Low Risk, High Reward Trading Experiment

Friday 5/26/2006 9:00 ET

We recommended tightening up the target on USD/CAD, and it was a good thing because it came up and hit our revised target before turning around.

We quote ourselves above: Revise Target for TS#79 - Buy USD/CAD at market price - 1.1065 - 1.1075 or lower
Thursday 5/25/2006 23:00 ET
Amend target to 1.1100.
Upon further analysis, we recommend exiting this trade at the abbreviated target of 1.1100 instead of 1.1250. The likelihood of the original target being met is not great.

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The short AUD/USD (TS#80) is progressing well, and for those not in it, a re-entry opportunity is happening about now. The price fell earlier to .7574 for a profit of about 25 pips, then rose again to the entry price.

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The short EUR/JPY (TS#73) trade is progressing well, and for those not already in it, a re-entry opportunity is occuring about now as well on this trade. The price fell to 142.78 for a profit of about 113 pips before rising to around 143.50, where it is now. But it should head southwards from here towards its much lower target of 140.65 as EUR/USD declines precipitously while USD/JPY maintains a fairly constant value.

Great call on the EURUSD and GBPUSD so far! Your system is good so far it seems -- although experimental.

Hi,

Is this a good opportunity to reverse, and go Long GBP/USD now since we're hitting lows?

Thanks, great call! I was ready to end trading for the week when I read your thread. I took a look at GBP and sold. A good end to the week.

Yes, you're perfectly correct. But we're not trying to call all the minor waves within the major trends here.

If you're still short, then you should probably get out and re-enter higher up. Use fibonaccis, etc.

Yes, we did reverse our position at the bottom of Wave 3 of this trend, and are now going long on GBP/USD. But it is too dicey to try to issue signals on all these fast moves. So we recommend to anyone who might one day trade these signals (once we've perfected our system) to simply hold through the Wave 4 retracement and then carry on down to the bottom of the fifth wave. In this case, this should be a long way down.

But these retracements are usually about 50% of the wave one is in, and sometimes even more, and they go ABC - up, down, up, or down, up, down, so there are hundreds of extra bonus pips to be earned within the consolidation phase of the trend. But that is excessive - you don't want to get rich overnight, do you?

I am telling you guys, itme is a celebrity in here!

We were pre-occupied with other things, or we would have recommended a short of USD/CAD at 1.1100 or 1.1110 earlier. However, the market is merciful, so there could be another opportunity to re-enter this trade situation at between 1.1100 and 1.1110. So one may place an entry order and create a possibility for oneself.

Friday 5/26/2006 12:00 ET

TS#81

Sell USD/CAD at 1.1100 - 1.1120

Stop is 1.1145

Target is 1.0950

Risk is max. 50 pips

Reward is min. 145 pips

Risk : Reward ratio is min. 2.9 : 1

Trade at your own risk. This is an experimental trading system. Its operators make frequent errors, though they are improving steadily.

Friday 5/26/2006 at 13:00 ET

The scalpers and momentum traders can go long now, with EUR/USD at about 1.2710 and GBP/USD at about 1.8550, for a retracement. But don't be too greedy, unless you are sure you know how much the currency will retrace.

Thank you so much for this thread --

It caught my attention this week -- and I will be following closely next week.

I did catch 50 pips in demo today on GBP -- but now it needs to be live !!

Again ---
Thanks

Elasticity and overshoot as factors in market prediction

We are making many discoveries in the process of attempting to make precise market predictions based on a linear model.

There is no doubt that in many ways the market moves in precise, predictable ways within definable price parameters.

However, it is obvious that the economic data releases and various changing world events and underlying market sentiments shape the market as well. This manifests in several ways. Two are overshoot and elasticity. Spikes and failures to fully fulfil model criteria (exceptions) are two others.

Whatever the linear model predicts, tends to be a little conservative the majority of the time due to overshoot, probably caused by the inertia of a trend that carries the price movement past a target quite often. This probably accounts for the frequency with which we either narrowly miss our stop, hit our stop exactly, or are stopped out by only 5 or 10 pips on what would otherwise have been a successful market prediction.

We place our stops slightly past the calculated boundary or limit of price movement, and the market often meets this point. We think that overshoot caused by inertia inherent in a price movement is the reason for this. We should therefore try to incorporate this into our model in some way, after further study of when it occurs, and how much it influences the market movements.


Some of the observers of our experiment have said they added 10 or 20 pips to our stops and had good results. They noted how ofter the market came within a short distance of our stop and then reversed direction.


Overshoot is not always evident. There are also many times when the market moves to precise price targets. The difficulty is to incorporate an occasional factor into the predictions without paying too high a price in terms of accuracy, which equates to a reduction in the rate of return of the trade.


It is possible that the so-called "overshoot factor" is caused simply by an error in our model, and that with more research we can improve our model and thus make more accurate predictions. We have made some observations this week that support this hypothesis.


