200MA f(x) Trading

Hello BabyPips!

Today I would like to share my 200MA f(x) trading system!

The trading of the system is very simple and it focuses on the 200MA and trading with the trend.

That being said, the ideas behind the system are anything but simple. Because of that, I am really going to try and explain the driving forces behind the system that provides its edge as simple as possible using clear-cut examples/metaphors.

This will mainly focus on market structure. The edge is not in the tools or the system itself. The edge exists in the market as a whole, the tools allow us to just carve a little bit of that edge out for ourselves.

Thread Rules:

  1. No spam.
  2. Respect the other forum members.
  3. If you don’t know something, ASK! But before asking, please search the thread for any questions you may have just in case it has already been answered.
  4. All posts must be on-topic & related to this system’s rules, ideas, and principles.
  5. Lastly, you must be willing to learn new ways to look and think about your approach to the market.

Introduction
You know what the 200MA is but what is f(x)?

Quote

The art of war teaches us to rely not on the likelihood of the enemy’s not
coming, but on our own readiness to receive him; not on the chance of
his not attacking, but rather on the fact that we have made our position
unassailable.
Lao Tzu – The Art of War

Take the hourly/daily/weekly returns of an underlying, we will consider this series of data x.

Then take your function and all of its rules and feed x into it to get your output. In our case, these rules consist of the 200MA, where the current price is, and where our vertical boundaries are.

This is f(x). The exposure, payoff, or effect x, the market, has on your function/process.

The 200 MA is one of the 3 main variables inside our function f(x). The other 2 are boundaries to create absorbing states inside our function. The key is not where they are or what they are, but just that we have 2 absorbing states creating a binary outcome.

Quote

Practitioner and risk-takers observe the following disconnect: people (nonpractitioners) talking x (with the implication that we practitioners should care about x in running our affairs) while practitioners think about f(x), nothing but f(x). And there has been a chronic confusion since Aristotle between x and f(x). The mistake is at two levels: one, simple confusion; second, a blind spot missing an elephant in the decision-science literature, being aware of the distinction and yet not realizing that action on f(x) is easier than action on x

To be successful, we must not focus on trading the behavior of x, but instead must focus on f(x).

Pairs/Crosses Traded:

  • All 28 major pairs and crosses.

Timeframe:

  • 1 Hour Chart

Indicators:

  • 200 MA (Can be EMA, SMA, etc).

Basic Trading Rules:

  1. Only Trade in Direction of MA. This will ensure that when trends occur, we are a part of them. That being said, we don’t necessarily need the market to be trending in order to trade it.

  2. You MUST risk the same fixed % of the account on each trade. I will go into why this is extremely important and it has nothing to do with “managing risk” but everything to do with “risk-taking”. In this system, we do not manage risks, we just optimize our risk-taking and cast the die to see where it lands.

  3. You only enter on what most would consider a higher lower in a swing. This means after a pullback has happened and the price is turning around back in the direction of the trend. Another way to think about this is a false breakdown of the existing trend. You want to get in when everyone who shorted the false breakdown is going to start thinking about getting out.

If there is any rule you will follow out of the 3 to the letter, I would recommend #2, #1, then #3.

Additionally, #3 will become much more defined when we start looking at how to analyze these turning points/pullback areas. But for now, I want to start simple so everyone can understand the general idea of how we are trading here.

My Story
I originally started my trading journey in 2011.

Since then, I have been using the technical skills I developed during my career as a software engineer to push the boundaries of what it means to quantitatively analyze the market as a retail trader.

After nearly a decade of spending thousands of hours writing algorithms studying the market through the lens of risk-taking and probability, I was finally able to come up with a robust and elegant approach to the market that provided consistent results.

Using this approach since 2017, I was able to consistently grow my account year after year.

Finally in 2020, after 3 years of grinding it out as a moonlight trader, I was able to grow my account large enough that the income I produced from trading exceeded the $155,000 annual salary I made as a senior software engineer.

Since then I have quit my job as a software engineer in order to trade currencies full-time. In order to showcase what kind of annualized returns can be achieved with enough effort, I have started a new account in December trading this system on all 28 major currency pairs and crosses.

2 Likes

After the spreads tighten back up, NZDUSD is looking like a great short.

Very interesting, thank you for sharing.

While you’ve made it sound complex, your strategy is actually quite simple and certainly viable.

Good luck!

1 Like

Thanks MattyMoney!

The strategy itself is simple, but the data that drives it is a bit more complex.

I will dig into it more soon but wanted to start out by explaining it in a way most traders will understand before I start throwing a bunch of probabilities and statistical data and ideas at them! :joy:

1 Like

CADCHF hit TP so I finally freed up some margin. NZDUSD still looking pretty ripe. Shorting here. Probabilities suggest we have about a 40-50% probability of profit with this one. Time will tell though!

Can almost see the 3rd leg of what most would call a 123 pattern getting ready to form. Shorting the pullback rollover with the trend is always a decent bet!