Low Risk, High Reward Trading Experiment

Sorry to interrupt here, ITME, but I'm curious...the USD/CHF never quite reached 1.2127 (unless 4 feeds that I have are wrong...highest for all of them is less than 1.2115)...is this a sell limit order that would get triggered (in other words sell at a price target) or are we supposed to jump at these trades if/when they come out?

I'm just curious as to how these works. I've been looking back and sort of ignoring the prices, but have placed trades at the time we received these messages on the forums, to see how well, I personally could have done, and I've been liking what I'm seeing...but now, I'm looking at the price on this one and I haven't quite figured out if we were supposed to take this one yet or not.

Hi Pip Samurai

We are experimenting here a bit to see how to get the best and most practical results from the trading system, and from the idea of tradeable signals. So we have tried different approaches. We have issued trade signals at approximately the time of the price reaching a target, and provided a small range of entry. We have also issued instructions to buy at the market price, at an approximate value. We have also given instructions, such as the one you mention, to sell at a specific price if that specific price is reached, which may or may not happen,and which may not be for a number of hours. In the case when we just say "Sell USD/CHF at 1.2130" (for example) then we recommend employing a sell limit order to execute the trade according to the precise specifications.

If someone was actually trading these signals, then they should only interpret or modifiy them in a way that would be more favorable. ie - selling at a higher price than what we specify, or exiting at a more conservative target. Or increasing the stop size if the higher risk tolerance is acceptable. But we are striving to achieve optimum specifications for the highest possible return on the trading program within the limits of our analytical model. Our model seems to be very strong, but we are not yet entirely expert at applying it and learning all of its nuances.

Any and all feedback is much appreciated.

Thanks for your comment.

We had built up last week to go long on USD/CHF when it reached the bottom of its 10 week downtrend. We issued a premature buy signal on Thursday ( "TS#38 Buy USD/CHF at 1.2120 to 1.2135 Thursday 5/11/2005 10:15 ET") which we cancelled (recommended exit from trade at break even) and replaced with a buy trade signal at a lower price:

"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"

Unfortunately, we were wrong again, as USD/CHF carried on down further as we later predicted it would:

"USD/CHF is going down before it goes up ....The USD/CHF is going to go down from the current price of 1.2125 to about 1.2050 to 1.2055 before heading strongly up....The signal to buy USD/CHF earlier was generated in error. Our system definitely indicates a further downward travel before the downward trend is finished....According to our analysis, the next large market moves will be a fall of the GBP/USD after it rises to about 1.8900, and a rise of USD/CHF after it falls to about 1.2050..."

It found its bottom it seems on Sunday at about 1.1920 when we were taking a break, and rose strongly (almost 200 pips so far) as expected. But we missed that trading opportunity. Now we are looking for the top of the upwards swing to enter a short position at about 1.2130 to 1.2150

Hi Itme,

Your trading signal is quite impressive , but it has one problem : it got stop out
quite often . Can i trade w/o stop? . Lately i increased your stop loss level and the result was soo good . Thanks

I would agree with that statement. I have also been stopped out of several good trades. While it is desirble to keep stops as close as possible to improve the risk to reward ratio, if one is stopped out of good trades this defeats the purpose because when one gets into the trade again it is with the established loss of the prior stopping out to overcome. Thus, in terms of ultimate bottom line, a slightly more generous stop loss would actually result in greater gains, as long as winning trades exceed losing trades.

Other than that, I would say that your signals are very good. Several of us are appreciting them. Thank you.

Hi FX Newbie,

Thank you for your question.

You can improve your win / loss ratio by increasing your stop size. But you may reduce the performance of the trading program.

As you noted, with the trading program so far we have hit our stops quite often. In the beginning, we hit them exactly or by a few pips about five or six times, and then we watched the market proceed all the way to our target. Close calls, but losses nonetheless.

However, we are satisfied with being stopped out quite often, in order to realise the very high returns on capital that result from low risk, high return trading. When trades are entered with a high reward : risk ratio, then the losses are much smaller than the rewards. In a sequence of trades the capital can grow very quickly if the number of losses is not too high.

A successful investor in the Forex market, in our opinion, must:

1) trade strictly according to a system

2) set a Risk Factor (maximum percentage of trading capital willing to be lost in each trade) based on the performance of the trading system,

3) employ a stop loss that is calculated before the trade is entered, in order to adhere to the Risk Factor.

In this experiment, we aspire to enter at very precise pivot points, and to place the stops as close as possible without them being hit too often. With practise, we hope to reduce the number of losses.

