Testing High Leverage Compounding

What is high leverage?

In my opinion, anything above 1:10 is extremely high leverage. Look at other instruments, you are rarely able to trade them with more than 1:5 leverage.

FX is unique in this sense because the leverage offers tremendous intra-day opportunities. It turns small moves in % terms into large profits. But there is no escaping the volatility/choppiness of the market. Still, it is immensely profitable as long as we do not shoot ourselves in our own foot.

It's really simple, just enter with the major/minor trend at a good price and let the volatility play itself out.

Goal-Oriented v.s. Process Oriented

When I am trading my live account, I will close my open trades/account balance tab. Before each trade, I will determine the lot size to use based on my current balance and then I would close the tab. I wouldn't even look at the equity when I am trading. Everything I do (order placement, trade management) is drag and drop on the chart using MT4 one-click trading feature.

To me this is key. Looking at the equity when trading strikes me as ironic and stupid. It's a bit like focusing on the scoreboard excessively when playing a sport. In truth, your equity doesn't matter. It shouldn't be affecting how you trade. When the opportunities arise, take them; else, do nothing. End of each week, look at it and see how you've done. Focus on the profit factor for that week and the largest drawdown % & pip expectancy, try and improve those, not how much money you've made. This way, you can truly use compounding in your favour. Only by disassociating from the $ amount, and focusing on the process, is it then possible to roll small amounts of money into large sums.

This is especially important if you are risking large %s like 5% per trade. Your account is bound to go into drawdowns of 20-40% regularly. If you focus on the equity, it will destroy you psychologically. Humans are risk-averse creatures. We can't handle losses. When we stare at the 30% drawdown, we can't imagine how we might claw it back. But the truth is, it will eventually recover if you are using a proper system and trading well. In fact, it's mathematically guaranteed to recover. You can almost never blow an account using 5% risk per trade.

Try it. 0.95^30 = 0.21. Even if you take 30 losing trades in a row, you are still left with 21% of your account. There's a saying that if you trade long enough, you are bound to see a string of 10 losing trades. Risking 5%, that would lead to a 40% drawdown. Still survivable.

What leads to a blown account however, and this is me speaking from experience, is letting the fear and greed get to you. Abandoning the edge and deviating from the system in an attempt to get back the losses. That's what always blows the account. (fyi, if your "system" allows you to keep taking trade after trade against the trend and compounding your losses in a bad day, that's not a system, that's suicide)

Intraday Trend Trading Works

Another demo account of mine that I've retired. This one trades a strategy close to my live account, but has similar principles to this system here.



Notice the low profitability but good profit factor... hence the losing trades in this system will come, it's just a matter of time. This streak so far, it's mostly luck. But if there's anything I learnt in trading is that luck favours the prepared and we got to learn to ride on luck when it comes.

If you have never considered this style of trading before, I strongly urge you to give it a try if you are still struggling for profits.

EUR/USD Long Trade Review



What went well?
1. Managed to scale-in.
2. Entry and trade management were impeccable.
3. Reacted to news well and removed TP accordingly.

What went wrong?
1. Still feel that I am not aggressive enough with the scale-in.
2. Scale-in rules are not clearly defined. Some discretion used. Problematic in LIVE trading.
3. Exit was borrowed from LIVE trading strategy and a bit ad-hoc. Reason for using it is because of scale-in.

What could be better?
1. Trade more and see how I can be more aggressive with the scale-in.
2. Again, trade more and see if I can come up with hard-and-fast rules for scaling in rather than relying on discretion.
3. Make it officially part of the rules that I'll borrow the exit strategy from my intraday method in situations like this. (news run)

Comments and Suggestions welcome as usual.

Asian Session

Pairs in focus:

AUD/NZD: long
CHF/JPY: long
EUR/JPY: long

Probability of a trade today is very low. Most likely no trades/counter-trend session.

fyi, it took me less than 2 minutes to narrow down from 15 pairs to 3 pairs and to decide what direction to trade. It's not complicated. No need for fancy analysis. So far all the trades I took, I used the exact same method to narrow it down.

It's more important to be trading the right pairs at the right time, than to be worrying about the specifics like S/R levels or what.

Now it's the waiting game. Rmb entry filter is a trend change on 5 min chart. So I have to wait for a counter-trend to establish itself and then enter when that trend changes to the daily trend.

lol that's all. and that's trend trading for you. Sometimes I think back at the thousands of hours I've spent trying to find a perfect strategy and then I laugh at myself at being so dumb. The simple stuff works.

