A Pro Talks on Designing the Optimal System

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:

  1. 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.

  1. 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:

  1. Our system parameters must be unknown to the market.

  2. 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:

  1. Time
  2. 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:

  1. Go to “break-even” on the trade once the trade has
    moved in your favor for two periods.

  2. 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.

  3. 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!!! :smiley:

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.

So you are not going to tell us anything but that’s ok. :slight_smile:

I still think the best trading systems are very simple in nature, allowing you to make very quick reactions when needed in a fast moving market.

Simple money management then dovetails into the system.

In the end, however, you still need to have a traders brain!! :stuck_out_tongue: :stuck_out_tongue:

Interesting post, am sitting in a University lecture at the moment so will take a closer look at what you’ve mentioned and charts.

As per your success in the markets, do you attribute it to a single system you’ve traded or had to adapt as markets turn? What would you say has been the major contributor to the success you’ve had?

Thanks for the insight.

So basically what you’re saying is that one should develop a winning system based on entering the market on a retrace and then following the trend. And don’t tell anyone about it, oh and exit when the trend changes ? Well that’s very general and everyone knows it.

Can you explain what you mean by a ratio of time and price that the market doesn’t know about? if there are enough unique variations that each of us can come up with our own that no one else knows about then can you give an example without giving away your own unique version?

of course the fx market is two dimensional, one spacial dimension with two degrees of freedom and one temporal dimension with one degree of freedom. so price can either go up or down and only forward in time. and it comes in discrete units of time duration. Should be a workable system there somewhere.

I disagree about not telling anyone.

People knowing about it could only affect the market if people acted upon it, and mostly they won’t.

I think you could publish a winning system in a national newspaper and almost nobody that tried to trade it could stick to the rules and trade it consistantly, regardless of how simple it was. Then after failing due to not sticking to the rules they’d just trawl the internet for another magical system that would make them a millionare and fail, again.

The reason for this is, I believe, confidence. To trade any system consistently you need to have confidence in it. This confidence comes from building and testing a good system yourself, one that’s right for you. It doesn’t come from reading an article.

I failed high school algebra and have trouble keeping my sock draw organized, so all I try to do is buy low and sell high. Am I doing something wrong?

I think that if you do publicize your system and EVERYONE acts according to it, then EVERYONE will benefit.

Let’s assume hypothetically that your system, which is known by all the people around the world, gives a buy signal at a certain time for a certain pair and everyone buys that pair at that time. Now if everyone buys a pair, that will force its price higher thereby profiting the buyers (everyone). This is an example of how unity can benefit you :slight_smile: Please correct me if I’m wrong.

yeah, but then you don’t have a profit till you close/sell so you better do that just before everyone else does :slight_smile:

Here are my answers to the comments and questions:

“So you are not going to tell us anything but that’s ok.”

A: On the contrary, I am telling you that a system that is
unique will outperform known systems by 10 fold. Now that
I’ve pointed out this possibility, you can pursue the
idea (or not) and come to your own conclusions.

“I still think the best trading systems are very simple
in nature, allowing you to make very quick reactions
when needed in a fast moving market.”

A: The Psychology Bias applies here. Usually your choices
will be wrong, and the faster the timeframe, the speedier
your losses will accrue. I do agree that systems should
be simple.

“Simple money management then dovetails into the system.”

A: Provided that your losses and wins will mimic your
system testing. Again, the PB applies. Your wins will
be smaller than expected, and your losses will be larger
than expected.

“In the end, however, you still need to have a traders brain!!”

A: That’s my main point! Use your brain. Be unique

"As per your success in the markets, do you attribute it to
a single system you’ve traded or had to adapt as markets
turn? What would you say has been the major contributor to
the success you’ve had?

