8738

Stop is 1.8625

Reward is min 98 pips

Risk is max. 15 pips

Reward : Risk ratio is 6.5 to 1

Hi Purple,

Yes, we note the spikes in both directions sometimes also. This makes it very difficult to trade with tight stops. We got stopped out on our EUR/USD trade, but survived all the others. It was a risky time for us to trade with our system.

But that wasn't why we revised the stop after the spikes. It was because all day it seemed that the forwards steps were followed by 100% retracements, and our system was not giving us the total positive signal that we would reach our target. So to be safe we locked in the profit. Now, after evaluating the situation, we stepped back into the market to attempt to continue to follow the trend. We added to our profit this way, by a small amount.

Wednesday May 10 17:00 ET

Revision TS#29 - Sell AUD/USD at 1.7800
Stop is 1.7822
Target is 1.7500

To be safe, we decided to raise our sell price for AUD/USD to 1.7800 from the original price 25 pips lower.

We are conflicted about this situation. One of our studies suggests that there is a powerful chance of reversal at 1.7775. Another method indicates 1.8700. Usually they agree. So we will do an experiment and find out which wins in this case. If it reverses at 1.7775, we can usually tell at the time that it is reversing, and then we will revise the signal back to the original specification.

Live and learn!

_____________________

Original trade signal:

Tuesday 5/9/2006 12:00 ET
TS#29 Sell AUD/USD at .7775
Stop is .7805
Target is .7500
Reward is 270 pips
Risk is 34 pips (incl spread)
Reward : Risk ratio is 8 to 1
This is for testing purposes only. Trade at your own risk.

Wednesday 5/10/2006 21:15 ET

TS#35

Sell USD/JPY at 111.40-111.50

Stop 111.61

Target 110.00

Reward min. 125 pips

Risk max. 26 pips
Reward : Risk ratio is 4.8 to 1

For testing only of this signal service.

Wednesday 5/10/2006 21:45 ET

TS # 36

Sell USD/CHF at 122.40 to 122.55

Target is 1.2100

Stop is 122.78

Reward is min. 135 pips

Risk is max. 43 pips

Reward : Risk ratio is 3 to 1

For testing only.

1st Preliminary Trading System Numerical Performance Review

The purpose of this study is to determine whether a special analytical model is capable of generating low risk, high return signals that are tradeable in the real world.

For this purpose, the analyst team worked long hours to identify and verify qualifying trade opportunities. They generated as many trade signals as they could in the time alloted in order to generate a reasonably sized sample of trades to evaluate.

The trading signals were generated over a seven day period, on a variety of currency pairs.

The team then created an Excel spreadsheet to help analyse the performance of these signals.

So far there have been 39 signals generated. Two did not meet their entry prices. No trades were entered. 15 were losses. 14 were winners. 8 are still in process. Most of those in process show significant gains.

Many of the winning trades were perfect trades. Several others were near perfect trades, reaching their targets, except that the stops were hit either exactly, or by one to six pips only. This indicates that the system can probably be substantially improved by slightly improving the accuracy of the entry price or by increasing the stop size slightly.

Several trades were errors; in retrospect they did not qualify according to the trading system. The team failed to properly apply the system criteria to verify qualifying trades. The team is new to the system and is currently getting their bearings and refining their skills.

The main feature of the trading signals is that the stops (risks) are comparatively small compared to the size of the rewards, which produces a relatively large reward : risk ratio of between 4:1 and 20:1.

That means that the gains are much larger than the losses. So even if half the trades were losses, the overall progress of the trading program was very favorable.

In the sample of trades tested, for instance, the return on capital for the 39 trades, assuming closing out the open trades, and assuming a 200:1 mini account, with constant risk factor, and compounding of capital, as a function of risk factor (percentage of trading capital one is willing to lose in a losing trade) is as follows.

(We assume that each of the trades had been taken in sequence, which would not be realistic since some were concurrent).

Performance of Trading Program for First 39 Signals

Risk factor 3% Return on Capital 700% ( capital would have multiplied by 8 times)

Risk factor 5% Return on Capital 2,400% ( capital would have multiplied by 25 times)

Risk factor 10% Return on Capital 25,600% ( capital would have multiplied by 257 times)

Risk factor 15% Return on Capital 147,200% ( capital would have multiplied by 1,473 times)

Risk factor 20% Return on Capital 555,600% ( capital would have multiplied by 5,557 times)

Risk factor 25% Return on Capital 1,505,300% ( capital would have multiplied by 15,054 times)

Given the relatively high reward : risk ratios and quite reasonable win / loss ratio of this first trial, it appears that a 15 - 25% risk factor is the optimum level of risk. The trading capital is not drawn down excessively by the margins required for most trades at 25% risk factor, but when the stops are extremely small the risk factor must be reduced to retain capital in the account to cover the stop capital at risk.

Preliminary Conclusion

Overall, this trading style, though requiring extreme accuracy and rigorous, skilled analysis by the signal generating team, shows good potential as a high performance signal service for traders who are available to enter a trade either by internet or by phone within 15 minutes to 1 hour of receiving a trading signal.

Thursday 5/11/2006 9:30 ET

TS#37

Sell GBP/JPY at 207.86 to 208.00

Stop is 208.21

Target is 204.40

Reward is min. 337 pips

Risk is max. 44 pips

Reward : Risk ratio is min. 7.7 to 1

For testing purposes only.

Thursday 5/11/2005 10:15 ET

TS#38

Buy USD/CHF at 1.2120 to 1.2135

Stop is 1.2107

Target is 1.2300

Reward is min. 165 pips

Risk is max. 33 pips

Reward : Risk ratio is min. 5 to 1

For testing purposes only.

TS#38 Buy USD/CHF at 1.2120 to 1.2135 Thursday 5/11/2005 10:15 ET

Due to error of analysis, we advise exit trade at current price of 1.2130- 1.2135 for small gain or loss, and re-enter at 1.2100 - 1.2105

Or change stop to 1.2090

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Original trade signal:

TS#38
Buy USD/CHF at 1.2120 to 1.2135
Stop is 1.2107
Target is 1.2300
Reward is min. 165 pips
Risk is max. 33 pips
Reward : Risk ratio is min. 5 to 1
For testing purposes only.

Thursday 5/11/2006 12:00 ET

TS#39

Sell GBP/USD at market price of 1.8850 - 1.8860

Stop is 1.8881

Immediate target is 1.8565

Ultimate Target could be as much as 1.6880

Initial reward is min. 285 pips

Ultimate reward is as much as 1970 pips

Risk is max. 36 pips

Reward : Risk ratio is min. 7.9 to 1

For testing purposes only.

Unlimited Reward sounds Cool!

Looks like a reversal is predicted by your system.

Thursday 5/11/2006 12:30 ET

TS#40

Sell EUR/CAD at market price - approx. 1.4115 - 1.4130

Stop is 1.4135

Target is 1.3650

Duration is approx. one week

Reward is min. 455 pips

Risk is max. 30 pips (incl spread of 10 pips)

Reward : Risk Ratio is min. 15.1 to 1

The original stop of 1.3135 was just hit or almost hit. Raise stop to 1.3147 and re-enter trade if needed.

This is a very promising trade. Enter at current price of 1.4135 to 1.4140