Follow the crowd

[B]Follow the crowd[/B]

I was just digging out some examples for the Maxmin strategy, and came across a way of slightly improving it � so to this strategy which supercedes it. It�s called Follow the crowd, �cos that�s exactly what it does.

It�s based around GBPUSD (though again works with other pairs if you tweak it), and works on some simple premises. No indicators and it�s much less discretionary than the maxmin strategy.

  • When the pair is making new highs, the strategy jumps aboard and trades in the direction of these new highs
  • When it stops making new highs, it closes the trade and reverses it
    If you don�t use a stop loss, that means you�re in the market all the time.

Compared to the other strategy, it�s shorter term (typical trade is around 8 days, compared to 40 odd days), and has a much lower percentage success rating, but overall, it�s more profitable. More importantly, the drawdowns are smaller. Of the two, I�ll be trading this.

Use daily timeframe on GBPUSD

  1. When the pair is making new high over the past 18 bars, go long
  2. When the pair is making new lows over the past 18 bars, go short
  3. When in a trade, and the pair stops making highs/lows for 2 consecutive candles, stop the trade and open it going the other way

That�s it. Simple, but very effective. Compared to the Maxmin strategy, it uses a max/min over 18 bars rather than 22, in order to jump on board the trend rather than just find a pivot point.
Open and close all trades at end of day (midnight GMT), or thereabouts.

[B]Stop loss and take profits[/B]
It�s most effective if you don�t use a stop loss. I know that flies in the face of most advice, but as these are long-term positions, you should make sure your money management could handle a drawdown of several hundred pips. That said, if you want a stop loss, use 65 pips. You�ll not be in the market all the time, you�re winning ratio will be down, but the overall results aren�t that different � about 15% less than if you didn�t use an SL.
Take profit � strategy has been tested without any TP levels and I�m not sure that this would be effective. Better off concentrating on avoiding losing trades�

[B]Discretion and max drawdowns[/B]
Over the past 5 years, almost every single losing trade was in profit, usually at the start of the trade, so there�s something to be said for making sure that once a trade is in profit, if it reverses you should close the trade. I�ll deal with this as I trade it.
The worst performance was 9 losing trades in a row. I�d like to think I wouldn�t have taken them � so you know what it looks like, see the attachment.
In terms of drawdowns (and therefore money management), as a rough guide, I�m looking at the worst possible scenario being twice the existing maximum drawdown. Over the past year it was 338 pips � so let�s say we should be able to ride out a drawdown of 680 pips. An average losing trade this year was 88 pips if you�re not using a stop. An average winning trade is 199.

The year ahead
For GBPUSD, I think the next couple of months will be really rocky when both the dollar continues to receive bad news and gloom for the pound sets in, which will mean chances of big trends are slim. However, when the dollar starts to recover, the pound will be allowed to wallow in its own sickness, creating a big downtrend. Bad for the economy, good for us. In short, I think we�ve either already topped the current up trend, or there will be one last push over the coming weeks, and from then on in, we�re in a downtrend. We�ll see.
I�m going to trade this according to my rules unless I see some solid reasons not to take the trade. Solid reasons for me aren�t anything to with MacD�s, crossing SMAs, Elliot Waves etc � it�s more S&R, trendlines, the odd candle formation and seeing if this strategy conflicts with the pivot points of my other strategy also on babypips. That�s it. I should point out though I�m not a trading veteran, so shout up if you see me trading in the path of an oncoming train, right?!

The only news I�m worried about is the NFPs and inevitable interest rate cuts this year. There may be a few more for USD, and there definitely will be for the GBP. In short, if we�re on the right side of possible interest cuts we�ll stay in. If not, we�ll jump out just before. As for NFPs, we�ll let them ride but just not open a position bang in front of them.

Attached is a graph showing net profits, a summary, a sample of trade entries (including losing ones), and a snapshot of the 9 losing trades.

I�ll start trading this from early in the NY. Cheers all and here�s to a successful 2008�!