The Dollar Cost Averaging Pivot Point Trading Method

Tweaked a few things on the demo side.

Looks like we're experiencing some USD weakness (supposedly on the back of a "risk off" environment generated by concerns over Greece), which may provide good entries on bounces, for example, in EUR/USD and GBP/USD.

That very same USD weakness, however, is not assisting me with exiting my EUR/AUD and GBP/AUD positions in either the live or the demo. This is because the bounce being experienced by AUD is being replicated (perhaps to a greater degree) in EUR and GBP. I will need EUR's and GBP's assistance to the downside in order to exit those positions ... .

Well, a little bit of work on the scalping side of things (USD/JPY short) made up for my EUR/NZD screw-up:

One problem I noticed on the demo side with the 3-Level ZigZag Semaphore indicator is that it does repaint. Consequently, if you already made an initial entry in a trade, you may end up chasing the most recent "3" level up or down the ladder (depending which direction you're trading) with your entries, and this is the cause of so many entries in EUR/AUD and GBP/AUD. Consequently, I'll have to modify the way I make entries after my initial entries and not make an entry on the last "3" Semaphore until a new swing high or low is established, at which time I assume the immediately preceding "3" is set in stone ... .

Tweaking the current demo entries in light of that fact now ... . (Another reason to do a demo on an indicator that may have little idiosyncrasies like this that require accommodation in the way you trade ... .)

On the live side, I just use a plain old ZigZag indicator, so I don't necessarily suffer from the same problems as with the MT4 "bells and whistles" indicator. However, it is entirely possible to chase price with various set levels using just the plain old ZigZag if you're not careful, which has ironically led me to be in the same boat in the live as I am in the demo with EUR/AUD and GBP/AUD (albeit with far fewer entries). I think the thing to do is pause for a little bit on those pairs, watch how they are moving in relation to the 200 SMA (up, for now) and wait until they break beneath the 200 SMA on various time frames before considering additions. The fact, however, is that by the time price breaks the 200 SMA (for example, on the 1H), the TP will be hit which is, naturally, fine ... .

Off to look at potential scalps in Yen crosses ... .

Barring some titanic market movement between now and Friday's close, this is likely to be this week's results for me in my live:



Bumpy in places, but it'll do ... . That being said, still have open positions to dispose of with EUR/CAD, GBP/CAD, EUR/AUD, and GBP/AUD -- as in the demo, all short, and all in the red ... .

As previously noted, I need to examine the manner in which I add positions after the initial entry. I think I have gotten in too mechanical a mindset with the additions and should evaluate open positions each day before deciding whether to add at a particular point.

Consequently, in the live, I've deleted out all of the open orders for the time being, so that I can look at the entries with a fresh perspective come next week's open.

Happy trading and have a good weekend!!!

Well, this week has been a roller coaster. First it looked particularly disastrous and then I was able to bail out of my Yen cross positions, at which time I felt better about what was left -- EUR/AUD, GBP/AUD, EUR/CAD, and GBP/CAD shorts. Well, not so fast ... . I am literally back in the crapper.

Oil prices, thought to have stabilized around $70/bbl., dropped even further. Equities markets tanked a bit. Risk-off seeped into the market on the back of concerns about Greece (remember Greece?), giving the Yen a brief bout of strength and the Greenback a bit of weakness. Everything, it seemed was upside down.

So, given where the portfolio was at -- the crapper, I think it was wise to step back, not get into any new positions, and then look at the situation with fresh eyes starting next week.

Now, some may say "Why don't you just use stop losses and/or just bail out of these horrible trades, and move on?" And that is a very good question. For the demo, my answer is that it is test, in essence, of a mean reversion method (which has been touted as an effective way of trading; I am in that camp, although I am beginning to doubt that in markets as tumultuous as this), and I think that stop losses could get in the way of that by stopping positions out at price extremes when the theory is to stay in the position until such time as price reverts to a mean and presumably to profit. The key to such a method is obviously the decision-making process behind when to add to a losing position (a contrarian view, I know) and something I confess I have not fully figured out. Obviously, it has not proven to be a good thing to just mechanically add positions without evaluating the direction in which price is moving at that particular time.

