Dear all,
in this thread I want to show some kind of low leverage trading I learned years ago. Basically it can be compared with directional grid trading. So you have a pair, have a bias for a direction and trade the pair in that direction.
I once did some kind of an explanation which I just repeat here for basic understanding:
Leverage
I think the most important thing from the book (BWILC) is to use low leverage and that gearing up can break your neck even though you might be right in the long run. Personally I use a leverage of 0.1:1 up to 3:1 depending on the near to a support/resistance and the position within the grid.
Entries
Second is that the entry itself is not that important. It becomes more and more important the higher the leverage is you use. The same is true for spreads and slippage. I don't care at all about that stuff. Using low leverage allows you to optimize your entry price by using cost averaging. But isn't that adding to a losing position you might ask? Well, actually no because you should differ between an entry and your trade.
If trader A enters with one single position of, let's say, 1 lot, he's already very limited and obviously has to know exactly where to set his stop in terms of his risk management. That's the way most traders do it and most of the systems here work. Let me say that there is nothing wrong doing it that way at least if you can handle it. Personally I couldn't.
Trader B (yes, that's me) split this position size of one lot into several entries, let's say 0.1 lot each. So I start with 0.1 lot and hey, usually the first entry isn't the best and you always get better prices later so I add to that position and might end finally as well with one lot but a much better entry price. I know, if it goes into my direction immediately, Trader A will have more benefit from its single position but for me cost averaging is a very important thing. Just don't see it as adding to a loser but as building up a position where another trader would enter with one single entry.
Another way of doing this would be the heavy usage of limit orders. That's one thing I'd like to use more in the future as I sometimes miss some nice entries around supports and resistances being just too lazy to add a simple limit order, but that's another story.
Median Grid / Comfort Zone
Right, you already know that we have our median grid (I call it my comfort zone), within trades are placed. The nice thing about this approach is that it both works in ranging and trending markets as long as your directional bias is correct. Let's say our grid is really big with a size of 600 pips. We divide this grid into 4 quadrants: Q1, Q2, Q3, Q4. Let's take the EUR/USD currently with a grid of 1.08-1.14.
Q1 would go from 1.080-1.095
Q2 would go from 1.095-1.110
Q3 would go from 1.110-1.125
Q4 would go from 1.125-1.140
The size of the grid is just defined by the volatility and usually sized 3-6% of the currency pair. You just want to have a size which is within possible move sizes within the following weeks/months without the need to adjust is permanently. Of course you have to use less leverage with a wider grid. As long as you're within your boundaries it should not be necessary to close any trades with a loss! That's a thing I sometimes not do but it's the way it should be.
So in the lower quadrants it's ok to enter with bigger positions, let's say 2:1 - 4:1. It doesn't make any sense to enter more than 2 positions within one quadrant. You don't want to end up with 4 positions in Q4 and 6 positions in Q3 only to see a drop to low Q1 levels. That's not a good feeling, believe me.
In Q4 I would only add one position at all with 0.1:1 up to 1:1. You might even enter shorts there even though your bias is up, that's just an additional part to play the range game.
If you add let's say two positions in Q1 then ride at least one of them to Q3 or Q4. No need to hurry, we've plenty of time. The other positions are for shorter profit targets like 30-60 pips (by just exploiting the randomness) where you can try to reenter at better prices again. Just have always one "long runner" in your list. If you get into Q3/Q4 it becomes trickier. Again, just avoid to have too many positions there. I almost always have a small 0.5:1 position at the top to benefit from a possible strong break to the upside. If it goes down again it doesn't hurt so much due to the low leverage. You can use cost averaging then effectively.
Grid Adjustments
So as long as we're inside the boundaries, everything should be fine. Use low leverage, don't enter too many position and go even short in Q4 if you see an opportunity. But what is to do if our boundaries are broken? Let me say first that for a break it's necessary that the price stays at least all 3 sessions beyond the boundaries so a simple break doesn't count!
The easy part is when the grid is left into our directional bias. In that case we lift it up using a half grid size to give it some room to the upper side (remember, we don't want to make adjustments that often!). So in our example (1.08-1.14) we would make an upmove of 300 pips to 1.11-1.17.
