Just got a question, Im looking at the AUD/USD pair. But this can apply to anything.
Can you just look at the long term average of a currency pair, wait until it dips below the average, buy in. Then wait as long as it takes for it to get back to above average.
Isnt this safe unless a major event occurs that shifts the average significantly? Even then, it is eventually likely to recover.
Not always. Moving averages move with prices so during prices go down, moving averages go down also. You can gain some money with this method but probably you will stop out and loss all your budget and your earns.
Don’t forget that. After %100 and %100 and %100 and %100 and %100 and %100 and %100 gain, if you lose %100 only once, you will have nothing at the end.
You are on the right way. Let me improve your trade plan by adding such concepts as Support and Resistance levels. These levels indicates where buyers and sellers capacity is exhausted. The more timeframes the sounder are those levels.You just need to define them on respective timeframe and wait the price approach or hit the marks. After that you can expect retracement with 80-90% (open an order in opposite direction). To get a better clue about it you can use references I used in my education: Hotforex FAQ - Approaches to Trading the Market | HotForex | Forex Broker and Pip School of babypips. Good luck!
I don’t know about ‘foolproof’, but the basic idea is relatively sound.
The two broad types of (directional) strategies that tend to be viable are trend-following and mean-reversion.
What you are proposing is a simple form of the latter - waiting for a price excursion away from the mean (average), and then entering counter to this price movement with the expectation that price will soon regress toward the mean.
You will need to refine your strategy to make money with this though. Here are some suggestions of things to consider:
Some markets are more mean-reverting than others. Select a statistical method of measuring the tendency of a time series to revert to its mean, and then use this to select the best markets to trade (tip: they’re not forex!).
Which mean? Optimizing (and regularly re-optimizing) the length of your moving average will improve performance. If anyone posts a reply suggesting that this will lead to curve-fitting, ignore them! You can’t curve fit a single parameter.
How big a dip does it take? You don’t know. It will vary from one scenario to the next. There will be a (historical) optimum, but you need to be concerned with the future and you don’t want to start optimising a second parameter (or else then you [I]will [/I]end up curve-fitting). So, scale in over a range of parameters. The deeper the dip the more of a position you put on. You’ll need a way to ‘measure’ the depth of the dip, by the way - standard deviations from the mean could work well - add one lot with every 0.5 stddev of dip, up to a limit.
You’ll need to manage your risk, as you’ll be doubling (or tripling, quadrupling . . .) down without a stop. There are various ways to control your risk that do not require a stop (you don’t want to use a stop loss - it will trash this type of strategy). Using options is one. My preference, and what I use in my own trading, is a massive de-leveraging. Throughout this last month my leverage was 0.96:1.
If you do this in lower timeframes the spread/commission will eat your profits (and then some). Work with daily timeframes.
Hope that helps - you’ve spotted a very general tendency that is applicable to all markets (and most data) - it’s even true of completely random data - now you just need to find a way to take advantage of it without falling into any of the potholes that lurk!
Kind regards,
Nick
I havent read your posts yet everyone, I will take the time to do it a bit later. Thanks alot.
Below is some clarification of what I was trying to say:
ht(remove this)tp://prntscr.com/4gvfcg
The average would be 0.93270, so knowing that I would wait until it dips below the average which would be at 8 august at 0.92445. I would wait, expecting it at some point to return to average which would be on 18 august at 0.93410.
What do you think of that?
Actually it’s not a good strategy because the average price even in a large timeframe as 1M doesn’t show anything. Sometimes the price can get back to the original position but how much drawdown can you afford and how long can you maintain your account to avoid margincall?
I think if you have a good equity account, this strategy may work otherwise please find a smarter one.
Hi Weijac 
The problem with the strategy you describe is that you’re willing to risk all the money in your account in a margin call for a small amount of profit. You may have 100 winning trades in a row, but on a long enough time horizon, you will eventually encounter a trade that keeps going against you and wipe out those gains and more.
This is a mathematical certainty, because you’re willing to risk unlimited losses for the potential to achieve limited gains. It doesn’t matter how many small winners you have in a row, eventually if you keep risking all the money on your account on each trade, you will eventually lose it all.
