DislikedOkay, since we've addressed Segment 2 - Initial series entry, we need to also talk about Segment 3 - Money Management There will be many aspects to MM that we will address as we go but for now we have to think about initial position sizing. As mentioned at the outset, I want this to be a low risk trading system. Low risk can mean a lot of different things to different people. To a large extent it will depend on you as a trader, your resources, risk tolerance, etc. There's umpteen threads about that. For the sake of simplicity let us begin with the...Ignored
Reverse Engineering a Profitable System (REPS)
- #23
- Aug 7, 2015 6:43pm Aug 7, 2015 6:43pm
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
- #24
- Aug 7, 2015 6:44pm Aug 7, 2015 6:44pm
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
- #25
- Aug 7, 2015 6:51pm Aug 7, 2015 6:51pm
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
- #27
- Aug 8, 2015 10:45am Aug 8, 2015 10:45am
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
Okay, so let's move forward with our initial series trade. Let's try using the opposite side of the Donchian Channel on the H4 TF as our stoploss.
We'll see how this fit's into our modeling for successfully staying in the trend. This will also keep our stops lower, allowing a larger position size.
As we see below our entry price on the Daily chart is 1.3505. The other side of the Donchian on the H4 is at 1.3628 which is 123 pips.
We want to risk $100 so that's 81.3 cents per pip. With .01 standard lots on the E/U trading at 10 cents per pip our position size would be .0813 lots, or rounded to .08
.08 lots @ 80 cents per pip x 123 pips = $98.40
We'll see how this fit's into our modeling for successfully staying in the trend. This will also keep our stops lower, allowing a larger position size.
As we see below our entry price on the Daily chart is 1.3505. The other side of the Donchian on the H4 is at 1.3628 which is 123 pips.
We want to risk $100 so that's 81.3 cents per pip. With .01 standard lots on the E/U trading at 10 cents per pip our position size would be .0813 lots, or rounded to .08
.08 lots @ 80 cents per pip x 123 pips = $98.40
- #30
- Aug 8, 2015 11:14am Aug 8, 2015 11:14am
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
- #31
- Aug 8, 2015 11:23am Aug 8, 2015 11:23am
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
- #32
- Edited 11:59am Aug 8, 2015 11:33am | Edited 11:59am
- Joined Feb 2014 | Status: ember | 1,268 Posts
- #33
- Aug 8, 2015 7:00pm Aug 8, 2015 7:00pm
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
Okay so now we have our exit criteria.
We have our initial series position open in line with our criteria.
Now we move to Segment 4 - Trade Management
Keeping in line with our desire for a low risk trading system, we need to look at protecting our trading capital by moving our stop to BE.
Open to ideas here...
We can choose an arbitrary number, a factor of ATR/ADR, Price Action/structure, lower TF donchian channel, etc.
For the moment, let's use 50 pips to move our stop to BE. I've used this successfully in the past.
So on the 23rd of July we move our stop to BE.
At this point our trade is at 0 risk to our trading capital, and so it shall continue.
Next Segment 5 - Addon trades
We have our initial series position open in line with our criteria.
Now we move to Segment 4 - Trade Management
Keeping in line with our desire for a low risk trading system, we need to look at protecting our trading capital by moving our stop to BE.
Open to ideas here...
We can choose an arbitrary number, a factor of ATR/ADR, Price Action/structure, lower TF donchian channel, etc.
For the moment, let's use 50 pips to move our stop to BE. I've used this successfully in the past.
So on the 23rd of July we move our stop to BE.
At this point our trade is at 0 risk to our trading capital, and so it shall continue.
Next Segment 5 - Addon trades
Good morning spyderman.
Yes i know about what you wrote but i was still writing my post when you posted yours.
Anyway. It seems to me that this is a ready system but i can't understand where we are going this way
Addon trade? Just keeping adding with same rules only if the previous trade has the sl at be. Fairly simple and efficient i think .
Thanks
Yes i know about what you wrote but i was still writing my post when you posted yours.
Anyway. It seems to me that this is a ready system but i can't understand where we are going this way
Addon trade? Just keeping adding with same rules only if the previous trade has the sl at be. Fairly simple and efficient i think .
Thanks
- #35
- Aug 9, 2015 6:01am Aug 9, 2015 6:01am
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
Good morning spyderman. Yes i know about what you wrote but i was still writing my post when you posted yours. Anyway. It seems to me that this is a ready system but i can't understand where we are going this way
Thanks again lemming for your input.
There is an outline of a system here but my hope was to gather input on possible ways to maximize it in line with the original goals as set out. As mentioned before we've adopted the Donchian Channel as an effective series exit and that was a great contribution by Mister White.