I have said this to myself a million times, but I can't seem to follow my own advice and that is: don't add unless price in relation to the 200 SMA on the 1 and 6H time frames (you can use others, I'm sure) is divergent and/or is no longer in the direction of your original entry. Wait to add until price in relation to the 200 SMA is convergent and price in relation to the 200 SMA is in the direction of your original entry.

Also, a chart with the 3-Level ZigZag Semaphore attached to it may present several possible entries above current price. Fashion only one entry order, for example, for the "3" immediately above the price, with the TP being the "3" immediately below the price. And then wait ... . If the order executes, but price does not hit the TP, consider adding additional positions as long as the set-up is still good. As tempting and easy as it is, I now recognize that is probably a mistake to set up three or four entry orders above current price where 3's exist; depending on the market environment, price can drill through those levels in quick succession, leaving you with a larger position than you would like and catch you in a trend that was not anticipated and that goes against your position. Obviously it is much easier to address problems associated with one leg than with four legs that executed one after the other in quick succession ... .

While I'm waiting for my various trades to resolve themselves, I usually go out and do a little surfing to see how other folks are doing things. I came across this guy, who has a similar trading style in terms of entries and additions:

It's worth watching the whole video, but in essence here is his entry/exit system:

1. Chart set-up: Renko/Heikin Ashi, 20 Period EMA, Either CCI or MACD.

2. Entry/Leg Sizes: 1/5th of what you do were you making a single entry.

3. If HeikinAshi is green, price is above 20 Period EMA, enter long with confirmation from the CCI or MACD; vice versa if HeikinAshi is red.

4. Add to position if original set-up is still valid with similar leg sizes.

5. Exit upon change in Heikin-Ashi trend direction.

It is unclear, however, as to whether he sets a price target upon initial entry or just lets it run until a particular time frame's Heikin-Ashi changes color. Similarly, it is unclear as to whether the initial entry is "at market" (which I virtually never do) or is at a particular price within the Heikin-Ashi candle or at some other price point. He mentions making entries across multiple time frames for a given pair (5 min., 30 min., 60 min., 240 min., 1D). Naturally, if you're trading manually, juggling trades across multiple time frames could be unwieldy; I prefer just sticking with one time frame for entries and exits for simplicity's sake, although I can see some advantage to entries across multiple time frames so as to catch a particular move at its beginning or to catch dips and bounces within a larger time-frame's trajectory.

He also uses to hedging to basically wash out adverse movement during the course of a trade, something that is easier if you're not subject to FIFO, although I imagine that if you're subject to FIFO, you could set up two accounts (one for the primary move; the second to hedge any adverse movement).

But the most interesting part of his method is his "Zone Recovery" trading methodology, which is a hedging strategy. Again, however, if you're subject to FIFO, you would have to set up two accounts, one for the primary move, and then one to hedge that move in the event that your assessment of trend direction turns out to be incorrect.

The example given in the video for this strategy is for a EUR/USD 1 lot long entry at price x with a TP of x+150 pips. If you've properly predicted the trend and price moves up to x+150, you book your profit.

If price does not strike x+150, but instead moves lower, you fashion an entry order to short the pair with 1.4 lots at x-50 with a TP for the short of x-200. If the pair moves lower and strikes x-200, the net trade (the long position is at x-200; the short position is x+150) will net 10 pips.

If price does not strike x-200 at that point, but instead moves higher, you fashion an entry to buy the pair again with 1 lot at your original buy entry at x, so you are now 2.0 lots long, 1.4 lots short.

