This article concerns the building of an optimal
market system.
First, some background on myself:
I worked for 13 years in the Electronic Data
Processing center of a bank. I have spent the
last 10 years as a market consultant,systems
designer and trader. I am a Chess Master, and am also a
member of the International High IQ Society.
To begin, we must first ascertain what it is we
want out of our system. What are our objectives?
What we should want is a system that will produce
tremendous probability of gain, with miminal risk.
System outcome is controlled primarily by two biases:
- THE KNOWLEDGE BIAS:
This is a formula of my own making. The KB says that:
PP = 1 - N
Where PP is the probability of future profit, and N is the
% of people that have knowledge of the approach you are
using.
So, if 99% of traders know about the approach you are using,
then 1 - .99 = .01 . You have a 1% probability of using the
approach profitably in the long run.
- THE PSYCHOLOGY BIAS:
The PB says that the actual execution of any system by a
trader will be far less accurate than the testing of the
system would indicate. Essentially, the trader will almost
invariably make the wrong move at the wrong time.
Taking these biases into account, we can deduce that:
-
Our system parameters must be unknown to the market.
-
Our system must produce a high probability of break-even or
profit, and a high reward/risk ratio. That way if we screw up and
don’t win or break even as often as we should, The high R/R will
save us, and if we screw up, and don’t win as much money as we
should, and lose more money than we should, the high frequency of
winning and break-even trades may save us.
The two main components of an optimal system are:
- Time
- Price
You can create some type of indicator using these two
factors, or you can do the following:
The main characteristic of all price movement in the
market is the ABC Swing.
An “UP” ABC swing would consist of an upswing(A), then a
downswing(B) with a low higher than the low of upswing A,
and then another upswing© with a high greater than
the high of the B swing.
A “DOWN” ABC swing would consist of an downswing(A), then an
upswing(B) with a high lower than the high of downswing A,
and then another downswing© with a low less than
the low of the B swing.
AN “UP” market is a market making a series of successive
higher ABC swings.
A “Down” market is a market making a series of successive
lower ABC swings.
THE SYSTEM
Time-Frame: 4 hour time frame
Markets: EUR/USD, USD/JPY, GBP/USD, EUR/CHF, EUR/JPY
EUR/GBP, AUD/JPY, NZD/USD and USD/CAD
Trade Size: Trade 1 mini-lot (1 dollar per pip) for
every $1000 in your account.
BUY on an a “DOWN” ABC swing in an “UP” market.
SELL on an “UP” ABC swing in a “DOWN” market.
The definition of the completion of an up or down ABC
pattern should be a ratio of time and price that is
unknown to the markets. In other words, you need to
study price action and devise a time/price ratio that
is unique to you. Naturally, such things as fibonacci
or other well-known retracement series are out, as the
Knowledge Bias applies to them. Your TP must be unique
to you. After you have devised your TP ratio, go up on
the internet and do a search to make sure no one else
has come up with your idea.
Completion of the system:
-
Go to “break-even” on the trade once the trade has
moved in your favor for two periods. -
Exit the trade if an opposing set-up occurs. i.e.
if long, the market switches to “DOWN” and an "UP"
ABC occurs signaling a short entry. -
If long, exit the market if an “upthrust” occurs.
If short, exit the market if a “Spring” occurs.
An upthrust is when price trades above a previous
peak ( in this case, a high with at least 3 lower
highs preceding it, and at least 3 lower highs following
it.) and then closes below the peak.
A spring is when price trades below a previous trough
(in this case, a low with at least 3 higher lows preceding
it, and at least 3 higher lows following it.) and then closes above
the trough.
Using this system, you can expect the following results:
40% at break-even
40% winning trades
20% losing trades
Profit-to-Loss Ratio (dollar amount won divided by dollar
amount lost): 15 - 1
MAX DD: 10% of Equity
So, with this system, you will win or break even 80% of
the time and you will lose 20% of the time. You will win,
on average 15 dollars for every dollar that you lose.
The system will average 3-5 trades per week.
The risk level is, on average, 4% per trade.
Starting with a thousand dollars in your account, let’s
take a look at a projection of how this system will
perform:
Week 1: 2,000
Week 2: 4,000
Week 3: 8,000
Week 4: 16,000
Week 5: 32,000
Week 6 64,000
Week 7: 128,000
Week 8: 256,000
Week 9: 512,000
Week 10: 1,024,000
So, this system provides a reasonable possibility of
becoming a millionaire with very little risk. If you
lose your thousand dollars, that’s not much.
So, take your best shot!!! 
As, a caveat, as a starting point in your search for a
time/Price ratio of your own, look at number of bars in
each swing, and some ratio of the swings compared to
each other.
Also, don’t cobble together two or three known indicators,
and think you have a unique system. There are a billion
traders looking at these relationships. The Knowledge Bias
still applies, and your chances of success are limited.
YOU MUST BE UNIQUE.
Once you have your system, DON’T SHARE WITH ANYBODY.
If you tell just one person, that person will tell
2 people, and those 2 will tell 2 people… the
result is viral in nature. Pretty soon, your method
gets posted on the NET, and that’s all she wrote.
As a final note to those wondering if profiting from
the markets can truly be done, after trading the
futures and FOREX markets, I retired when I was 35,
and bought a house in Florida. So, it CAN be done.
