TradeDream's Trader Challenges

Hello Traders! Today I'm going ask that you take part in a challenge that I'm setting for both you and myself.

CHALLENGE 1 - PROVING AN EDGE

What's the challenge?

I want you to think of a system that you've traded in the past, or perhaps even the system that you're trading now, where the reward:risk ratio you're aiming for is 1:2 or higher. All I want you to do is to trade that system as you've always done BUT only take profits at 1:1. All that means is that your take profit target will be the exact same pip or tick amount as your predefined stop loss.

Why?

Because I want you to find an edge. Think about it, an edge is defined as the odds of something happening more often than not,your pattern can work only 51% of the time and it's still a predictive edge! Where traders can run into trouble defining their edge is that we look for every trade to be a home run, we hold and hold onto a trade only to see it fall back to our stops and we end up with a losing trade. What if we simply run a test on our system to see if it performs well at 1:1, that way the only figure we're looking at to prove we have an edge is 51% or higher!

Now, don't get me wrong, I DO NOT think that a trading system that limits you to 1:1 reward:risk ratio is the best idea BUT I do think this is a very valuable exercise just to think in terms of "odds".

Think bigger picture too, let's say we run our test over the next two weeks and I personally end up with a 45% win rate, suggesting that my edge probably isn't there. This gives us a great opportunity to look over our logs and see if there are any common themes to the trade working or not! How powerful is that! I might find some clear signals that a trade has a much lower chance of working based on my review, not take those trades moving forward and increase my edge to 51% or higher.

How?

Ok, first you'll have to choose your system. It can be anything, choose something from the forum or preferably, something you're working with right now, or have worked with in the past that you didnt' see the success that you would've liked. Now you've got your systems, there are a few things you HAVE to do for this challenge to be of any value to you:

1. Make sure your rules are consistent. You'll be able to see if you're taking the same trade over and over when it comes to reviewing time BUT it'll be valuable to make sure you're very structured in your rules for this first 2 week run.
2. Only trade demo. This is a training experiment, not a money making bonanza (yet). I don't want you losing your life savings on my behalf.
3. Keep a very structured log. I'll be keeping both an excel log and a screenshot log where I explain my trades in notes on the screenshots. At the very least I'd like you to take screenshots of every trade once over (whether a win or loss) and I then want you to scribble all over it with your entry / stop and take profit as well as reasons for entering and why you think it might've been a win or loss.

That's it, simple right? Don't underestimate the power of this challenge though, this can be very valuable and is a fantastic starting point to developing your very own system that has a measurable edge.



Limitations

- Keep in mind that what I'm suggesting is only 2 weeks, this experiment for you could go on for much much longer until you've defined a great system.
- I’ll post near the end of the challenge how we could tweak our systems for better performance once we've got some hard data. ALSO, this is challenge 1 of many, the sum of which should give you a solid foundation for continued development.
- Your systems' edge may lie within having a lower win % but the chance for long runs. Perhaps that sort of system would've be great for this particular challenge but feel free to experiment with something else!

Give me a system!

Oh Cmon! I'd LOVE for you to use your own system or a system you've used in the past because that will have the most impact on you moving forward. If you REALLY need a nudge in the right direction, I'd suggest a simple support resistance strategy on the hourly chart and higher that uses candlestick confirmation for entry. Trade with the trend when there’s a trend, fade support / resistance if we’re consolidating, that’s it! If any of those terms mean nothing to you, you're lucky that support / resistance and candlestick patterns are probably the most common educational items on the internet.

Moving on

I'll be posting the simple system I'm going to use in my next post, it'll be very similar to what I suggested above. Now, please let me know if you'll be taking part in the challenge by posting in here and maybe even give a quick rundown as to what system you're using and your history with it. As for you lurkers out there, stop being a wallflower for a moment and do this challenge. Stop spinning your wheels and get some hard data on your system! Challenge ends on Friday the 1st.

First things first, are you in?

My Trading System for the Challenge

Timeframes – H1 and H4 only, daily for trend.

Setup

 

1. Price is either trending on the H4 or ranging. I’ll define this factor prior to taking any trades.
2. If price is trending on the higher timeframes, I’ll look for trades only in the direction of the trend. If price is ranging with decent swings, I’ll take trades in either direction.
3. I’ll draw support and resistance lines manually, using both standard definition and using prior highs / lows as reference points (I can explain more later if required, it’s not too hard to grasp).
4. I’ll also draw trendlines if applicable.
5. If price trades up to one of my “levels”, I’ll wait for a minimum of a H1 candlestick pattern in the form of a pin, inside bar or outside bar (engulfing bar).

Entries / Stop Loss / Take profits

 

1. I’ll enter once the candle on the H1 (or H4) is closed in the appropriate direction.
2. Stop loss will be placed 5 pips beyond the low/high of the PA candle.
3. TP will be at an equal amount of pips + spread as the stop loss.

Simple hey?

I’ll post screenshots of the trades I take as per the challenge with plenty of notes. Please don’t focus on what I’m doing though, focus on your own process. Focus on taking trades as per your rules, keeping that SL and TP at an equal pip number (including spread if you’d like) and most important of all, LOGGING EVERYTHING. Remember we can’t improve what we don’t understand and the entire purpose of this challenge is to improve.

Don’t overthink your own system either, like I said in my first post, just use something you’ve used in the past that had a requirement higher than 1:1 R:R. Use something that resonated with you and that you’d like to use. That will be the base system and we’ll tack upgrades to it as we get more data!

Accuracy isn't an edge. You could have a system that wins 25% of the time and make more money than someone with a 70% accuracy rate it all depends on your `R' multiples to use a Van Tharpe expression.

Of course, I think if you re-read my thread you'll see I understand that.

This is just an exercise in simplifying our R:R so we have a base point from which to adjust and mould our systems as required.

this is the problem I have with R:R.

lets say spread is 1 pip.
stop loss is 2 pips (from entry).
take profit is 3 pips (from entry).

for every loss your bank will go down 2 pips. (but price only has to move one pip)
for every win you'll only bank 2 pips. (but price has to move three pips)

3/(1+3)=75% win rate just to break even at those extremely tight levels.

obviously, the wider you put your tp and sl the better that ratio gets, but it only ever gets closer to 50% but never reaches 50%.

But, you can count me into this challenge, it's sounds progressive.
Do we need to open a trade explorer?

No definitely not, the challenge is only for your development. Feel free to use one if you'd like but it's only if it's convenient for you. A spreadsheet with the basics will be fine also but as I say in the first post, the most important thing will be your screenshots and notes once the trade is over. A folder full of those screenshots, combined with a simple win % will be a great learning experience.

Guys and gals, I just want to reiterate that the point of the challenge is to move your own trading forward through simple exercises. The basic process will be like this:

1. Use a simple strategy with simple R:R outcomes.
2. Adjust the strategy based on your observations.
3. Retest and review.

This is for you, the only reason I'm doing it as well is because I want to show you how powerful it can be. It can drive progress forwards in a structured manner, helping you find strengths and weaknesses during certain setups and then improving based on that.

Slow day so far! I did have a valid entry on the AUD/JPY for my system I've posted above but price is just moving sideways so nothing to report as of yet! I'll have my screenshot tool and notes at the ready though once closed. No news can be good news, it's good news because it means that we're following our rules and doing nothing!

I'd love it if those participating in the challenge posted up some of their screenshots and thoughts. Might show the diversity of systems and expose people to some of the different rules / ideas people use.