Unfortunately, however, to make the sequence work mathematically to net pips upon a strike of either the upper or lower TP requires you to increase lot sizes over time:

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... and I could contemplate a situation where price wobbles back and forth over the Zone Recovery area for substantial periods of time (for example, during a price consolidation period) and the exposure to that one trade could easily become 10 x equity. So part of the mathematical trick is to choose TP's that are achievable within a fairly short number of iterations of the sequence (for example, based on Daily ATR) and a so-called Recovery Zone that doesn't result in a huge multiple of entries within the sequence such that the net position overwhelms the account. Point in fact, though, I don't know how given brokers treat hedged positions in a single account from a margin standpoint; at one point, they were deemed "flat" with no margin required. http://forexmagnates.com/fxcm-makes-...ged-positions/ But I do know that if you are subject to FIFO and want to hedge, you will have to set up two accounts, and you are going to be subject to margin requirements on your primary trade account and margin requirements on your hedging account, which would be a major drawback to such a system.

Also, the additional drawback relates to account size. This is because in order to get the correct multiple for the hedged position (in the above example, a EUR/USD long), a 1K intial entry would not work. Doing the math, the short, hedged entry would have to be a 1.2k lots and brokers who only allow trading in multiples of 1K will not allow an entry of that sort. The minimum entry initial entry in the above example would have to be a 5K lot, with the first hedged short position 7K lots (1.4 x 5K) and things would get funkier as you go through the sequence and the math requires you to round up in order for the net position to become profitable with these kind of lot sizes ... . Obviously, being able to trade in standard lots would relieve you of this problem, but not everyone (me included) has accounts of such a size as to permit that. The alternative would be to go with a broker that permits trading in "units." (Don't quote me on this, I think Oanda allows trading in units of currency, rather than in 1K lots ... .)

So, it could be a great system for folks: (1) not subject to FIFO; (2) with brokers who treat hedged positions as "flat"; and (3) account sizes that will accommodate the math required for the lot sizes in the sequence without rounding up and/or a broker that permits trading in "units" as opposed to set lot sizes that are multiples of 1K.

Live/Demo

Well, looks like I've got some waiting to do.

Although there are differences between the live and the demo, they are basically the same in the sense that they are both short EUR/AUD, GBP/AUD, EUR/CAD, and GBP/CAD and are both in the red for each of those net positions.

Looking at the charts for all of these pairs, it makes little sense to add positions at this juncture; they don't appear to yet to be poised to give up their recent moves' upward. History has shown that it makes little sense to continue to add positions until such time as a pair appears to be topping or bottoming or reversing its recent trend, in spite of the fact that those additions might move the net positions' prices in your favor in the long run. (Point in fact, once it became apparent after the second addition or so that these pairs weren't going anywhere but up, I should have paused and waited, but hey, all part of the educational process ... .).

That being said, does my current exposure in the live or the demo permit dabbling in other pairs? Probably not, given the current level of exposure versus my total exposure rule-of-thumb (10 x equity max). The usable margin in the live is 85.0% or so, and we're at 10 to 1 in the demo. I could wade into another pair in the live, but have to keep in mind that I may have to add positions to the current open positions there going forward; the demo is basically maxed out, especially when I have to keep in mind that I will in all likelihood need to add positions there to get out of the positions net positive ... . I know it's just a demo, but in order for it to be a true test, I have to attempt to adhere to my rules and not do anything funky (like my reverse Martingaling idea, outlined above).

Now, this isn't necessarily a bad thing. Sometimes you just have to wait if you've gotten yourself into a bit of a pickle. It's part of managing your bad trades.

Additionally, these positions might get a boost out of upcoming economic data (who knows, though; been a weird past few days; they could tank further), and it might be worth waiting until after that data comes out to see where things stand at that point ... .

The one thing I'm going to do in the demo, though, is move all the TP's to BE +10 pips ... . This has already been done in the live (although to +20).

Alrightee ... . Doing a little bit of a different thing with the demo to dollar cost average ... .

A couple of things: First of all, I know that I should not add a position unless the original conditions that prompted the initial entry remain true (i.e., that, for a short, price is below the relevant MA). If conditions change such that the direction is no longer valid in light of price's current relationship to the relevant moving average, then you should not make an addition, but rather wait until the conditions that prompted the initial entry are true ... .

But, here we are; I've added too many positions with a couple of pairs. Generally speaking, I only want to have 4-6 legs in any position max before being able to bail out of the net position in a positive manner.