If you examine our preliminary performance review above, you will note that in spike of the number of losses, the performance of the trading program has been very good so far. We hope to maintain, and even improve if possible on this performance through practise and research.

Hi Itme,

Do i have to use stop loss to trade your signal?
I read stop loss thread in this forum which some professional trader like Budmudda said his didn't use stop at all. What do you think about that?

As I see it, no stop loss trading might work to a marginal extent on the two following conditions:

1) that you only take a very small position in the market relative to the size of your account, so that you can tolerate large draw downs in terms of pips without being margined out, and

2) you are never, ever, wrong about predicting the general direction of the trend.

The disadvantage of 1) is that you cannot achieve a high rate of return on your trading program if you only take a very small position in the market.

The disadvantage of 2) is that if you are EVER, EVER totally and drastically wrong in predicting the movement of the market, and if it takes off 500, 1000, or 1500 pips in the wrong direction, if you hold on to the trade on the expectation that sooner or later it will come around, then you will be margined out and loose all your capital.

So, overall, I am of the opinion that people who don't employ stop losses are not good at making accurate predictions in the market at least some of the time, and who are relying instead on some kind of moving average, bollinger band or other such concept to ensure (or, in my opinion, hope) that the market will go the way they expect it to. They may be right most of the time, but sometimes the market takes off in a very strong, long trend. In this case the no stop loss trader will be wiped out.

Monday 5/15/2006 17:45 ET

TS#49

Sell CAD/JPY at 99.70 or higher

Stop is 100.03

Target is 98.25

Reward is min. 135 pips

Risk is max. 43 pips

Reward : Risk Ratio is 3.1 to 1

For testing purposes only.

Monday 5/15/2006 18:45 ET

TS#50

Sell GBP/JPY at Market Price (approx. 207.90 - 208.00)

Stop is 208.16

Target is 206.80

Reward is min. 101 pips

Risk is max. 35 pips

Reward : Risk Ratio is min. 2.9 to 1

For testing purposes only.

Tuesday 5/16/2006 9:15 ET

TS#51

Sell USD/CHF at 1.2090 or higher

Target #1 is 1.1955

Target #2 is 1.1900

Target #3 is 1.1810

Stop is 1.2105

Reward min. 130 pips

Risk max. 20 pipsReward : Risk ratio is min. 6.5 to 1

For testing purposes only.

Note: our Trade Signal #47 to sell USD/CHF at 1.2127 was stopped out by 5 pips at 1.2166. Trade Signal #51 is a re-entry opportunity to participate in this downwards USD/CHF trend.

Hi Itme,

Your trade #47 usd/chf got stop out . It is very fustraded b/c the trade went to your target direction . Can you increase your stop few more pips in your strategy?

Yes, Newbie, there have been many close misses in our trading program so far. We will be doing a full review of our strategy to address this point. We can improve the signal quality in two ways. We can improve the quality of the original predictions. And we can refine the signal as we approach the entry price by adjusting the entry, stop and target to the best values based on the latest information.

We did not monitor the market last night, or we could have refined the trading signal. The closer the market gets to the reversal point, the more information is available to us to improve the accuracy of the signals.

Thanks for your comment.

I took a look at this trade and it looked like it entered last night at around 7pm EST...It touched a low of about 1.2070 for total profit of about 57 pips before going up to touch the stop around 1.2165 and then moving back down.

I'm wondering, if this system is supposed to use a trailing stop at some point, or if we're supposed to just wait until it hits the target or the stop.

If a trailing stop would have captured at least 1/2 of the profit before being stopped out. That's a pretty good profit considering the number of trades the system is generating.

Tuesday 5/16/2006 10:45 ET

TS#52

Sell AUD/USD at market price - approx. .7675 or higher

Target is .7500

Stop is 1.7691

Reward is min. 170 pips

Risk is max. 20 pips

Reward : Risk ratio is min. 8.5 to 1

For testing purposes only.

Either mrmikal is right, if we use this system with trailing stops than the profit potential can be very high. Most of itme's trade are very longterm with very near stoploss (which works out very nice though), but often the market moves in range AFTER giving some realy nice profits and the stops are triggered.


One more thing I have noticed is that a large number his trades bounce back exactly from his stoploss point. so if one could monitor the movements, than he put in some system like the stoploss only gets triggered once a 15 minute candle has closed beyond that point.

This is a pretty good point, Itme...

