A trading method for those who can't watch the market all day and, maybe, for those who can.
PIP EQUITY CURVE, JANUARY 2007 THROUGH MID-JUNE 2012,
GBP/JPY, EUR/USD, AUD/USD, AND USD/JPY.
It starts with a casual observation. Look at daily bars. Does it seem to you that when the high (low) of yesterday is broken, the close today is often also higher (lower) than the break point? Here is a shot of GBP/JPY for May 2012 where we just mark the outcome from the breakout relative to the close.
We can use a spreadsheet to ask a simple question: If all we did was go long on a break of yesterday’s high and go short on a break of yesterday’s low and we held positions until the close of today, how would we come out? We will define a breakout as a pip above the high or below the low.
Using IBFX data from January 2007 through mid-June 2012 gives us five and a half years or about 66 months of data. To replicate these results, you probably already know that you can save the data from a chart by clicking “file” “save as” and saving it to a spreadsheet. We are including the GBP/JPY for a simple reason, it moves, dramatically. For GBP/JPY, the excel formula to look at long trades is =IF(C11>C10,(E11-(C10+0.01))*100,0). That is, if our high of today (C11) is greater than our high of yesterday (C10), then take the close of today (E11) and subtract our entry point (C10+.01) and multiply the result by 100 so we can read our outcome in whole pips. And, here is your excel formula to check the short trades: =IF(D11<D10,((D10-0.01)-E11)*100,0). For pairs with four decimals, add two zeroes to your breakout spread and to the multiplier that gets you to a whole pip number. Here are the results for our portfolio just taking the breakouts and holding until close:
GBP/JPY: Long +6,714; Short +11,890; Total +18,604
EUR/USD: Long (-197); Short +5,117; Total +4,920
AUD/USD: Long +5,107; Short +2,191; Total +7,298
USD/JPY: Long +3,571; Short +3,778 ; Total +7,349
Without considering spreads, slippage, and other negatives, trading this portfolio would have yielded more than +38,000 pips, i.e., just under +600 on average per month. That looks pretty good, but I think it can get a little better and less risky. First, a couple of entry tweaks seem to be in order.
1. Go long at yesterday’s high plus one pip.
2. Go short at yesterday’s low minus one pip.
3. Exception: For Monday trades, go long at yesterday’s high plus 11 pips or go short at yesterday’s low minus 11 pips.
The reason for the Monday exception is that we are going to have a limited data base from Sunday trading. The Oanda platform is going to give us about 10 hourly bars from 14 to 23, platform time, and IBFX is only going to give us one or two, usually 22 and/or 23, platform time. See what your own datafeed provides. In any case, you will probably agree that we would feel safer asking the market to move a little before we jump in on Monday.
Some traders have a valid aversion to Monday trading and may want to skip that day entirely. By now, we should all know that the best days to trade, from the standpoint of price movement, are Tuesday through mid-day Friday. However, there are some opportunities on Monday, like the two GBP/JPY trades in April, 2012. One on the 23rd and one on the 30th for about +80 each using DAYBREAK. Or, that phenomenal Monday last October 31 where the short trade lost, but the long trade could have made +367. Your call.
The only other matter is that of an emergency stop-loss. As indicated by the results from our spreadsheet, we want to give our positions every opportunity to go to close for a profit. On the other hand, we don’t want to look in on a trade that is down -300 or -400 pips. Emergency stops are intended to be just that, for emergencies only. Only those days when the market sucks us into a position, then turns like a rabid wolverine. Been there, right? We can determine these stops for each pair based on relative movement and the probability that the stop would occur. Until I can get in more research on this, we will use the following emergency stops:
By adding these emergency stops, we are avoiding only the extreme moves against us and we are getting a significant improvement in our expectation for overall profit. To get an estimate of the difference these stops might make, do this. Take the original results and limit each day’s loss to the emergency stop for that pair, i.e., if my loss on a GBP/JPY trade is more than -200, show that trade at -200. Keep any other number. Spreadsheet formula: =IF(G11<-200,-200,G11). Our new projections (and where the data for the equity curve above came from) show a potential of more than +50,000, close to +750 on average monthly. These numbers have eliminated Sunday trades, but the spreadsheet will still enter Monday trades at +/- 1.