A: I traded the futures markets with one system for 10
years. It was a “Counter-Trend” ABC system that had an
uncanny knack for catching the beginning of intermediate
trends. The FOREX markets trend more strongly than the
futures markets and I have adapted to this by trading
the same system only within an existing trend. On
"adaptation" I would like to mention an interesting point
about unique systems. I have found that as the market
changes the system characteristics change. When the
P/L Ratio of each trade goes down, the number of
winning trades increases. When the number of winning
trades decreases, The P/L Ratio goes up. So, these systems
seem to adapt to changing market conditions quite well.
Also, I trade ABC or AB patterns, and this aspect of the
market never really changes. Being unique is the secret to
my success.

“So basically what you’re saying is that one should develop
a winning system based on entering the market on a retrace
and then following the trend. And don’t tell anyone about
it, oh and exit when the trend changes ? Well that’s very
general and everyone knows it.”

A: Nothing general about it. You have a definition of trend,
and a very specific pattern to trade. True that everyone
knows about ABC’s, but my main point is that you have to
trade it in a way that is unique and not commonly known
to the market. ABC’s aren’t the only application. Any
Time/Price Attribute can be applied.

“Can you explain what you mean by a ratio of time and
price that the market doesn’t know about? if there are
enough unique variations that each of us can come up
with our own that no one else knows about then can you
give an example without giving away your own unique
version?”

A: Here’s a down and dirty example:

DOWN ABC Pattern =

Time:
DownSwing of 3-6 periods,
Upswing of 2-4 periods, Downswing of 3-6 periods.

Ratio:
Second downswing©>= first downswing(A)

Enter if time and ratio complete and the Low of the
most current completed bar is > the Low of the previous
bar. OR Enter if time and ratio complete, and the close
of the current bar is > the midpoint of the current bar.

Reverse the logic for UP ABC’s

“I disagree about not telling anyone. People knowing about
it could only affect the market if people acted upon it,
and mostly they won’t.”

A: The problem is that people WILL act on it at various
times, and not act on it at others. When trading a known
methodology, you are at the mercy of mass decision
processes.

“I think you could publish a winning system in a national
newspaper and almost nobody that tried to trade it could
stick to the rules and trade it consistantly, regardless
of how simple it was.”

A: There ARE people that will trade it, until it becomes
unprofitable (Which will be sooner than you think).
Richard Dennis, the originator of the “Turtles”, Commented
along the same lines as you. 5 years later, Dennis, along
with his trading partner Bill Eckhart admitted that their
system no longer worked.

"The reason for this is, I believe, confidence. To trade
any system consistently you need to have confidence in it.
This confidence comes from building and testing a good
system yourself, one that’s right for you. It doesn’t come
from reading an article. "

A: I agree. That’s why I’m not giving out some system to
blindly follow. You have to make a system that is unique
to the market and unique to yourself.

“I failed high school algebra and have trouble keeping my
sock draw organized, so all I try to do is buy low and
sell high. Am I doing something wrong?”

A: You’re not doing anything wrong, although you do need to
take some time to study the markets. I recommend studying
time(Various number of periods) and price action (How price
moves in relation to it’s periods) Come up with a unique
time and price relationship in relation to buying highs
and selling lows if that’s what you want.

"I think that if you do publicize your system and EVERYONE
acts according to it, then EVERYONE will benefit.

Let’s assume hypothetically that your system, which is
known by all the people around the world, gives a buy
signal at a certain time for a certain pair and everyone
buys that pair at that time. Now if everyone buys a pair,
that will force its price higher thereby profiting the
buyers (everyone). This is an example of how unity can
benefit you Please correct me if I’m wrong."

A: Little error in logic here. If everyone is buying,
There are no sellers to sell!! Price cannot advance.

Thats it…:smiley:

I think The TP ratios I gave as an example are too tight.