There are a couple of things I can do here: (1) I can treat the entire net position as a single entry at the average price for all the positions and add legs of equal size to the entirety of the current position as though I had made a single entry at the average price; or (2) treat the entries to date as 2, 3, etc. legs by dividing the current size of the position into 2, 3, etc. positions as though I had taken fewer positions, but at larger sizes. The former would involve additions, in certain cases, larger than I would like to expose, so I have opted to take, for example, the entire GBP/CAD position, which consisted of 5 equal legs of .14 lots (for a total of .70 lots) and treat it as though I had made only 4 entries of .175 (rounded up to .18 lots) per entry. I have done a similar thing with the EUR/CAD position, although I probably did not need to do that, since it only consisted of two entries to date.

Although this smacks somewhat of a Martingale, it is the only mathematical way in which to make the additions effective because, as you add legs, the impact of a given addition diminishes.

Naturally, were I not to have gronked up the additions in the first instance, I would probably rarely be placed in a position of increasing the size of an addition in order for that particular addition to remain of use in bringing the target price closer to current price ... .

Edit: I'm adding positions in the demo to look at how this might work, but I won't be doing that in the live. Prices still above relevant MA's, and I'm short in all these positions, so not a good place to add (still).

With the live, I am probably going to be attempting to pick off one position at a time in order to avoid overexposing myself (which sounds dirty).

The live is somewhat different, since there are fewer legs involved:

EUR/AUD short at 1.48313, consisting of 4 legs (8 k total)
EUR/CAD short at 1.42408, consisting of 3 legs (6 k total)
GBP/AUD short at 1.86622, consisting of 6 legs (12 k total)
GBP/CAD short at 1.80491, consisting of 3 legs (6 k total)

So, with GBP/CAD (for example), I could treat the average sell price as just one leg of 6K at 1.80491 and make subsequent additions of 6K. Alternatively, I could treat it as though I had made two 3k entries at 1.80491, and make subsequent additions of 3k to dollar cost average. Or, I could just continue doing what I'm doing and add 2k legs until I have a total of 10k legs (5 legs at 2k each) and then reevaluate the position at that point.

In contrast, I've got too many legs with GBP/AUD ... . The next leg would be the 7th leg. So, by way of example, I could again treat that trade as a single 12k entry at 1.86622 and make subsequent 12k entries; two entries at 1.86622 of 6k; three entries at 1.86622 of 4k; or four entries at of 3k at 1.86622.

At this point, adding anything to any of these positions is academic. Prices are still above the relevant moving averages across multiple time frames, and there is no point in adding positions until these pairs break lower or, at the very least, fall into a range at current price levels.

But, when I do add, I am likely to do the following:

EUR/AUD short additions that are 4k in size (i.e., treat the current position as two legs)
EUR/CAD short additions that are 3k in size (again, treat the current position as two legs)
GBP/AUD short additions that are 6k in side (treating the current position as though two legs were entered), and
GBP/CAD short additions that are 3k in size (treating the current position as though I only entered twice).

Naturally, this is less than ideal; it smacks somewhat of Martingaling, which usually ends in a dramatic implosion. What you want to do is be patient (unlike me) and wait for the trend to revert to the direction of your original trade before making additions. This might be a couple of days, a week, or a month, but you wait. This is the only way a dollar cost averaging methodology will work ... .

This guy also says that stop losses are "bullshit", so I'm an immediate fan ... .

From an AUD bloodbath to a CAD bloodbath ... .

Demo Side

I am not sure I did my additions to the shorts entirely correctly from a mathematical standpoint (in particular, GBP/CAD, which I recalculated and found out that my additional, oversized position should be .35 lots, so I had to add another piece separately). That being said, I have checked the Daily ATR's for these pairs, and it looks like I am relatively close to something like 2 x the Daily Average True Range for the Target Prices. Nevertheless, absolutely horrid intratrade drawdown from my perspective. (My sole defense is that this is attributable to something like "funky market syndrome," which appears to have been in place for a couple of weeks here ... .)

