The Dollar Cost Averaging Pivot Point Trading Method

Current Open Positions

EUR/JPY Short at 146.350/TP 146.250
EUR/USD Short at 1.24566/TP 1.2000/SL 1.23938 (Last swing high)
GBP/AUD Short at 1.84508/TP 1.84408
GBP/CHF Short at 1.51830/TP 1.51820 (Added leg during Asian session)
GBP/NZD Short at 2.00240/TP 2.00140

Good for Day Penders

EUR/USD Short at 1.24534/TP 1.23934
GBP/USD Short at 1.57166/TP 1.56585

Notes

EUR/JPY has broken the previous day's low and is now poised to break 147.00, with price testing the underside of the 1H 200 Period SMA. I think this has more to do with Euro weakness than Yen strength, since USD/JPY and GBP/JPY continue to burn higher.

EUR/USD: I expected to wake up this morning and find this trade stopped out. At this point, I'm going to exercise some patience (which I don't usually have) to let it run a bit. With the stop placed below both of the legs I entered using Pivot Points, I will attempt to add to the position after the New York close, assuming that the .764 is below my stop.

GBP/AUD: Some Aussie retracement of its downward movement during yesterday's Asian session has helped this position out, but it is not there yet ... .

GBP/CHF and GBP/NZD Shorts: Okay ... . Okay ... . Okay ... . Why? Well, sometimes you enter crappy trades. These fall into that category.

GBP/USD short for another 30 pips off the .764:



Wanted to peel this off in advance of BOE tomorrow when I'll be at work ... .

Demo looking a little bit battered to begin the month ... . 3.4% drawdown as of right now ... . Nature of the beast .. .

But with a mean reversion approach (which is basically what I'm using here), it sometimes gets worse before it gets better ... . The important thing -- keep the lot sizes small to weather the price extremes that run against your position ... .

With the Yen cross set-up's in the demo, I am running trades counter-trend, so this may be "unfortunate" in the short-term ... .

Not much has changed since earlier today ... . Basically standing aside to await the dropping of the ECB and BOE "bombs" (or lack thereof).

As I expected I would have to do earlier in the year, I will need to wind down my Trading Station only FXCM account before opening an MT4 account (which, ironically), I will then be able to access from Trading Station. I assume that Trading Station can interpret MT4 data, but that MT4 cannot interpret Trading Station data. (Ain't that the crappers!)

In any event, I probably won't be posting much here (at least regarding my live trades) until that is done, since all I'll be doing is closing out existing positions once they move into profit, yada, yada. Naturally, I'll continue goofing around with the demo, trying a few last minute things before heading into 2015 which, (oh my God!), is right around the corner.

Kinda kicking myself for not doing this when I had everything closed last week or the week before. Would have been a lot easier. Oh, well ... .

Trade safely!

That being said, I am looking forward to what the ECB does tomorrow, as I am currently EUR/USD short at 1.24566 with my SL set at 1.23801. I have about 65 pips of wiggle room between current price and the SL, but would naturally like to see the pair move lower. The current target price is 1.21000 (although I am doubtful we'll get there tomorrow), even assuming that everything goes my way:



Unfortunately, I'll be asleep or at work when the fireworks occur ... . I hope to wake up tomorrow and see my position still there. (Fingers crossed).

... and the demo continues to be somewhat brutalized by AUD, NZD, and JPY weakness ... .

The fortunate thing, these are .25 x equity legs for each of these positions. If I would have gone larger with each of the legs (say, for example 1 x equity (which would be like 56k per leg)), I'd be a good 14% down ... .

As far as the Yen trades are concerned, I am gambling (pure and simple) on a correction. There is absolutely no evidence that the bullish trends for USD/JPY and GBP/JPY are yet at an end. EUR/JPY is slightly different in my mind; Euro weakness is beckoning that pair lower or, in the alternative, the pair is somewhat rangebound as compared to UJ and GJ. The preferable thing to have done with these pairs would have been to wait for a break of the 1H or 4H SMA or obvious support before going short. Just thought I'd let you know ... .