The more difficult part comes when our grid is left against our direction. In that case we have to shift it down, usually a half grid size as well, so down to 1.05-1.11 in that case. The more important thing is what to do with the open positions? We have two options: Close some or hedge them. If you hedge you get some time to rethink everything without watching your losses become bigger and bigger. Sometimes it's just necessary to close positions with a loss. Due to that approach your losses might be bigger than your winners (that's why it's important to have some long run positions from Q1/Q2 with higher leverage!). But losses are part of the game, so if you have to close some positions, always close those positions which are most out of the money, because those positions have the most less chance to become profitable again. Usually you will close those 0.1:1/1:1 trades (from the formerly Q3/Q4) but can benefit from your formerly Q1/Q2 trades which might be higher geared. As long this is a single event and not a trend change (with further grid adjustments), everything should be under control.
Those grid adjustment in the "wrong" direction shouldn't happen that often. If so, your directional bias is obviously not correct.
Managing the drawdown
You should know in advance how big your acceptable drawdown is. It doesn't make sense to allow let's say 30% and start actions if it gets there. If your acceptable DD is 30% you have to start counter measures around 15% to be able to handle your positions if it continues to go deeper (by closing or hedging). There is no need to feel pain by watching your positions going into the red deeper and deeper. If you can't sleep at night your leverage is obviously too high!!!
Summary
That's basically all. I have a directional bias, buy the dips and use multiple entries and cost averaging, so it sounds more like investing that trading, mhh? That directional bias comes from the underlying fundamentals and a break of a neckline of a H&S pattern isn't a change in the direction of the trend. I enter slightly bigger positions in the low of my comfort zone and I'm more careful to enter one at the top of that zone (I often just stick in a very small one (0.1:1-0.5:1) to keep in touch if there is a rally).
So actually I don't look at charts that often, I enter here and there around supports with low leverage and don't use stops. If it goes against me, well, cheaper levels to buy (all in my comfort zone!!!). So my risk/reward ratio is undeniable scary regarding the TP:SL ratio but how often did you get stopped out only to see it continue in your direction? Again, that doesn't mean to let loser trades run forever against you! It's just all about probabilities. If you use a tight stop you just get stopped out due to the noise in the markets. I tried to trade 5m charts in the past but I didn't really get it. Now I'm much more relaxed and don't have to glue to the screen the whole day...
A great daily funny read btw is the DailyPfennig of Chuck Butler.
in this thread I want to show some kind of low leverage trading I learned years ago. Basically it can be compared with directional grid trading. So you have a pair, have a bias for a direction and trade the pair in that direction.
I once did some kind of an explanation which I just repeat here for basic understanding:
Leverage
I think the most important thing from the book (BWILC) is to use low leverage and that gearing up can break your neck even though you might be right in the long run. Personally I use a leverage of 0.1:1 up to 3:1 depending on the near to a support/resistance and the position within the grid.
Entries
Second is that the entry itself is not that important. It becomes more and more important the higher the leverage is you use. The same is true for spreads and slippage. I don't care at all about that stuff. Using low leverage allows you to optimize your entry price by using cost averaging. But isn't that adding to a losing position you might ask? Well, actually no because you should differ between an entry and your trade.
If trader A enters with one single position of, let's say, 1 lot, he's already very limited and obviously has to know exactly where to set his stop in terms of his risk management. That's the way most traders do it and most of the systems here work. Let me say that there is nothing wrong doing it that way at least if you can handle it. Personally I couldn't.
Trader B (yes, that's me) split this position size of one lot into several entries, let's say 0.1 lot each. So I start with 0.1 lot and hey, usually the first entry isn't the best and you always get better prices later so I add to that position and might end finally as well with one lot but a much better entry price. I know, if it goes into my direction immediately, Trader A will have more benefit from its single position but for me cost averaging is a very important thing. Just don't see it as adding to a loser but as building up a position where another trader would enter with one single entry.
Another way of doing this would be the heavy usage of limit orders. That's one thing I'd like to use more in the future as I sometimes miss some nice entries around supports and resistances being just too lazy to add a simple limit order, but that's another story.
Median Grid / Comfort Zone
Right, you already know that we have our median grid (I call it my comfort zone), within trades are placed. The nice thing about this approach is that it both works in ranging and trending markets as long as your directional bias is correct. Let's say our grid is really big with a size of 600 pips. We divide this grid into 4 quadrants: Q1, Q2, Q3, Q4. Let's take the EUR/USD currently with a grid of 1.08-1.14.