Live Side

I am basically letting the positions in the live ride for now until prices move to the short side of the SMA. I've already goofed up the additions with GBP/AUD (too many, as it was with the demo).

But the two pairs I am considering adding to the mix are EUR/NZD short and EUR/GBP short, if only because the movement is largely sideways, somewhat rangey, and centered around a fairly flat 200 period SMA. I look at both of these pairs as more suited to longer-term set-up's that may take several days to develop given the breadth of the ranges, so I won't be using the Daily Fib Retracement Pivot Points for the entries, but rather range floors/celings for entries and exits.

Given EUR/GBP's longer-term range profile, I may fashion a GTC entry order to sell at around .8015-.8030, with a TP around .7850.

With EUR/NZD, I may fashion a GTC entry order to sell at around 1.6240, with a TP around 1.5910. There is a lot of wickiness at both the floor and ceiling of this range, unfortunately ... .

While I am waiting for EUR/CAD, GBP/CAD, EUR/AUD, and GBP/AUD to become more favorable for additions, I will probably be scalping most of the time, which is what I've been earning pips with this week so far:



I'm a rookie scalper, so some of the entries have been rather inept, but have yet to turn off the platform with my head held between my hands in sadness and dismay ... .

Demo Side

Post FOMC, EUR/CAD and GBP/CAD shorts very near their respective TP's, but the EUR/AUD and GBP/AUD positions still have some work to do. Naturally if there are ZigZag "3" semaphores above current price, I may add short positions should price strike those levels.


Live Side

It is basically the same story on the live side, with prices very near TP with the EUR/CAD and the GBP/CAD positions, but somewhat distant from the EUR/AUD and GBP/AUD positions.

On the 1H, both EUR/AUD and GBP/AUD appear to have broken the 34 EMA (I've been using the 8 and 34 EMA's to scalp; might as well use them here ... ), but have yet to do so on the higher time frames. That being said, I think I will now start adding positions here, and will fashion good for day entry orders to short both EUR/AUD and GBP/AUD should they hit their respective Daily Fib Retracement .764 Pivot Points (which are now some distance overhead).

Out of the EUR/CAD short position (net 20.1):

Same deal on the GBP/CAD short:



Only remaining positions in the live are the EUR/AUD short and GBP/AUD short ... .

Live

I've got two positions left:

EUR/AUD short at 1.48313 (consisting of 4 legs)
GBP/AUD short at 1.86622 (consisting of 6 legs)

Additions to Current Positions

Currently, price has just broken the 1H 200 SMA for EUR/AUD, but nothing doing for GBP/AUD, which remains above that line. As previously noted, I am going to treat the EUR/AUD position (which is 8k total), as though I only entered two legs for that position (this is somewhat arbitrary at this point; frankly I never considered rules for adding when you've, for example, already entered 5 times (5 legs), but have yet to reach your target price). While I could enter one more 2k leg (for a total of 5 2k legs), I am more interested in motivating an exit from the position, rather than being patient (which, as I have noted, has burned me in the past). Additionally, the closing of the EUR/CAD and GBP/CAD shorts has freed up some margin, and I am now back at a comfortable margin level, so I don't have a particular problem adding here (Current Usable Margin: 91.02%).

8 divided by 2 is 4, so I am going to treat the position as though I only entered 2 4k legs and make my additions of 4k size and fashion a good for day entry to short EUR/AUD should price strike the current .764 at 1.51467. I will revise the TP in the event that that order fills to +20 pips for the net position.

With GBP/AUD, I am going to continue to wait out of concern that not only Cable may strengthen, but also that AUD may weaken further, thus causing the pair to move higher from where it currently sits.


New Positions

The following pairs appear to be either range-bound or convergent in terms of prices' relationship to the 200 Period SMA on the 1H and 6H charts (i.e., they are both on one side of the line for both time periods):

EUR/USD (convergent short)
EUR/GBP (rangebound between .800 and .784)
EUR/CAD (reverting to rangebound between 1.433 and 1.404)
EUR/NZD (rangebound between 1.62 and 1.577, albeit with a tendency to slop over the ceiling and floor)
USD/JPY (convergent long) (although I would exercise some caution here going long; price has just cleared the 1H 200 Period SMA)
GBP/USD (convergent short or rangebound between 1.56 and 1.575)

For my part, I am going to fashion good for day entry orders to short EUR/USD, EUR/NZD, EUR/CAD, and EUR/GBP should price strike their respective .764's, with the TP being the .236's.