***

the reason why time and pairs are so important is because you must understand FX is primarily driven by central banks and multinational corporations/ large firms, not retail traders or bank traders sitting behind their trading desks... These people don't give a shit about support and resistance levels. They come out at each day when their markets open to do their thing, you just have to tag along to their order flow.

***

Shit, if it's so simple, why don't more people trade this way!?

because it's damn tough. try losing half of your trades and getting break even on 25%. It's mind-f'ing.
because people don't like to be wrong. they want the perfect system with NO LOSING TRADES. and then they lose their accounts trading martingale or grid. lolololol.
because people want short-cuts and the easy way out and to cheat the system.
because people think they are the special snowflake and somehow can bend the rules.
because people like to practice mental masturbation by imagining how their perfect trade idea is going to pan out instead of just going with the flow and treating it like just another trade.

I was one of those 'people'. Thankfully, I am no longer.

BTW the trading results you see above are almost definitely due to LUCK.

I reiterate, these are the numbers I expect to see in the long run.

Expected Win-Rate: 15% winners, 35% breakeven/partial win, 50% losses.
Expected Max Drawdown: 40~50%
Expected Profit Factor: 1.7
Expected Monthly Gains: ~70%

Are these good enough for you? If not, what are your expectations? Are they realistic?

If you risk up to 1% per trade, you can scale everything down. It's approximately correct, you can try monte carlo simulation to see for yourself..
Expected Max Drawdown: 8~10%
Expected Profit Factor: 1.7
Expected Monthly Gains: ~14%

The reason why these numbers are feasible from an economic standpoint/efficient market perspective, is that the person at the other end of the trade is not looking to make profits off speculative price movement. They are in the market for transactional purposes/business reasons/policy induced factors. They are not looking to make a profit off the trade with you. Plus you add in all the losing traders who trade against the trend and get margin-called because of high leverage, it's easy money.

Granted, the edge may diminish over time as more people catch on to this method of trading, but it will never be zero as long as human nature stays the same. Markets will continue to trend. If markets one day stop trending and just kept moving in TIGHT ranges (< 30 pips intraday range with no volatility whatsoever) OR went from point A to B in a split second without any in-between movement, then this will not work anymore.

As you can probably see, I gave it a lot of thought... because my aim is to create the system that can last me for the next 40 years.

Volatility as a Fractionally Integrated Process

From Wikipedia:

In statistics, autoregressive fractionally integrated moving average models are time series models that generalize ARIMA (autoregressive integrated moving average) models by allowing non-integer values of the differencing parameter. These models are useful in modeling time series with long memorythat is, in which deviations from the long-run mean decay more slowly than an exponential decay.

See this paper: The Distribution of Exchange Rate Volatility http://archive.nyu.edu/fda/bitstream...2/wpa99059.pdf

In simpler terms, volatility persists significantly, but less so than price. Given a shock from news, you can expect volatility to spike and then stay high for subsequent periods, although it will slowly decay to some long-memory mean. This phenomenon is statistically verified and shows that volatility is predictable to a large extent.

Price on the other hand, statistically follows a random walk. (Fama, 1970; Meese and Rogoff , 1983) In other words, the best predictor of future price is the price now. i.e. we don't expect prices to change. That's not very helpful because if prices stay the same then you can't make any money as a trader.

Question: How can we make use of this "edge" in volatility to make money?
Hint: I am doing it with these systems. It is subtle/ seem unimportant BUT actually is extremely important.

EUR/JPY, CHF/JPY, AUD/NZD

All 3 setting up for longs... Looks like I was wrong earlier to predict no trades today.

Excellent trading journal you've got here, shellsnail. I think struggling traders can learn a lot by reading your posts. And you're right, it's not about a high win rate. But many people can't handle a string of losers, or more losers than winners. It messes with their emotions. A big part of trading is psychological, that's for sure!

I hope to comment further here when I have more time. But just wanted to say thanks, and please keep up the good work

Hey thanks for the vouch. Means a lot to me.

Hope to see you around!

The Nature of (Day) Trading

"Many traders believe that their aim is to forecast future prices. The amateurs in most fields ask for forecasts, while professionals simply manage information and make decisions based on probabilities.

Take medicine, for example. A patient is brought to an emergency room with a knife wound—and the anxious family members have only two questions: “will he survive?” and “when can he go home?” They ask the doc- tor for a forecast.

But the doctor isn’t forecasting—he is managing problems as they emerge. His first job is to prevent the patient from dying from shock, and so he gives him pain- killers and starts an intravenous drip to replace lost blood.Then he sutures damaged organs. After that, he has to watch against infection. He monitors the trend of the patient’s health and takes measures to prevent complications. He is managing—not forecasting.When a family begs for a forecast, he may give it to them, but its practical value is low.