At the present time we are mostly aware of certain general principles - exceptions, the elasticity of the model which allows it to conform to fundamental laws while at the same time giving expression to market forces and changing events, the tendency of the market to expand and contract in its movements (cycles in volatility), and the apparent "overshoot factor".

just stumbled onto your thread this week. i have monitored some of your recommendations over the past two days and have kicked myself for not actually trading them! the accuracy of your entry and exit levels is quite remarkable.

i was wondering if you have any data results on your "experiment" regarding success/failure rate, and overall performance of your trades over a period of time. as i said, i can see the results in the past 24 hours, but wondered what your long-term results have been.

thanks for the thread. it is the most exciting one i have found to date. you guys really have something here.

enjoy your weekend!
janine

Hi Janine,

Did you see our previous performance review, covering the first 39 trade signals?

Here is a link to it:

http://www.forexfactory.com/forexfor...ance#post57091

We are now up to over 80 trade signals in three weeks, and are working on the statistics. It takes quite a bit of time, because we are analysing each trade signal carefully to see what we can learn from it.

We hope to have the results in a few days.

The first 39 signals had quite a few failures, but quite a few of the losses were very, very close to being wins. We either hit the stop, or passed it by a few pips. The target was then hit.

For a period of time after the first 39 posts, there was a high percentage of losses. Once again, many of the trade concepts were valid, but the entry prices or stops were not quite right. The performance was not as bad as it looks, however, for often we issued several trade signals on various currency pairs all based on a single erroneous assumption about the status of the trend, so several losses were all essentially one failure of analysis. In practise, we would not take three or four different trades based on one analysis, but rather choose the trade set-up with the best prospects and concentrate on that one trade.

Often the stop was a little too tight, or the entry price too close to the centre of gravity of the oscillation. The basic concept was correct, but the devil was in the details.

Lately we have tried to improve the win / loss ratio by being a little more selective, and choosing a more conservative entry price, with a slightly larger stop. The last week, as you noticed, we have had a number of winning trade signals. We also narrowly missed a couple of excellent trades because the market price fell slightly short of our entry prices. That is the problem with putting in excessively conservative entry prices - we miss out entirely on the trade!

We have also learnt that each trade requires carefull monitoring. As time transpires and the market price patterns unfold, the stop sometimes needs to be adjusted, or the target adjusted, or the trade exited entirely. This type of monitoring can greatly enhance the performance of the trading system.

We have learnt quite a bit from our mistakes and successes, and feel much more confident in our ability to fashion winning trade signals going into the future.

The concept is that we are trying to develop a methodology and competency to make successful predictions of relatively large trends with great accuracy. The reason is that the return on capital of successful trades of this kind is very high. On the other hand, the percentage reduction of capital caused by losses in a "low risk, high reward" trading system is relatively small.

Also, we have developed an analytical model that is well suited to this type of trading style.

If the reward : risk ratio is 5 : 1, for instance, the percentage effect on capital of a loss is only one fifth the effect of a win. Under these conditions, the percentage of wins does not have to be particularly high to produce a very high performance trading system. If the reward : risk ratio can be increased to 20 :1, as it sometimes can, then the performance of the trading system increases dramatically. We may have been somewhat lucky, but the performance of the first 39 signals was excellent - based on a risk factor of 25% the capital would have increased by 15,000 times!

The performance of a trading system employing compounding is exponentially related to three factors:

1) reward : risk ratio

2) win : loss ratio

3) risk factor

Many people would be challenged psychologically by a trading program of the kind we are developing. It would be characterised by frequent losses, and occasional big wins. It is a good trading system for the very logical person, however, or for the risk - taking type of personality who enjoys risk and excitement. It also suits a very common type of individual - the gambling type of personality who enjoys the element of high risk juxtaposed with the possibility of high gain.

We like it because it is forcing us to push the limits of our market analytical model to its limits, causing us to learn alot about the mathematical structure of the market.

If you have time, we suggest that you read this entire thread, because there are important explanations peppered throughout the trade signals.

Thanks for your comment! We hope you have an enjoyable weekend too.

Looking forward to see your calls for next week The EURJPY call seems to be stuck in limbo at the moment. Same with the AUDUSD call.

Monday 5/29/2006 1:15 ET

TS#82

Sell EUR/CAD at 1.4125 or higher

Stop is 1.4146

Target #1 is 1.4000

Target #2 is 1.3940

Risk is max. 31 pips

Reward is min. 115 pips, max. 175 pips

Risk : Reward ratio is min. 3.7 : 1 (Target #1)
and 5.6 :1 (Target #2)

Trade at your own risk. This is an experimental trading system. Its operators make frequent errors, though they are improving steadily.

Monday 5/29/2006 6:15 ET

TS #78D Sell GBP/USD - Re-entry opportunity

For those not already in this trade, or those that have already cashed out, a new re-entry opportunity has occured.