Demo

With the demo, I am not completely following my trading plan. If the past few weeks have shown anything, it is that I do not have a plan for when the plan I've got reaches five legs and the TP is not struck. Do you continue adding? Do you change lot sizes? How do you treat the net position at that juncture? I think that treating the net position as though a smaller number of legs has been entered for the net position is fine, but what number of legs should you treat the net position as? Clearly, I think treating it as a single leg might be inadvisable; the additions get too large. Looked at another way, should I reduce my lot sizes for the legs from 1/4 of 1 times equity to something smaller like 1/5th, so that when I do reach the fifth leg, I am only at 1 x equity for the net position?

Since this element of the trading plan requires tweaking, I figured I would just treat the net positions as though a certain number of legs were added, divide the net size of the position by the number of legs, and then add that new lot size for additional legs in an attempt to close out the position net positive. For instance (and I know I've gone through this math before), if the net size of your position is .70 lots and you've entered 5 times and decide to now treat the .70 as though it represents only two legs, your 3rd, 4th, and 5th additions under this new series should each be .35 lots (.70 divided by 2 legs equals .35).

Naturally, all this dividing of the net positions by a set number in order to continue adding with the goal of exiting the net position profitably would possibly not have been necessary were I to have followed the trading plan of not adding unless price was convergent on the 1H and a higher time frame (e.g., 4H) in the direction of the original trade and had realized that the 3-Level ZigZag Semaphore repaints. Looking at the GBP/AUD chart, for example, I would basically only have made the first entry and then waited, and waited, and waited for a higher 3-Level ZigZag "3" Semaphore to Paint and then waited for a lower "3" to paint before fashioning an entry order to enter in the direction of the original trade at the higher "3". Instead, I chased the repainting "3" all the way up the ladder ... . This naturally did not occur in the live, since there is no semaphore, but just Zigs (peaks) suggestive of where an entry should be made, although I did do a little bit of chasing there as well, but not as much in the live with the 3-Level ZZ, which is why I am out of both my EUR/CAD and GBP/CAD positions in the live, but not in the demo.

All that being said, I find that the matter of being patient and waiting for price to be convergent in the direction of your original trade is harder said than done. For example, the GBP/AUD position looks to be deep underwater at the moment. You start to panic and tell yourself you just want out of the position net positive, and you really don't care if it's just for 5 pips at that point. You are tempted to fashion an entry at the swing high, even though there are no indications that price is breaking lower and, in fact, may break higher, merely for the purpose of moving price for the net position closer to current price. It is enormously difficult, I have found, to resist the urge to enter and steel yourself to the fact that an intratrade drawdown, sometimes larger than you would like, is occurring, and to convince yourself that if you just wait, you will get a sounder entry.

Basically, however, I'm looking to hone in on a set of rules that I can apply somewhat mechanically, not only for the initial entries, but for the additions of legs, such that the system is profitable while at the same time reasonable from an exposure standpoint. While I think the system is sound as long as you're able to exit net profitable within five legs, I think my treatment of additions after the fifth leg has been added but the TP has not been reached has been sloppy and less than systematic.

From that perspective, I think it's worthwhile to ask myself that if I were going to design an EA to do what I do manually, what set of rules would I give it for the entries, additions, and TP? If I don't know what rules I would give it for additions and for situations in which the max number of additions is reached, well, that's an aspect of the EA that I need to work on ... .

Let me give you some ideas. I look at your trade explorer and found that you make a lot of SELL orders in bullish trend, but why? You need look for tools that help you detect real trend (not indicator).

About zigzag repaints, it should do that. To use zigzag you need split your graph using zigzag and then statistically calculate probability of each legs movement in pips, with this information you'll have a more chances to place order at right time.