Question

Beginner Questions
1

I have been a lurker casually for roughly 3 yrs and I have just recently got back into forex trading as my graduate semester has died down.

So, I have developed a trading plan, that thus far has been flawless, but I am not so naive that I actually to believe it is flawless. So i ask, can anybody point out when my trading strategy will fail, and is it possible to offer advice to mitigate the losses when it does fail?

A brief synopsis :

It is similar to a martingale strategy, with some slight changes. First off, there’s no stop loss (iconoclastic, i know). The premise is as follows, set a takeprofit at say 10-15 pips on any pair at a very, very, very, low investment relative to your account balance (I use Oanda for the odd lots). As the pair moves away from your original by 100-150+ pips, you re-enter your position, this time doubling the total volume. This puts your avg position at roughly 33% of the start. The take-profit is then re-calibrated with consideration to the average position. Now because I have started at such a low amount of my account balance, I am able to double roughly 4-7 times on a pair before the trade would blow up my account, which statistically would be so incredibly unlikely and would require a movement of 1000+ pips from the original position. This is assuming high fidelity of re-entering every 100-150 pips, I could choose to re-enter every 200 pips and extend the total pip loss I could incur and recover from even further. I hope this is clear, as i wrote this in a slight rush. If not please let me know and I can elaborate =D.

At the moment in the past 3 weeks I have had a roughly 33% increase in my account balance, with less than 15% net loss of total account balance at any time.

So in what types of conditions will this strategy fail? My primary concern is during interest rate changes. Can anyone tell me how often these occur per year with any pair and if there is any predictability to their changing?

Thanks
-PipTherapy

2

You are on the right path, the manipulation of space is key to small losses and large gains.

(Examples exaggerated for simplicity)

Say that you have 5 lots and 100 pips of space (5% risk) with -2 lots on a stop loss resting at -40 pips.

If the stop is triggered then you will go from 5 lots to 3 & the number of pips price has to move from
the current price to wipe out your initial risk is again 100 pips: 5/3 * 60 = 100.

Now lets look at another example:

Same 5 lots and 100 pip stop only price moves sideways and you add 3 lots expecting a continuation.

5/8 * 100 = 62.5 pips of space remaining = initial risk.

You place -4 lots on a 30 pip stop loss which eventually gets hit. 8/4 * 32.5 = 65 pips.

Had price gone up 100 pips you would have made an additional 3%.

4 lots and 65 pips has a 5 lot value of 52 pips. It doesn’t really matter that you are down 48 pips as space is just fabric and fabric can be folded or unfolded at will. You could adjust to net long 3 lots w/ nearly 87 pips of space & it would be nothing for you to jump from 3 to 5 & back to 8 lots in an up trend.

What matters is that you actively seek to add lots which in turn pulls in more fabric; fabric that can then be unfolded into more space.

Stops are important but stops that liquidate your entire position is overkill.

Space is a shield, leverage a sword, and management of the two is the skill of the warrior (and trading IS war)

3

The obvious answer to your last question is that your strategy will fail if price moves persistently against you, and you keep adding to your losing position until your account is gone. There may be a more detailed answer, but it requires some clarification from you.

If I understand your method, you enter a tiny position (call it X) with a tight TP, and no SL.

For convenience, let’s not use the 10-15 pip range for your TP, which you referred to in your question. Let’s just say TP = 15 pips.

If your 15-pip TP is hit, you take your tiny profit, and go again.

If price moves against you, you sit with it, until you reach negative 100-150 pips. Again, for convenience, let’s get rid of the range, and just say that your second entry point is at negative 100 pips.

At this point you enter a 2X position in the same direction as your initial position, and you set a TP for this 2X position based on the break-even price for your entire 3X position + 15 pips.

You now have 2 separate positions:

• a 1X position with a TP at initial entry + 15 pips (this position is now showing a loss of 100 pips)

• a 2X position with a TP calculated to cover your 100 pip initial loss, and yield a profit equivalent to 15 pips on a 3X position.

Do I have it right, up to this point?

Now, I presume, if your latest TP is hit, your platform closes your 2X position (for a profit), and you manually close your initial 1X position (for a loss). Overall you book a profit.

Right, so far?

If your second TP is not hit, and price keeps moving against you, again you sit with the loss, until price has moved another 100 pips negative, at which point you enter a 4X position with a third TP calculated to cover your accumulated losses and yield a net profit of 15 pips on a 7X position.

Please verify that I have correctly laid out your method.

Specifically, please verify that you are “doubling” your entries as I have described. (That’s what’s implied by the 33% figure referenced in your question.) If this is correct, then your overall position will increase as follows: 1X, 3X, 7X, 15X, 31X, 63X, etc.

You said that you can stand to do this doubling 4-7 times.

If you double-up 4 times, what actual leverage are you using? If you double-up 7 times, what actual leverage are you using? (Note: actual leverage used = overall position size ÷ account balance.)

4

Yes, I do think that you have my trading strategy correct.