Q1 would go from 1.080-1.095
Q2 would go from 1.095-1.110
Q3 would go from 1.110-1.125
Q4 would go from 1.125-1.140
The size of the grid is just defined by the volatility and usually sized 3-6% of the currency pair. You just want to have a size which is within possible move sizes within the following weeks/months without the need to adjust is permanently. Of course you have to use less leverage with a wider grid. As long as you're within your boundaries it should not be necessary to close any trades with a loss! That's a thing I sometimes not do but it's the way it should be.
So in the lower quadrants it's ok to enter with bigger positions, let's say 2:1 - 4:1. It doesn't make any sense to enter more than 2 positions within one quadrant. You don't want to end up with 4 positions in Q4 and 6 positions in Q3 only to see a drop to low Q1 levels. That's not a good feeling, believe me.
In Q4 I would only add one position at all with 0.1:1 up to 1:1. You might even enter shorts there even though your bias is up, that's just an additional part to play the range game.
If you add let's say two positions in Q1 then ride at least one of them to Q3 or Q4. No need to hurry, we've plenty of time. The other positions are for shorter profit targets like 30-60 pips (by just exploiting the randomness) where you can try to reenter at better prices again. Just have always one "long runner" in your list. If you get into Q3/Q4 it becomes trickier. Again, just avoid to have too many positions there. I almost always have a small 0.5:1 position at the top to benefit from a possible strong break to the upside. If it goes down again it doesn't hurt so much due to the low leverage. You can use cost averaging then effectively.
Grid Adjustments
So as long as we're inside the boundaries, everything should be fine. Use low leverage, don't enter too many position and go even short in Q4 if you see an opportunity. But what is to do if our boundaries are broken? Let me say first that for a break it's necessary that the price stays at least all 3 sessions beyond the boundaries so a simple break doesn't count!
The easy part is when the grid is left into our directional bias. In that case we lift it up using a half grid size to give it some room to the upper side (remember, we don't want to make adjustments that often!). So in our example (1.08-1.14) we would make an upmove of 300 pips to 1.11-1.17.
The more difficult part comes when our grid is left against our direction. In that case we have to shift it down, usually a half grid size as well, so down to 1.05-1.11 in that case. The more important thing is what to do with the open positions? We have two options: Close some or hedge them. If you hedge you get some time to rethink everything without watching your losses become bigger and bigger. Sometimes it's just necessary to close positions with a loss. Due to that approach your losses might be bigger than your winners (that's why it's important to have some long run positions from Q1/Q2 with higher leverage!). But losses are part of the game, so if you have to close some positions, always close those positions which are most out of the money, because those positions have the most less chance to become profitable again. Usually you will close those 0.1:1/1:1 trades (from the formerly Q3/Q4) but can benefit from your formerly Q1/Q2 trades which might be higher geared. As long this is a single event and not a trend change (with further grid adjustments), everything should be under control.
Those grid adjustment in the "wrong" direction shouldn't happen that often. If so, your directional bias is obviously not correct.
Managing the drawdown
You should know in advance how big your acceptable drawdown is. It doesn't make sense to allow let's say 30% and start actions if it gets there. If your acceptable DD is 30% you have to start counter measures around 15% to be able to handle your positions if it continues to go deeper (by closing or hedging). There is no need to feel pain by watching your positions going into the red deeper and deeper. If you can't sleep at night your leverage is obviously too high!!!
Summary
That's basically all. I have a directional bias, buy the dips and use multiple entries and cost averaging, so it sounds more like investing that trading, mhh? That directional bias comes from the underlying fundamentals and a break of a neckline of a H&S pattern isn't a change in the direction of the trend.
I enter slightly bigger positions in the low of my comfort zone and I'm more careful to enter one at the top of that zone (I often just stick in a very small one (0.1:1-0.5:1) to keep in touch if there is a rally).So actually I don't look at charts that often, I enter here and there around supports with low leverage and don't use stops. If it goes against me, well, cheaper levels to buy (all in my comfort zone!!!). So my risk/reward ratio is undeniable scary regarding the TP:SL ratio but how often did you get stopped out only to see it continue in your direction? Again, that doesn't mean to let loser trades run forever against you! It's just all about probabilities. If you use a tight stop you just get stopped out due to the noise in the markets. I tried to trade 5m charts in the past but I didn't really get it. Now I'm much more relaxed and don't have to glue to the screen the whole day...
A great daily funny read btw is the DailyPfennig of Chuck Butler.
No, I'm not a full time trader and never will be.
