Mathematical Trading System

Trading Systems Free Forex Trading Systems
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By the time you finish reading here, you will be saying “O thank God, I got the Holy Grail”. From my point of view this system is as close to the Holy Grail as the nose is close to the mouth. I therefore request your comments and contributions to make this system better for us all. Thanks, and here we go…

Do you know that when a Currency pair begins to move, it will not continue moving in one direction? It will move move 20, 35, 78, or even 100 pips but [B]somewhere somehow it has to retrace in the opposite direction.[/B]

Let’s say, I wake up 00:00hrs GMT(use any time here) and look at the GBP/USD. What I do, without asking, [B]I short the pair expecting 25 pips as profit. I risk 25 pips[/B] for the trade, meaning SL at 25 pips away(assuming zero spread). I also put a pending order, double the size of the first one, at the point of the SL. This pending order is also a Sell, expecting a 25 pip profit and having 25 pip SL as above.

Let us see the outcome:
[B]1) [/B]The pair may go down immediately and give me profit of 25 pips. 25 pips? I am rich! So, close all the other trades, pending, whatever. Assuming a Micro account, with a starting balance of 1000 USD, 1:200 leverage, I had used a 5% margin. This was 10 Microlots. This gave a profit of 1025/10= 25 USD. That is a cool 2.5% for the day. I am rich!!!
[B]2)[/B] Sorry my profit-hungry friend. By the time you finished bathing, you find the Pound has moved against you. You watch, and the stop loss is hit. Pooooo… Well, you have just lost 2.5% of your account. Remaining balance: 975 USD. However at the point the stoploss was hit, a new trade of 10% margin was triggered. It has TP at 25 pips and SL at 25 pips. You watch, and the pair continues to go against you. When it is about to hit the new stop loss, you mutter something like “Jesus”. The pair then reverses, moves through its origin and goes down and makes you rich 5% of your account( ie 2025/10= 50 USD). You are twice richer your initial loss. In other words, your -2.5% has been rendered 2.5% for the day. A miracle, not so?
[B]3)[/B] Another guy, who was on the EUR/JPY, using the same principles, gets the second SL hit. He therefore loses a further 5% bringing his balance to 925 USD. He therefore decides to go in with 20%(of 1000 at 1:200 leverage) margin which is 40 Microlots. This trade is a sell. It gives him 25 pips, and he makes 10% profit with a net of 2.5% Profit for the day.

This assumes the pair will retrace at a certain point. Please read and review. Let me give you one of my reviews:
1)[B] I could not put a sell at the beginning of an up-trend[/B] as shown by, for instance, moving average cross-over(faster ma moves above slower). At this point I would go in with successive buys.

2

Hi Busingy, I don’t think I have a come across a system like this before (though I am fairly new to this).

So basically what you are doing is constantly adding to a losing position until it retraces 25 pips in your direction?

How far would you be willing to go before you cut your losses? For instance, to start with you would be risking $1 per pip, but by the time it has gone 150 pips in the wrong direction you will then be risking $64 per pip. And 25 pips @ $64/pip is $1600. Your unrealised P/L will already be at -$1575 just to get to 150 pips. So if price goes that extra 25 pips to reach 175 pips in the wrong direction, you will be at -$3175 and will now be risking $128/pip.

I think this is a surefire way to get an account wiped out. But good luck.

Tom

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I also agree, markets trend all the time. I’m not liking this fixed idea of 25 pips, how have you come up with this fictitious number? Doubling bets each time is know as gambling. You would be better off doing this idea on roulette. Each time you loose, repeat your bet on the same colour without changing. Eventually the colour will change to the one you are backing. This is a really dumb idea of trading if you want to blow your account when a bad run occurs. You cant afford to go wrong more than 4 times before the leverage starts rocketing.

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This is pure and outright gambling. No strategy, just hoping the markets will work in your favour… eventually. Try it on demo for 3 months and see your account wiped clean…

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There is sort of a name for that gambling style: Martingale.

You can win with it. If you have enough money. But if you have enough money, why would you risk to lose it?

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Thanks for your comments.

I have been using this system today. I used 2.5% of account as Trade 1. The 2nd Trade was of course 5%. and so on… My 1st trade was entered whenever a candle closes out of the Bollinger on the 5 min chart; a Buy if on Lower Bollinger; and Vice-versa. My TP was 12.5 pips; SL 12.5 pips. This means 0.625% on a successful round.

This way I have to make sure I win before Trade 6. In otherwords, Trade 5 has to win or else…

When I backtested, it worked well for many months. Of course use the Eur/USD which has low spreads.