Moreover, the method being utilized, which is basically a "mean reversion" method, seeks to buy or sell at price extremes (repeatedly, if necessary, and as indicated by the ZigZag indicator in this case) and then wait for price to revert to a mean or average which will ideally mean that your multi-leg position will move into profit for the net position. Naturally, this requires some patience; as you can see in the open positions section of the demo, many of the positions are quite far away currently from their target prices. From time to time, I tweak these targets if it is becoming apparent that the target price in relation to current price does not appear to be attainable. This results in some legs being "in the red," but the intended result is that the net position be profitable, rather than a single entry. To me, it is simply easier to identify larger/longer-term trends or themes and to take several, small entries consistent with that trend rather than take a single entry and hope for the best. Additionally, I think it is harder to be wrong if you use several entries (not all of which, of course, are always profitable) than it is if you just rely upon a single one.

The last thing I need to constantly remind myself of is that this is just one day or one week in which the portfolio is down; the goal is consistency over the long term, and one day or even a couple of days or even a week is not long-term.

Short EU stopped out at 76.5 pips on the net position:

GBP/CHF short manually taken out at BE:



Figured I've got other GBP crosses that I can work Cable weakness on. Not sure what I saw in this pair ... . Lol.

Unfortunately, I again got home too late to look at how my live's sitting (not nearly the exposure to the Yen as the demo).

Clearly, though, going contra-trend with the Yen crosses ... Eh ... not such a good idea.

I'll naturally see how those positions are doing come the Monday open, but my guess is that I'll have to devise something to exit the Yen cross positions gracefully, and it is likely to be a reverse Martingale set-up which I will use to pick those positions off one at a time (or at least reduce the Yen strengthening gamble down to, for example, one pair).

Hey, it's a demo; it is for experimentation, and the word "Martingale" generally implies that the account will eventually be blown up, so I am not sure that I would necessarily use this method on a live unless the position I am trying to dispose of is quite small, which mine generally are ... . However, a reverse Martingale to me is better than a blind forward Martingale where you buy or sell at set levels, increasing the lot size at those levels, which are really quite arbitrary ... . With a reverse set-up, you know where price has been and potentially can discern where it might go short-term, so that you don't need to take a loss on the net position (ideally), which is really what the game is all about -- some winners, some losers, but, in the long run, net positive.

That being said, I bet that there are plenty of little reverse Martingale horror stories, the likes of which are: "I went in for 15 x equity with a TP only 15 pips away, and my order executed, but price bounced up a hundred pips and never hit my TP; now I am in a world of hurt." My guess, however, is that these stories are likely to be smaller in number just because every Martingale system I've seen is "blind" and looks to take profit moving forward into the future before price has moved ... . So, just because you have the benefit of looking back at where price has been in setting up a reverse Martingale doesn't mean that it is any less fraught with risk than a forward. In fact, it is entirely possible that a reverse is more risky ... . This is because a forward Martingale starts out extremely small and can, by design, have capped doubling at a particular exposure level. A reverse looks at where price is now and then assesses BE at that juncture, and a BE proposition could be (at the point at which you're making the attempt), be very dicey and increase your exposure quite substantially all in one fell swoop. Well, enough of the relative merits of the system ... .

The basic reverse Martingale requires you to first calculate the current average price of your net position.

With my GBP/JPY entries, I have 14k at 188.18, 14k at 186.92, and 14k at 186.00. The average price of the position is 187.033, consisting of a total of 42k (or, in decimal terms -- .42 standard lots).

Secondly, you will want to choose the price at which to add your reverse Martingale position. There are naturally the usual considerations about where to add the position, such as nearby S/R, historical highs and lows and that sort of thing, but let us assume for the moment that I want to add the position at 189.20.

Thirdly, I need to ask myself at what price point I want the entire position (original entries + reverse Martingale position) to attain break even, so that I can determine what the size of the reverse Martingale position should be. In this case, let us assume that I want to enter the reverse Martingale at 189.20 (just below current price) and that I want break even to be 10 pips below my reverse Martingale entry. What will the size of the reverse Martingale position need to be in that case?