Try this

DOWN ABC =

Time:
Swing A > 3 periods, Swing B > 2 periods, Swing C > 3 Periods

Ratio:
Swing C >= Swing A

Reverse logic for UP ABC

Here’s something you might find of interest. When I was consulting with
Funds and financial institutions, the majority weren’t interested in seeing
new or innovative techniques. They just wanted me to adjust the systems
they already had in place. You would be suprised how common most of
the approaches they used were. And the best they could hope for was
maybe 10% a year if lucky. A few firms had higher returns, but were
accepting large risk to get them. We’re talking drawdowns as deep as
80% of equity.

There were a few firms that listened. But that didn’t work out either.
Every time I trained an institutional trader, once he saw what he could do,
He immediately left the firm to start trading for himself. This happened
in almost every case.

Go figure…:smiley:

Why doesn’t this work on smaller timeframes?
Thanks
:slight_smile:

Interesting Walt.I always thought along those lines.I am a casual horseplayer and have read many books on the subject.The edge the authors that they had was the knowledge others didnt have either from devloping there own figures or looking at it from a differnt angle.When there knowledge went public and the public digested it there edge dissapated and profit from there methods were harder to attain.Drawing your own line in the sand so to speak seems to me aviable way to go.

I know that this takes the discussion a bit off the subject but I’ll still try to defend my logic.

Assume there are only 5 pencils in the world and they all get sold out at the same time because a famous system told the buyers to buy those pencils at a certain time. This will make the pencils’ price shoot up. Then the possessors of those pencils decide (following their popular trading system) that the price has reached a pretty strong resistance so they all sell it at the same time. They have all made huge profits.

This technique can be used on smaller timeframes, except for
1M and 5M, where news reports distor price action too much

As to the other comment, sometimes the buyers using the famous
system will profit, and sometimes they won’t. Depends on the total
number of buyers. The point is that as the profitable systems becomes
more and more well known, more and more people pile in, and the
advantage of the system becomes less and less.

The whole point of my pencil example was to show that exactly the opposite should be true - more people following your system will increase your advantage, not reduce it.

no because some greedy people will think “if i sell a day early ill keep more profits to myself before the others lower the price” and the next guy will think “if i sell 2 days early ill beat the guys that are selling a day early” and they’ll lower the price before others can bail out with profit. also not every1 will be able to sell at the same time, some will be sooner then they should and others will sell when its too late and make no profit and maybe lose money. its called price manipulation. in theory you could mass buyers and drive the price up. but when it comes time to sell some people get caught holding the bag. also, most people that run a price manipulation scheme would “dump” what theyre trading before everyone else to ensure their profits. And, i imagine manipulating the prices in forex would be VERY difficult and require billions in total assets.

fact is if you have a “holy grail” strategy, or even one that produces good profit, dont tell anyone. the more that know the less you make. its a simple fact.

Thanks Walt

This is the Holy Grail.

Your own uniqueness.

This is why the pips will then follow you.

:slight_smile:

Hi

If only the fact of my earlier retired and possession of House on Florida makes me more happier I definitely want to be more UNIQUE.
I`m curious what was your purpose in writing thread like this ?

Cheers.

I’ve never heard of a true pro making silly claims/insinuations that you can double your account every week such as the one seen in your post.
I wonder why that is…?

Second, so you’re a member of MENSA or something similar huh? I took the MENSA test and passed and chose not to join… Btw, IQ has very little to do with trading skill.

And lastly we get the ridiculous myth about how your “secret” system will stop working if you disclose it. That may be true for those that trade based on a TRUE edge, such as non public information, arbitrage, etc.

The systems that retail traders will use do not fall into this category and it will not matter at all if Joe tells the world that he uses this and that set to that and that.

Excuse my suspicious attitude but after reading through your fantastically long post, I find it very unlikely that you’re a pro.

Since you have a high IQ you should be able to follow this easily…

You claim you retired at the age of 35…

You worked for 10 years as a consultant: 35 - 10 = 25.

You worked for 13 years at a bank: 25 - 13 = 12.

Exactly which bank was it that hired a 12 year old kid in their data processing center? I want to know just in case it’s my bank. If it is I’m taking all my money out before the kids there spend it on Pokemon cards…