To make money trading, you don’t need to forecast the future.You have to extract information from the market and find out whether bulls or bears are in control.You need to measure the strength of the dominant market group and decide how likely the current trend is to continue.You need to practice conservative money management aimed at long-term survival and profit accumulation.You must observe how your mind works and avoid slipping into greed or fear. A trader who does all of this will succeed ahead of any forecaster."
The New Trading For a Living, Alexander Elder

All across this forum you see people claiming to be day traders but dishing out forecasts.

Intra-day trading is deceptively hard because it's all about real-time information management. Many around here are playing the wrong game.

***

footnote: while implicitly as @hanover mentioned in one of his posts, you are always predicting either distribution of prices, value of price, volatility. So the distinction here is subtle/just mere nomenclature. But it matters from a mindset perspective (i.e. your ego is not at stake if you "predict" wrongly)

CHF/JPY Long

Attached Image (click to enlarge)

This initiates a short JPY position and thus EUR/JPY long will not be taken as per rules to not take correlated trades.

Loser warning: I lose or BE 75% of my trades. Follow at your own risk.

CHF/JPY Long

Attached Image (click to enlarge)

tried to scale-in. A bit too aggressive/early. Stopped out at BE.

Trade may still run but don't see favourable entry point.

Have to let this one go...

Not sure if the entry should be repeated. perhaps with a looser stop in the future. 130.000 is a good level for a stop instead of a BE stop. A general rule of thumb would be to keep the risk the same, meaning half of the original stop if I choose to scale in BEFORE the break-out/momentum run.

This may turn out to be a winner. oh well. it happens when the rules are unclear. Even if the rules were clear, it still happens

NEXT.

EDIT: Decision here is to NOT consider scale-in until initial stop is at least at BE.

Mistakes

There are in general two kinds of mistakes -- mechanical errors & decision errors.

The former is when you press sell instead of buy or you accidentally open an order when you didn't intend to etc. these can be fixed fairly quickly and should be done so promptly with no regard to the costs incurred. Just fix it immediately. these happen from time to time and can pose a serious cost to profitability if not reduced; but by and large they are harmless.

The latter is the dangerous one and is totally avoidable. Decision errors that arise from unclear rules and trading out of the system. It's hard to build a fool-proof and solid system. Even though this system is pretty detailed, the scale-in parts are still fuzzy and that makes it an avenue for serious mistakes to occur. The real damage of these mistakes is to the trader's psychology. Often one will feel like revenge-trading just to make up for the mistakes or to enter trades haphazardly because the trade was missed. This type of action out of the system parameters can often begin a slippery slope to a blown account. I've been there many times myself.

That's why it's so important to forward test a system rigorously. Make sure these mistakes drop to ZERO and every possible market scenario is catered for in your plan. If something is unclear, acknowledge it and STOP trading LIVE until that is fixed. It's very dangerous to trade live when the rules are unclear. If your plan is not well thought out, you will be confused in the thick of the action and you will be prone to compounding mistakes.

Recovering from these mistakes psychologically is something you've to practice over and over to get better at. So that when it happens unexpectedly, no serious damage will be done.

Here are some paradigms that can help you deal with it.

1. Trading is about expectancy.
Instead of thinking: how can I get back at this trade, instead think: what can I do now that has positive expectancy and protects my system's integrity? If your system is the best you've got then the answer is almost surely nothing! Nothing until the next opportunity comes along. Any other action will just damage your profitability in the long-term.

2. Independence and randomness.
Understand that it DOESN"T matter if you miss trades or trading sessions. As long as there is no clear discernible pattern that you miss them, there will be no impact to your expectancy (pip gain/trade). This is because these winners and losers are distributed randomly more or less. In the long term, no matter what trades you choose to take, the system's performance will average out. So it's PERFECTLY OKAY to miss some trades. There's no damage to your expectancy. You just slow down your growth that's all.

European Session

Pairs in focus:

EUR/CAD long
GBP/JPY long
GBP/USD long

GBP/USD Long

GU stopped out at BE.

Meanwhile, EU did indeed go up ~50 pips and reverse.

Indeed, I blew this one up.

http://www.forexfactory.com/attachme...5&d=1431563530



Interestingly, following the rules, it'd have missed my BE stop by 1 pip on that early european retrace and go on to travel to TP.

EUR possible 130 pip bounce from here.

EUR/JPY trigger signal, SL not hit.