Is it possible or advisable that if we get stopped out (in profit) and the market reverses to the stop point and comes back to the original entry point, should we take another position assuming we don't get a contradictory signal before hand?

In otherwords, if we don't have an open position and the signal comes back to the entry, should we re-enter the trade if you haven't told us otherwise? Do you know if your underlying indicators support this theory?

I suspect it should consindering if your indicators still point to the original target, then a move back to the original entry would be the same as if we followed it from the first entry...right?

Thanks for your comment, Pip Samurai. If someone was trading this way with real money, I expect that they would be frustrated. However, the 15,000 to 1 return on capital they would have enjoyed with a 25% risk factor in the first 39 trade signals would have made most people jubilant.

There are many ways to potentially enhance the performance of the signals we are generating. From our point of view, our goal is to generate low risk, high return signals that perform as they are originally calculated without any monitoring or intervention of any kind. Our method is to use pattern analysis to try to correctly predict the reversal points of the trends. We do not employ or incorporate any information about the quality of the movements between the entry point and the target to assess the degree of progress towards the endpoint. If someone had a means to reliably detect the nearing of the endpoint of a trend or a point of significant reversal on the path towards the target, or a reversal of direction, then they could superimpose this analysis on what we are doing and potentially enhance the performance.

We have not quite perfected this process, as indicated by some trade signals being generated that don't comply with our system criteria (human errors) and by signals which are almost correct, but hit the stop before proceeding to the target (system errors).

We will continue to practise, review, modifiy and enhance if possible the quality of the signals.

A trailing stop could be added to this system, however I expect that it would degrade the performance by preventing the full target being reached.

If there were two additions to this system that a user could add, that I would definitely recommend, it would be these:

1) Before entering a trade, evaluate the local support and resistance levels, and localised price pattern. Employ any means at your disposal to optimise the entry price. Be very discriminating and don't enter a trade if you believe that there is a significant chance that the price will move in the wrong direction after you enter the trade. Enter only at an optimum price level. This minimizes the probability of being stopped out, minimizes the risk, and maximizes the return on capital.

2) If, during the course of the trade, a major price channel is formed, and then a trendline break occurs in the opposite direction of the trade, then exit the trade. In effect, move up your stop to a point about 5 - 8 pips outside of any obvious channel trendline.

Good point, Mr Mikal

Our entry points and stops are based on our calculations of expected reversal points. The entry point is slightly inside the range we expect the price to move to, and the stop is slightly outside. In general, the market tends to either respect trendlines or pattern boundaries or expand a little as it oscillates, breaking trendlines a little as it overshoots its target. This is the factor that we will need to understand better. So sometimes we are correct, and sometimes, we underestimate the price movement due to the overshoot factor. We hope to improve the signal quality after examining this in more detail. From the point of view of the people trying to employ these signals now, it may be prudent to factor this error in by adding some extra price movement into our entry prices and stops, to compensate for the "overshoot factor" which we have not incorporated into our analytical model yet.

Regarding entries and re-entries, the boundaries of movement are relatively fixed, and the entry price is often met one, two, three and even four times. It is generally a very strong support or resistance line. If significant time elapses between the first and subsequent approaches to the reversal zone, then the reversal price may have migrated ten or twenty pips due to sloping channel lines. One may need to increase the stop slightly or add (or subtract) to the entry price a little to compensate for this. But in principle, if the price returns to the entry price, and the trader is not yet in the market, then an entry or re-entry would be appropriate.

______________________

Mr Mikal: "Is it possible or advisable that if we get stopped out (in profit) and the market reverses to the stop point and comes back to the original entry point, should we take another position assuming we don't get a contradictory signal before hand?

In otherwords, if we don't have an open position and the signal comes back to the entry, should we re-enter the trade if you haven't told us otherwise? Do you know if your underlying indicators support this theory?

I suspect it should considering if your indicators still point to the original target, then a move back to the original entry would be the same as if we followed it from the first entry...right?"

There is a second opportunity to enter the trade shorting AUD/USD now at a price of approximately .7680 - .76865

Original signal:


TS#52 - Sell AUD/USD at market price - approx. .7675 or higher Tuesday 5/16/2006 10:45 ET
TS#52
Sell AUD/USD at market price - approx. .7675 or higher
Target is .7500
Stop is 1.7691
Reward is min. 170 pips
Risk is max. 20 pips
Reward : Risk ratio is min. 8.5 to 1
For testing purposes only.
[img]images/buttons/quote.gif[/img]