Where we are "going" hopefully is to come up with a trading system, after the fact, that would have traded the 3 examples given earlier (E/U, E/N, G/U) on their recent long trends (concentrating on E/U at the moment) both with low risk and high profitability. Then we can apply that system to forward trading and should be well placed to capture future long tail trends as they develop. Thus far, most of the ideas put forward have been unrelated to the example trends given and so it may seem that they are unappreciated or ignored out of hand. That's certainly not my intent...I just want to keep on track with the goals as set.
I know this is a different way of thinking about it but hopefully it will be of benefit to those reading and participating if they have the patience to follow along.
If not, then they probably don't have the patience to trade long term trends in the first place...JMO
- #36
- Aug 9, 2015 6:17am Aug 9, 2015 6:17am
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
Okay,
Moving forward to Segment 5 - Addon trades
We have 1 position open in our series at .08 lots and it's sitting at BE.
In keeping with our desire for a low risk system our main rule in adding on more positions is to not incur any further risk to our trading capital.
To accomplish this we will only use any floating profits we have built in the series to fund further positions. Any profit used must be "locked" in by s/l so that if our trend ends or reverses and takes out our position then our trading capital won't take a hit.
I think our 2nd rule should be to lock in at least some of our profits to the extent that if the trend collapses we walk away with a gain in our trading capital and not just break even. I've read LR Thomas' books on Forex and she presents the idea of using 50% of a previous trades profit to finance the next trade and thereby allow larger position sizes. As you roll that strategy forward to trade after trade you can dramatically increase your position size and profit potential without additional risk to trading capital. You are only risking unrealized gains. I don't think she applied it to a long series of trades like this, but I think it will be effective.
So to summarize: When we wish to add a position to our series we will base our MM criteria (trade location, position size, s/l) on the amount of floating profit we have already accumulated from previous positions and we will lock in enough of that unrealized gain to guarantee that if all our stops are hit we will still "bank" 50% of the gains that were available at the time of adding our most recent position.
I hope that makes sense. If anyone has any questions about it, or any ideas on how to better tweak the figures, then shout out.
But hopefully it will become clear once we see it in action.
So, on to the charts.
Moving forward to Segment 5 - Addon trades
We have 1 position open in our series at .08 lots and it's sitting at BE.
In keeping with our desire for a low risk system our main rule in adding on more positions is to not incur any further risk to our trading capital.
To accomplish this we will only use any floating profits we have built in the series to fund further positions. Any profit used must be "locked" in by s/l so that if our trend ends or reverses and takes out our position then our trading capital won't take a hit.
I think our 2nd rule should be to lock in at least some of our profits to the extent that if the trend collapses we walk away with a gain in our trading capital and not just break even. I've read LR Thomas' books on Forex and she presents the idea of using 50% of a previous trades profit to finance the next trade and thereby allow larger position sizes. As you roll that strategy forward to trade after trade you can dramatically increase your position size and profit potential without additional risk to trading capital. You are only risking unrealized gains. I don't think she applied it to a long series of trades like this, but I think it will be effective.
So to summarize: When we wish to add a position to our series we will base our MM criteria (trade location, position size, s/l) on the amount of floating profit we have already accumulated from previous positions and we will lock in enough of that unrealized gain to guarantee that if all our stops are hit we will still "bank" 50% of the gains that were available at the time of adding our most recent position.
I hope that makes sense. If anyone has any questions about it, or any ideas on how to better tweak the figures, then shout out.
But hopefully it will become clear once we see it in action.
So, on to the charts.
- #37
- Aug 9, 2015 8:08am Aug 9, 2015 8:08am
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
Looking at our Daily charts we a desirable entry at 1.33332. There's a break of the downside DC and a break of recent support at this level.
Moving to the H4 for a potential s/l we find that our stop at the upper DC would be at 1.3411 or about 78 pips.
If we were to move our initial entry to this s/l as well we would be locking in a profit of 94 pips (1.3505 - 1.3411). With a position size on that initial entry of .08 lots that gives us a value of $75.20 of floating profit (.08 x $10 x 94 = $75.20). We only want to risk 1/2 of that or $37.60. So with a proposed s/l of 78 pips gives us a position size of .05 lots ($37.60 / 78 / $10 = .048 then round up)
So we place our order and move the s/l on our initial entry to 1.3411, the same as our 2nd position.
Now if the trade moves entirely against us we have a guaranteed profit of $37.60. But we have the benefit of hindsight in this case and we know that didn't happen.