I’m on a 50:1 leverage. Currently, I’ll start out at about .25-1 lot. If I’m trading a pair that tends to trend really hard (AUD), i’ll consider starting lower. For the most part I’ll start around .5-1 lot. I’ve never had to go past 3 entries using this method, not to say I won’t in the future, but there is room too. If i feel one trade is sucking up a lot of leverage, I wont’ double my positions on the other trades and wait until that trade is closed.I have considered doing away with the doubling and instead, matching my current position when the amount doubled becomes too high, but again it has not become an issue yet because after a big fall there is usually 33% retraction.

5

Honestly once i saw martingale i had a prejudgement, so there is obvious bias here. I doubt this strategy will work in the long run. Clint provides the meat of reasons why, but consider the probability that you only need to have that situation occur ONE time for you to be broke. Not even that for your account to be crippled to a point that you will require massive returns on the remainder. Also if you find a point where you will NOT double your position on the losing trades, then are you really trading with a martingale system? And will that system will allow you to recover those losses?? Just because you haven’t had to go past 3 entries YET doesn’t mean its not possible. If your plan can not account for all possible scenarios then you either must adjust it by defining situations where that may occur then avoiding it or adjusting your plan to allow you to trade during those situations.

Cliff notes: I believe that there is a probability that this system be forced to open more than 4 or more positions in a loser. Your max entries is 7. This will either bust you or cripple your account severally. Also I have a huge bias against martingale and think its stupid. (full disclosure)

6

[B]Thanks, your input was very constructive and insightful. [/B]

7

From what I was told martingale’s strategy is like playing russian roulette with a 1000 chamber barrel, eventually that 1 bullet will take you out.

8

I would HIGHLY HIGHLY recommend a book called “fooled by randomness” by (I think his name is) Nassim Taleb.

Plenty of GREAT examples in there of people that have used strategies similar to this (martengale or not…have traded in some way with out a stop loss…using in some cases EXTREMELY limited risk amounts)… and some were successful for years and years.

But of course, then were not.

No word on whether they were saavy enough to close up shop and pocket a large part of their profits, and completely forget about trading, and move onto some other aspect of life. I suspect that if one makes a million or two (or 10+ million, as some examples in the book show), that they would likley think they actually “have it”…and, if it starts to fail later…the theinking would be: “the market will stop being dumb, and become normal again, and then my method will work again”.

Of course, the examples given did lose all (or nearly all) of it. but MAYBE someone knew they were eventually going to end up odd man out…because nothing based on position sizing alone works for every…and empires fall, and wars break out, and the most amazing things happen that cannot be planned for…and these are the “bullets” that get you in the back of the head.

And sometimes, things do NOT revert to what they used to be, so sometimes, what used to work, never does again.

Anyway. Good luck to you. You may yet prove to be the exception. But know that it would be JUST that…the “exception”. And i’ve heard of people trading without stops. Some were brilliant traders.

I can even think of some who were written about in the legendary series “market wizards” and “the new market wizards”. But of those that did… (and i’m talking folks who ran hedge funds in the 9 or 10 digits)… they all blew up eventually using strategies that would often not incorprate a hard stop, but would use position sizing and hedging primiarily as their “stops.”

SO did long term capital management…a multi billion dollar hedge fund that was founded by a CEO from goldman sachs, and one of the creators of the black scholes option pricing model (i think it was scholes…but not sure). Anyway, he won the nobel prize in economics… and they STILL crashed out.

They made phenominal returns for 2-3 years. And then lost billions so badly the government stepped in to help some of their investors.

One of those guys then went on to found another fund with even MORE conservative risk parameters. And I think he lost about 75% of his capital in the 2008 melt down.

Bottom line: what you are doing may work for week, months, even years. but everyone i’ve ever heard of, including a nobel prize winning economist, a CEO of goldman sachs, and others more legendary and established and connected and informed in the world of finance than yourself have tried it to some degree…that is, trading using position size and/or hedging as their “edge” for directional speculation on the markets…and i’ve NEVER heard about a single one making it, and keeping it, for an entire career.

Hope this helps,

Jay

9

Are you like straight out of a comic book…? O.o

10

Is that the leverage offered to you by your broker, or the actual leverage you are using, as defined above?

I’m trying to get at a way to calculate your overall risk. But, so far, you haven’t given me all the info needed.

11

I have a lot of sidekicks :38: so I must be.

12

I have to say I like your post though I have no idea what you are trying to say. :stuck_out_tongue:

To be fair your post sounds like a chapter straight out from Stephen Hawking’s “A Brief History of Time”. Read it and am as clueless as your post.

I understand Back to the Future better though.

13

You have to use a stop, Never know… Even if its 20 pips above last high, or below last low,

What if your power goes out, Or your internet provider goes off line?

I dont use them regualrly, but Im starting to, just because of those reasons,…

Be safe, not careless,

Proper Preperation Produces Positive Performance

14

In my first two years as a trader I had a landline, paper charts (Daily/W/M) , and a bright red pen.

Dails the broker,
“Aye, Gimme Dave”
“Dave I need quotes, let us start with (month) Coffee”
"(month) is at $0.69 SwordOFManagement"

I would call him every 30 minutes for quotes and he would give them to me because that is what brokers are payed for.

You can do the same thing with a Forex broker, they should have a 24 hour number.