Thanks again.

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so what is going to keep you from having 6 losses in a row? or 7 or 8 or 9 etc. ? It can happen. Since the title of this mentions mathematical which it isn’t. It’s Martingale which is a killer eventually, but here is some real math.
If your take profit is the same as your stop loss and assuming price is random (which it isn’t) then you have a 50% chance of loosing your trade. On averge you can expect to loose 10 trades in a row one time in 1000 trades and it only takes that one time to more than wipe you out. You have to cut your losses somwhere.

ok if you really want to be precise mathematically you can expect to loose 10 times in a row this many times 0.976563 in 1000 trades but that’s close enough to 1
or in other words there is a 97.65% chance that it will happen and the more trades you make the higher the percent chance.

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Hey TalonD,

Just out of interest, how have you calculated that the odds of loosing 10 trades in a row is almost 1:1000. To me that seems rather high, almost to high at first glance. Im not disagreeing, just interested in how you calculated this.

I may even use this formula on my own trading strategy.

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if your chance of loosing is 50% and your chance of winning is 50% that’s 0.50 (by the way the odds of winning 10 in a row is the same as the odds of loosing 10 in a row)
so .50 x .50 = .25 odds of loosing 2 in a row
.50 x .50 x .50 = .125 odds of loosing 3 in a row
and so on
multiply the result times 1000 to get the odd of loosing that many times in a row in 1000 trades or mutiply times 100 to see the odds of loosing that many in 100 trades and so on.

so in the example above you could expect to loose 3 times in a row 125 times in 1000 trades but you would also winn 3 in a row that many times

this is all assuming your odds are 50:50

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The actual probability of losing 10 in a row (of 50/50) wagers would be 1 in 1024 (e.g. [1/2]^10) but this is optimistic in the real world. When you take into consideration the spread you realize that losses will occur not at you SL but at your SL - Spread, for LONG trades and SL + Spread, for SHORT trades. You will also have to take the spread into consideration on winning trades. IOW, the probability density function will be skewed by the Spread. This is why Martingale systems are deemed losers. If drawdown was not a consideration (i.e. unlimited funds available) all a trader would have to do is execute a trade (doesn’t matter LONG or SHORT) and wait for the market to move into profitability before closing.

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He’d be better off if he had some type of edge that would increase his win rate. Maybe only trading with the trend or something similar. Still, martingale and a blown account eventually.

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yep, some kind of edge will give you better than 50 50 odds but no matter what the odds are there is still a probability of loosing more than one trade in a row. you have to have enough of an edge that the wins will overcome the losses. Any string of losses will give you some draw down but martingale can magnify that draw down exponentially to the point where you can’t recover from it.

hmmm… I’m tempted to share my winning roulette system now… Nah I’ll resist the temptation

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Thanks. That’s very helpful analysis. Thanks to all the other members who have endeavored to comment on my system. My research is into finding a system that will win in all season, whether C/M Bernanke says what or services PMI is how much.

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The premise for this strategy is valid because markets do not move in a straight line, and a rational market retraces after a directional move. The problem is, markets will ultimately have periods where they act irrationally.

As others have stated above, this basis of this strategy is known as the Martingale Technique. Personally, I have experimented with it extensively on 3 different practice accounts on a daily basis for over a year. I was able to perfect the system to profit in excess of well over 100+ times in a row on each of the three accounts. However, there inevitably came a time when the market moved irrationally in the wrong direction just enough to crash the account.

You may be able to wiggle out 1000+ or more trades in a row with the Martingale technique, but at some point, the system does crash. When it crashes, it crashes in the BIGGEST possible way and at the worst possible moment. The only way I can imagine the Martingale system would be truly reliable is if you had some way to borrow unlimited funds from an investment bank or something like that.

As for the person who is trading forex with their own money, forget about it. If it were a “holy grail” everyone would already be doing it because it is not a new idea. There are easier strategies that require much less effort anyway.

[B]Markets can remain irrational longer than you can remain solvent.[/B] - As quoted in When Genius Failed (2000) by Roger Lowenstein, p. 123; actually “Markets can remain irrational a lot longer than you and I can remain solvent.” from A. Gary Shilling, Forbes (1993) v. 151, iss. 4, pg. 236.

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Nice commentary, but you do know that the last time someone contributed to this thread, was 2 years ago …

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There are better ways to use Martingale system. The market can really move against rapidly and extensively without giving you the 25 pip retracement. One way to avoid the sudden big moves is to avoid the news. Zone recovery trading might be useful if used properly .