You have to stay alive to win. A margin call is the trading equivalent of the death of your trading account. The trading strategy you describe is kind of like Russian roulette. Would you play Russian roulette if there was 1 bullet in a 6 chamber revolver? You have a 5 out of 6 chance of winning each round, but what if you had to play 6 rounds? Would you play Russian roulette if there was 1 bullet in a 100 chamber revolver? You have a 99% chance of winning each round, but what if you had to play 100 rounds?
The goal of trading is to implement a strategy that’s sustainable not just for 6 trades or 100 trades but for unlimited trades. Successful traders cut their losses and let their winners run, while losing traders cut their winners and let their losers run. This article has more details on risk management that you may find helpful: What is the Number One Mistake Forex Traders Make?
Welcome to BabyPips!
Hi Jason,
In point 4 of my post above, I have explained how to do this [I]without [/I]risking all the money in the account. More sophisticated mean reversion models of statistical arbitrage do not use stop losses but they do control risk. There are smarter ways to control risk than stop-losses - delta-neutrality, optionality, and de-leveraging.
For a trade to keep going against you indefinitely with the strategy described, a market would have to rise or fall indefinitely without retracement - can you give an example of a market that has ever done this? A retracement to the mean once that mean has moved against the position may cause an exit for a loss, but there will be an exit nontheless, and not an indefinite movement against the position.
Having said all that, it’s genuinely good to see a brokerage firm with a responsible message representing itself on a trading forum
Kind regards,
Nick
+1 on that. Sophisticated traders do use stop losses, but only to protect profits against unexpected price swings after the trade is in the green (i.e. making money).
To the OP: There is no such thing as a foolproof strategy, but if you are set on trading the way you described you should go ahead and ignore what anyone else says. Personally I would not do it, but hey it does not really matter what me or anyone else would do as different traders have different strategies.
In the end you won’t know until you put it to the test in a live account and you can go from there.
Hi Nick,
You’re right that an explicit stop loss order is not required or even desirable for certain strategies. That said, we both agree that it is necessary to exit some trades for a loss in order to manage risk properly.
You mention yourself that the strategy proposed by Weijac could require “doubling (or tripling, quadrupling . . .) down without a stop”. I think that’s the fatal flaw of this approach, because it means losing trades will be much larger in size than winning trades.
Good discussion! :57:
I agree with you and TLB, however OP has to learn to crawl before walking, then running and Jason’s post if I might be so bold to interpret is telling him to crawl.
You’re dead right on " good to see a brokerage firm . . ." he does an excellent job of representing his company
Hi Jason,
Thanks for taking the time to reply.
This is certainly true - you would have a full position on when a market was moving against you, and this can be problematic. While no one single trade of this kind should ever cause a problem (controlling risk per trade is a given), a run of them (i.e. the breakdown of the strategy) will wreak far greater havoc on an account than if a single point of entry was used.
I like to think of it in terms of a probability distribution around the mean. A small movement away from the mean is less likely to revert than a larger excursion. As a simple proxy, take standard deviations from a mean as a method of measuring this, and you might get something like the following:
Buy 1st unit when price drops 1std below mean = 55% probability of winning trade
Buy 2nd unit when price drops 1.5std below mean = 70% probability of winning trade
Buy 3rd unit when price drops 2std below mean = 80% probability of winning trade
If additional units are thought of as separate strategies with their own probabilities, rather than as adding to a single position, then this makes a bit more sense. To flip what you say on it’s head: all your trades with a low win-probability will be much smaller in size
Of course, markets don’t actually follow these simple gaussian distributions, and there’s a definite “breaking point” to what I’ve described above; the point at which a market isn’t just undergoing a pullback, but has reversed against you. This is why you can’t keep adding indefinitely to a position. In terms of the probability distribution you have entered the realm of “the fat tail” . . .
If the OP is still reading, I would definitely echo Jason’s advice: you really need to know what you’re doing before attempting this kind of thing, and it may be best avoided for you at this time - but you have also managed to identify (independently, it seems) a general market tendency of the kind that can form the basis of a viable strategy, so don’t be discouraged from further trading research!
It looks as though FXCM offer a micro account - this can be a great way for small account holders to scale into positions (with any type of strategy) and still keep risk in check.
Kind regards,
Nick