Sell GBP/USD at 1.8650 to 1.8660 (or higher)

Stop is 1.8671

Target is 1.8445

Risk is max. 26 pips

Rewards is min. 200 pips

Reward : Risk ratio is min. 7.7 to 1

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Original Trade Signal:

TS#78 Sell GBP/USD at market price - approx. 1.8825-35

Wednesday 5/24/2006 5:30 ET
We are sorry that the forum was down so that we couldn't post a sell signal at the top of the channel, at 1.8850 - 60 (we entered at 1.8851) but there is a bit of a retracement here, so one could enter a sell GBP/USD at 1.8825 - 1.8835.
Stop is 1.8861 Target #1 is 1.8730 Target #2 is 1.8575
Reward is min. 90 pips (270 pips for Target #2)
Risk is max. 41 pips
Reward : Risk ratio is min 2.2 to 1 (Target #1) and 6.6 to 1 (Target #2)
For testing purposes only. Trade at your own risk. Don't risk too much of your capital in any single trade. (5% is a maximum according to most advisers)

For those not already in this trade, there may be a good re-entry opportunity at 1.4150, with a close stop at 1.4169

For those already shorting EUR/CAD, stop should be adjusted to 1.4169 from the previous level of 1.4146

Original Trade Signal:

Monday 5/29/2006 1:15 ET
TS#82 Sell EUR/CAD at 1.4125 or higher
Stop is 1.4146
Target #1 is 1.4000
Target #2 is 1.3940
Risk is max. 31 pips
Reward is min. 115 pips, max. 175 pips
Risk : Reward ratio is min. 3.7 : 1 (Target #1)
and 5.6 :1 (Target #2)
Trade at your own risk. This is an experimental trading system. Its operators make frequent errors, though they are improving steadily.

Tuesday 5/30/2006 2:15 ET

TS #78E Re-entry Opportunity - Sell USD/GBP at market value - approx. 1.8735 to 1.8750

Stop is 1.8783

Target is 1.8450

Original trade signal:

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TS #78D Re-entry Opportunity - Sell GBP/USD at 1.8650 to 1.8660 (or higher)
Monday 5/29/2006 6:15 ET
TS #78D Sell GBP/USD - Re-entry opportunity
For those not already in this trade, or those that have already cashed out, a new re-entry opportunity has occured.
Sell GBP/USD at 1.8650 to 1.8660 (or higher)
Stop is 1.8671
Target is 1.8445
Risk is max. 26 pips
Rewards is min. 200 pips
Reward : Risk ratio is min. 7.7 to 1

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Original Trade Signal:
TS#78 Sell GBP/USD at market price - approx. 1.8825-35

Wednesday 5/24/2006 5:30 ET
We are sorry that the forum was down so that we couldn't post a sell signal at the top of the channel, at 1.8850 - 60 (we entered at 1.8851) but there is a bit of a retracement here, so one could enter a sell GBP/USD at 1.8825 - 1.8835.
Stop is 1.8861 Target #1 is 1.8730 Target #2 is 1.8575
Reward is min. 90 pips (270 pips for Target #2)
Risk is max. 41 pips
Reward : Risk ratio is min 2.2 to 1 (Target #1) and 6.6 to 1 (Target #2)
For testing purposes only. Trade at your own risk. Don't risk too much of your capital in any single trade. (5% is a maximum according to most advisers)

Tuesday 5/30/2006 2:15 ET

TS#83

Sell EUR/USD at market price - approx. 1.2835 to 1.2850 (or higher)

Stop is 1.2884

Target is 1.2625 or lower

Risk is max. 52 pips

Reward is min. 217 pips

Reward : Ratio is min. 4.2 to 1

For research only. Exercise discretion when trading real money.

Tuesday 5/30/2006 6:45 ET

Re-entry opportunity on short EUR/USD trade

TS#83A Sell EUR/USD at 1.2880 to 1.2885

Stop is 1.2893

Risk is only 11 to 16 pips

Original trade signal:

Tuesday 5/30/2006 2:15 ET
TS#83 Sell EUR/USD at market price - approx. 1.2835 to 1.2850 (or higher)
Stop is 1.2884
Target is 1.2625 or lower
Risk is max. 52 pips
Reward is min. 217 pips
Reward : Ratio is min. 4.2 to 1
For research only. Exercise discretion when trading real money.

Tuesday 5/30/2006 7:00 ET

TS #78F- Re-entry Opportunity - Sell GBP/USD at 1.8800 to 1.8815 (or higher)

Stop is 1.8831

Target is 1.8500

Risk is max. 36 pips

Original trade signal:

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TS #78D Re-entry Opportunity - Sell GBP/USD at 1.8650 to 1.8660 (or higher)
Monday 5/29/2006 6:15 ET
TS #78D Sell GBP/USD - Re-entry opportunity
For those not already in this trade, or those that have already cashed out, a new re-entry opportunity has occured.
Sell GBP/USD at 1.8650 to 1.8660 (or higher)
Stop is 1.8671
Target is 1.8445
Risk is max. 26 pips
Rewards is min. 200 pips
Reward : Risk ratio is min. 7.7 to 1