A calculation is required: my current position is .42 at 187.033 for a total of 78.55386 so the calculation is (78.5536+(x)(189.20))/(x+.42)=189.10, where x is the number of lots required to be sold at 189.20 in order to achieve break even at 189.10. Solving for x, the number of lots you will need is equal to

(Desired Break Even Price)(Size of Current Position) - (Current Position Average Price)(Size of Current Position)

Divided by

The Difference Between the Entry Price and the Desired Break Even Price

In this particular example, the result is 8.68 lots at 189.20 to achieve BE at 189.10.

If I wanted BE to be 5 pips below my reverse Martingale entry, I would need to sell 17.79 lots; 15 pips below -- 5.65 lots.

Purely as an experiment, then, I will fashion an entry order to sell 8.68 lots of GBP/JPY at 189.20 with a TP at 189.05. Naturally, I will have to change the TP's of all the outstanding positions so that when price hits 189.05, the entire batch will sell at that point, and my GBP/JPY positions -- as a whole -- with be net positive.

Hey Zebrasquirl,

first thank you very much for your tread.
Very well written (even if English is not my first language, I appreciate it a lot. It is easier to follow, thank you), and provokes everyone to take a step back and think.
Personally it is one tread that I follow on FF, even if I do not post :o)

From your last post above about “saving”your long Yen, it kind of makes me “shiver”, if I can say so.
I completely see your point, but I feel (and I am most probably wrong ;o) that doing it the other way might bring better odds in your favour.

Do exactly the same approach, but put your “big saver order” going with the trend.

With what happened on the last day of October from the BOJ, people are more incline to short the Yen than to long it the way you would do it with your “saver”. Thus it seems a lot safer, and logic, to short the Yen with your “saver”.

So why not close your losing trades (it is hard, but really it does completely make sense to just stop the bleeding) that are long Yen, and place your saver short Yen, using whatever entry approach you normally use and are experienced with?

It would make a LOT more sense to me.

Moreover, by doing so, going with what could be a reasonably long trend, why going to 10 pips only?
I completely understand that you want some reasonably quick results (so not going for the 500 pips trade just yet...) to clean your sheet, and feel “good” about it, but why not reducing the order by 2 and going to 20 pips? or by 3 and going to 30 pips? Etc... you see what I mean.

30 pips going with the train is quickly done if right, and the position size would be a 1/3 of what you would use going for that 10 pips counter trend, just in case something goes really wrong.

With that 10 pips counter trend idea, with such a leverage, I feel it can jeopardize your whole account ("blow your fingers off" as your signature says) and your confidence really quick, whereas you are actually doing really well so far.

OK I stop here I speak far too much ;o)

It is just some thoughts from a total noob, because I know nothing about forex or trading actually.

So do not trust what I say, and no worries at all if you feel it is bullsh*t (it probably is anyway!!! ;o), I won't be offended at all.

Have a great day,
Cheers,
J-F

You are exactly correct.

There are three things I can do with these Yen cross trades in the demo: (1) just close them out, take the loss, and look for a better short entry; (2) exercise some patience and wait for the anticipated correction (the first week of the month, after all, tends to be somewhat unsettled); or (3) do something high-risk and somewhat stupid by attempting to exit the positions net positive by, in essence, loading up on the position at this level, even though it may continue higher.

Because I am attempting to test a method (a mean reversion method that intentionally does not use stop losses), and I wanted to keep statistical track of whether I could get a 6% ROI on such a system with minimal heartbreak, I've decided to just let these positions ride for the time being; doing a reverse Martingale will screw up my stats, even if it is successful, and I'd prefer not doing that at this point. But the fact is is that the short entries (long Yen) were against the trend and were based on the mere fact that these pairs were in overbought territory and were due for a correction (which is not really enough to enter a trade on).

Also, I would note that a smarter thing to have done if I wanted to take a counter-trend trade in the Yen based upon merely my "gut" feeling that the Yen would eventually strengthen, would have been to limit my Yen exposure to just one pair. Tripling up on three crosses only magnifies the problem if the "gut" feeling does not pan out, which exactly what happened here.

But this is why demos are good to use for a period of time trying different things, especially if you try to treat your demo somewhat seriously and learn from the lessons your demo trades teach you.

