I'd like to share with you a strategy that I developed, and still developing and testing. I'm not any kind of pro trader or anything, been around the forex world for about a year now, studying a lot and doing my research.
We will start with a few conclusions of the past year that will help us move on and understand this method, and if it helps anybody even without the strategy it would be great.
- Win-Lose ratio - You know, probably even in these forums some traders tell you that it's bull**** and that a Win-loss ration does not have to be at least 1:1 and some tell you that to be profitable you have to have at least a W-L ratio of 2:1 or 3:1 - well - they are all right and at the same time they are all wrong! How come? When you think of W-L or Risk-Reward ratio you have to look at the big picture. You could be profitable in both of the ways and you could also loose all your money. The factor that will make the difference is the winning trades precentage.
For example -
If your strategy has a 2:1 W-L ratio, then it's enough to win only above about 35% precent of the time and you will be profitable. Why? because each winning trade covers 2 loosing trades so when you win you win big.
If your strategy has a 1:1 ratio, you'll have to have above 50% winning precentage to make money.
Makes sence? great.
Of course we have to take into consideration that price doesn't really "listen" to our 2:1 and 1:1 ratios so we have to be careful always and to look for support and resistance zones, the ratio can be dynamic as long as we check the average of it in the long term and see that we can make profit!
We also have to make sure that we risk the same % of our account.
You will see that in this strategy we bend the rules a bit but it's stuff that are good to know anyway.
- STP - as I see it - the best strategies contain three elements - Shape, Time and Place. You could use this method either in pure Price Action or add some indicators, but don't you ever overload the screen with too much!
Shape - Usually makes us stick with PA in any way - anything that has to do with the shape of a candlestick.
Time - The setup must accure in a certain time, of the trading cycles and waves, it could be as simple as Stochastics being at the Overbought/sold zone or anything like that.
Place - Price action again - Fibonacci retracements, S/R zones, MAs, Bollinger bands or whatever.
(If any of the terms are new to you - go to the School of Pipsology and come back after you graduate (: )
So until now I've used these guide lines in strategies that I learned and I thought of thinking more outside the box and not like "every other trader" because 90% are failing! and the BOMB strategy came up. (cool name isn't it? took some time to think about it)
BOMB stands for Bite Off Momentum Break.
Anyone knows that when a car drives fast, it can't stop in one moment! It always keeps on going a bit after hitting the breaks until it comes to a full stop. This is exactly what we are looking for in this strategy. Following the big momentum candles and biting of a little bit so that even if it hits the breaks, it sill take it some distance to come to a full stop and reversal.
How do we do that? Here are the filters/rules:
First of all - this is a Once a Day - Set and forget method - this is the way I like it, great for busy people and keeps the psychology out of the picture.
- The candle has to have the biggest BODY of the last 5 candles (including itself), in the wanted direction. (If we have a big bullish candle and then a smaller bearish one, it's ok, as long as there are no bearish candles with a bigger body around)
- the closing piont of the candle has to be at least at the 1/3 of the whole candle (in the wanted direction of course - that's what will make us take bullish candles for long and bearish for short, and they have to be some serious candles too)
We will use 14 period Stochastics for the "time". We will NEVER trade short when the Stochastics are oversold and never go long when Stoch are overbought - this will prevent us from taking trades when the price has already hit the breaks! or getting close to a cliff
the last chance to take a trade will be if the Stoch is just entering the over zone.
We will use 21 EMA for the "place". The candle has to close above the EMA for long, and below it for short. It could be either just crossing it (but a significant cross not just 1-2 pips) or way below/above. This will filter out retracements against the momentum.
Now after we've got the basic ingredients, TP and SL:
The TP is going to be very (maybe a bit scary) small sometimes as aposed to the SL - which means - W-L Ratio is small - Why? because we're riding the momentum and it might be hitting the breaks so we only want to take a bite. What do we need for that to work? Very high precentage of winners! If you answered before me - you've read the top of the page! if not - go there immediately!
The SL will be placed at the top of the candle for shorts, and at the bottom for longs.
After researching a bit I decided to use a different FIXED TP for each Pair we will trade.
That makes it usually 1:2 or 1:3 ratio (2 and 3 as the losing part) but no worries - you'll see soon the winning % and you will see that we can still make money, and lots of it!
We place the trade right on the close of the candle, a market order, and we will use only NY close candles!
I used Hot forex for the testing and now for trading.
Don't forget to consider spread in the trades too.
Which pairs will we traid?
Thats still in process, and that's where you can come in and join the research!
They don't all work well, We must have a high precentage of winners - for us the limit will be 80% win.
You will see now that the winning % is very high - between 80-95%. so that's what we're looking for.
These are the pairs I've tested until now - 1-2 years back and these are the results:
GBPUSD - TP=30 pips, 58 wins out of 71 - 81%
AUDNZD - TP=30 pips, 45 of 55 - 81%
AUDUSD - TP=20 pips, 43 of 48 - 89%
EURCAD - TP=30 pips, 42 of 45 - 93%
GBPNZD - TP=40 pips, 38 of 41 - 92%
GBPAUD - TP=35 pips, 41 of 48 - 85% - very big stop losses, we'll have to think about it.
The big winner of the strategy:
EURUSD - TP=30 pips, 57 of 58 - 98%!!!!
EURJPY - Don't get close to that one - this is an example of a pair that doesn't work! not enough Win %.
I am planning on testing out all pairs, finding out which are the best and which are the worst, you are all welcome to join me in the journey and hopefully make some money!
You are also welcome to critisize and suggest things of course I'm open to anything. This is a project in developement and it could turn out really great.
I'm adding a chart of GBPAUD of some of the last months for better understanding, feel free to ask questions, I've probably missed some things.
Orange - Win, Red - Lost
I'm sorry if there are some mistakes in grammar, my english is not perfect.
All the Best,