GBP/JPY: Total +24,361
EUR/USD: Total +7,395
AUD/USD: Total +9,056
USD/JPY: Total +8,599
SOME PRACTICAL CONSIDERATIONS
The spreadsheet study has a few limitations, but if someone is interested enough, this one looks simple enough to program for more accurate results. The spreadsheet will treat Mondays like any other day and enter at +1 or -1. If we trade Mondays at all, we will be holding for +11 or -11. There may also be occasions where our stop-loss is hit, but the market recovers to show a more favorable outcome. Since our stops are wide and get taken out infrequently, I don’t believe this is a major factor in our pip tally.
To hedge or not to hedge... For this system, I am always assuming my reader can't watch the market all day and, for the most part, wants something to set and forget. On days when we get two signals, the spreadsheet will trade both, effectively putting the trade in a hedge, limiting our losses to yesterday's range. About two-thirds of these trades come on Monday, but if we eliminate Monday trades, we lose about +10,000. Our reference or control trades on the portfolio showing us +49,000 would be including the hedge trades. Therefore, in order to have yielded the approximate results for the test period, we would have to be taking both sides of the trade on those days when two were triggered.
From a practical standpoint, most brokers do not allow hedges. We have a few options. Since the portfolio shows the highest yield with the hedges, it is preferable to hedge. In order to hedge, you will either have to be with a broker who permits those orders or have two accounts. Some brokers also have sub-accounts which work like separate accounts. You would place all your buy stops in one account and all your sell stops in the other. Should both sides of a trade be initiated, you will be hedged between the two accounts.
If you can't or don't want to open additional accounts and if your broker doesn't permit hedging, you can do this. Enter both sides of the order. When one side is opened, the platform will not allow the second. Be sure your broker operates this way. Mine do, and if I attempt to enter a second order while one is open, I get a pop-up saying, "Hedge not permitted," and the order is unfilled. Another alternative is to enter only one side of the entry stops. How do you decide which one, long or short? I ran a test choosing the entry closest to the open, seemed most likely to be triggered. Yield about +39,000.
I commented on this area in a response post later in the thread, but thought it was important enough to also bring up here. For the sake of those who might have to set it up and go to bed or work, for testing purposes, and for the space available on bp, I kept these rules pretty static. In real trading, if we are watching the screen, I don't think we can or should avoid some discretion. One example would be when you see the close of the day coming at or near the high of the day. If you are already in a long position, why not just leave it open with a tight stop as we enter the new day? Or, as jj suggested, if entering a new trade, require a few additional pips movement before entering. We have seen times where the pair closes near the high/low and just doesn't have the oomph to continue next day. Sometimes it does. For a great example of this, look at June 28 and 29, this year. We were in a short on the 28 which was successful. Had we put a tight stop on that short as it continued into the 29th, we could have saved the run up against us and even profited by closing out the short and taking the long as it broke.
Another discretionary decision might be when we have seen a good run in our favor. Then, the market enters that afternoon sleepy time where hourly ranges get small and we see a drift off our high point. Close, bank the money, go for a cup of coffee. Then, hope it doesn't hit another big run which would have been in your favor while you're gone. Another suggestion from jj was that we not wait until the actual closing bar, but exit the trade maybe two or three hours earlier.
Still another decision might come if we look in on a chart, no trade has been triggered, and it is getting late in the day. If we had in mind to close by end of day, why give a trade only an hour or two to develop? Cancel the orders, especially Friday. Go into the weekend flat and get it off your mind.
Discretionary decisions are hard to teach, possibly as often wrong as they are right, and just come with experience. If you are the type to panic, move stops, curse the market, then you need to keep it mechanical. If you can keep your head, make some judgment calls. In any case, maintain a trading journal, so you can look back and see what you did and what on earth you were thinking at the time.
Read more: Daybreak
Note: As of July 7, 2012, we are getting perilously close to deciding if we want to pursue this one or let it go. The method shows historical profitability as described and that's a good place to stop. Unless, of course, someone finds something that raises that control number. I do have a couple of traders who tell me they've gone live with small trades. As long as interest continues, I will contribute to the thread and post trading results. Sincere best wishes for your success.
Update, August 28, 2012. My equity charts and related studies show the eur/usd and usd/jpy currently underperforming with this strategy. My recommendation would be that you drop both pairs from demo or live trading and begin trading the eur/jpy with a -200 emergency stop-loss. Performance on this pair for the test period approaches that of gpy/jpy. The three-pair portfolio will reduce risk and continue with the most promising pairs.
IMPORTANT! Please read my post #52 for additional information on the performance of this system.