Live Results -- First Week of December

The first week of December went well after a losing month (due to a "gamble" on USD/RUB short that I bailed out of at quite a loss; I knew that it could have been the best trade of the year; it turned out to be the worst):



I do have some scalps with larger than usual lot sizes sprinkled in there, some of which panned out, some of which did not. The scalps I have been doing use the "fingertrap" method, extremely tight fixed stop losses, and scaling in and out, but turn out to be very time-consuming for a guy with a day job who is largely relegated to the Asian session (which can be like watching paint try for a scalper who is looking for follow-through movement), so I am likely to do little of that going forward (gotta get your sleep some time, and three to four hours a night just doesn't hack it).

Live Account Current Open Positions

EUR/AUD Short at 1.46983/TP 1.46000
EUR/GBP Short at .79228/TP .784000
EUR/JPY Short at 147.424/TP 147.224
GBP/AUD Short at 1.84508/TP 1.84408
GBP/NZD Short at 2.00921/TP 2.00721

Notes

Every so often, I like to tweak my method, see how the "tweaking" works out and then incorporate it into my trading methodology if it works out.

Previously, I was largely entering and exiting at the .764 and .236 Daily Fib Retracement Pivot Points, but I am modifying that slightly to fashion entry orders to enter/exit on the Daily 1 and 0 pivots, but also on the Weekly and Monthly 1 and 0's. There is often some retracement from Weekly and Monthly 1 levels, as well as bounces from Weekly and Monthly 0 levels that I want to take advantage of; these levels also represent price extremes for given periods of time.

The Good for Day Penders will have to be redone on a daily basis after the New York close; the ones based on the Weekly Fib Retracement Pivot Points once a week at the beginning of the new week's session; and the ones based on the Monthly's once a month at the beginning of the new month's trading ... .

I am also kind of reverting to just trading EUR/USD, EUR/GBP, EUR/CAD, EUR/AUD, and EUR/NZD (and possibly GBP/CAD). While EUR/USD is in a prolonged down trend, the other weak/weak pairs (I don't really know how else to describe them) have characteristics that make them ideal for a mean reversion methodology, which is why I imagine why traders like Hayseed like to use them so much (Alirajaie likes to scalp GBP/CAD from the bottom and top of short-term ranges, best as I can tell). Without going into too much chart analysis, you can pick one or more of these pairs out and see the rangeyness that I want to take advantage of with them (with the exception of EUR/USD, which I just intend to short on bounces).

There is also one other option (kind of): exiting the position at a loss, but at the best possible "loss" price.

And by the best "loss" price, I am speaking of the nearest swing low (for a short) or the nearest swing high (in the case of a long) ... . It's less of a loss than a standard stop, which usually does not represent the best "loss" price ... .

Demo Account

With the demo, I am using the 3-Level ZigZag Semaphore ... . The entries/exits are at the points where generally the 1H "3" Semaphore indicates. In this example, I've made several short entries over time, with the original TP at the "3" level to which the Yellow arrow is pointing. Unfortunately, the position has not gone my way, so I will be revising the position to TP at the "3" indicated by the red arrow:



I guess this is what I am talking about when I say that I am taking a loss at the best loss price that price action indicates ... .

In comparison to the GBP/JPY example above, the USD/JPY has not yet given me a revised exit point, so (at least for the time being), I'm keeping my TP (indicated by the red arrow) in the same place in spite of the fact that the position has moved against me:



Naturally should the indicator provide me with a new "3" exit point, I will revise my TP to that level ... . (Point in fact, though, I expect it to "paint" a new low "3" level soon ... .)

Live Penders

So, here are the live penders ... . You'll notice that some are "Good for Day" and that some are "Good 'Til Cancelled". The Day orders are based on the Daily Fib Retracement Pivot Points; the GTC ones based on weekly and monthly's:



I would note that some of the entries are virtually the same for the Daily, Weekly, and Monthly because some of these pairs reached weekly and/or monthly highs last week. Naturally, if these entries are particularly close, I only take one entry ... .

Also, if I just had an entry at or about the same price as what current pivot points would indicate, I don't bother setting up another entry for the time being (EUR/JPY, for example, is literally at daily, weekly, monthly highs, and I just had an entry late on Friday around these levels, so I didn't fashion any entry orders for that pair).