The next day price breaks sharply below 1.3400 and we move our stop on the 2nd position to BE
Moving to the H4 for a potential s/l we find that our stop at the upper DC would be at 1.3411 or about 78 pips.
If we were to move our initial entry to this s/l as well we would be locking in a profit of 94 pips (1.3505 - 1.3411). With a position size on that initial entry of .08 lots that gives us a value of $75.20 of floating profit (.08 x $10 x 94 = $75.20). We only want to risk 1/2 of that or $37.60. So with a proposed s/l of 78 pips gives us a position size of .05 lots ($37.60 / 78 / $10 = .048 then round up)
So we place our order and move the s/l on our initial entry to 1.3411, the same as our 2nd position.
Now if the trade moves entirely against us we have a guaranteed profit of $37.60. But we have the benefit of hindsight in this case and we know that didn't happen.
The next day price breaks sharply below 1.3400 and we move our stop on the 2nd position to BE
- #38
- Aug 9, 2015 9:19am Aug 9, 2015 9:19am
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
On 8/29/14 we see another entry opportunity as price hits the lower DC and again clears recent support at 1.3152
Here's where we start to see the power of compounding this way.
Moving to the H4 we see our top side DC s/l at 1.3222 for 70 pips.
At this point our initial series entry has a floating profit of 286 pips or $228.80 (.08 x $10 x 286 = $228.80)
Our 2nd position has a floating profit of 110 pips or $55.00 (.05 x $10 x 110 = $55)
Total floating profit at our new s/l of 1.3222 is $283.80. We only want to risk 50% or $141.90.
With a s/l of 70 pips that gives us a position size of .2 lots ($141.90 / 70 / $10 = .2027 rounded down to .2)
If price turns and takes out our trades we'll still bank $141.90 on our initial $100 of risk.
A week later price makes a strong break down through the 1.3100 area and allows us to move our stop to BE
We now have 3 positions open for a total of .33 lots. Now every pip we move down is $3.30 compared to .80 starting out. Again, all with no additional risk to our account balance.
Here's where we start to see the power of compounding this way.
Moving to the H4 we see our top side DC s/l at 1.3222 for 70 pips.
At this point our initial series entry has a floating profit of 286 pips or $228.80 (.08 x $10 x 286 = $228.80)
Our 2nd position has a floating profit of 110 pips or $55.00 (.05 x $10 x 110 = $55)
Total floating profit at our new s/l of 1.3222 is $283.80. We only want to risk 50% or $141.90.
With a s/l of 70 pips that gives us a position size of .2 lots ($141.90 / 70 / $10 = .2027 rounded down to .2)
If price turns and takes out our trades we'll still bank $141.90 on our initial $100 of risk.
A week later price makes a strong break down through the 1.3100 area and allows us to move our stop to BE
We now have 3 positions open for a total of .33 lots. Now every pip we move down is $3.30 compared to .80 starting out. Again, all with no additional risk to our account balance.
- #39
- Aug 9, 2015 9:48am Aug 9, 2015 9:48am
- Joined Nov 2010 | Status: Snaggin' Some Pips | 2,159 Posts
Something to keep in mind as we move forward.
Our series exit is the opposite DC on the daily chart. Thus far we've been moving our entry stops to BE to lock in profits to use in funding further positions.
That s/l lock movement has kept our group series stop loss inside the opposite daily DC. So if our trades reverse we would be closing our series before the daily DC actually indicated we wanted too.
That's the price of getting positions setup early in the trend with no risk. It will payoff big time if the trend continues (as we know this one did) because we'll have multiple positions early on.
But as we move on we want to get our individual stops on past positions (not the most current since that stop is figured on the H4 DC) at no closer to PA than the opposite DC...in fact that's the place for it to be since we want to close all trades in the series at that spot anyway.
Let's just keep that in mind.
I'm going to do 2 more entries this afternoon to how those work and then we'll move on down to the trend finish line.
Our series exit is the opposite DC on the daily chart. Thus far we've been moving our entry stops to BE to lock in profits to use in funding further positions.
That s/l lock movement has kept our group series stop loss inside the opposite daily DC. So if our trades reverse we would be closing our series before the daily DC actually indicated we wanted too.
That's the price of getting positions setup early in the trend with no risk. It will payoff big time if the trend continues (as we know this one did) because we'll have multiple positions early on.
But as we move on we want to get our individual stops on past positions (not the most current since that stop is figured on the H4 DC) at no closer to PA than the opposite DC...in fact that's the place for it to be since we want to close all trades in the series at that spot anyway.
Let's just keep that in mind.
I'm going to do 2 more entries this afternoon to how those work and then we'll move on down to the trend finish line.