Basically I’ve been trying to trade on demo accounts using trends. What I do is simply look for breakouts, then after a second lower low (or higher high if it’s bullish breakout) I place the short trade, stop loss just above the 61.8% retracement and determine limit by looking at the past strong supports, usually I make from 1:1 to 1:2 risk reward ratio. But it seems like this way I lose about 70% of the trades if not more.
So I thought what if I try to make completely opposite trades at the same time? You know, place an opposite trade with opposite stops and limits. Logically if my original trades were losing me money, the reverse strategy should make me money, shouldn’t it?
So I created 2 demo accounts and put this experiment into action. I just started this recently so I only made a few trades so far, the account balances are already 9162$ on the original account and 11183$ on the other one. Both were 10k to start with.
In your opinion what is going to happen eventually with the 2 accounts? Logically it seems to me like the second account is gonna win in the long run. Or perhaps they will both wipe out because of the simple newbie strategy and spread? What if we assume for a moment there is no such thing as spread? Or maybe they will both float around 10k in the long term because the original strategy gives me just enough profit to break even?
George Costanza syndrome. If every intuition you have is wrong, the opposite must be right. Right?
But it doesn’t work out that way in forex. Because it’s not simply about price going up and down. The same things that happen if you buy can also happen if you sell. For example, you could buy and have the price spike up (making you happy cause your in a winning trade) and then it shoots down hitting your SL.
Well, one thinks to theirself, if they Sold instead they would have been profitable. But the price spike, which made you excited about your buy, would in this case be the spike that hits your Sell SL!
So its much more than simply direction.
But I think you are not considering the fact the SL and TP are exactly the same in both cases (except switched around of course). So there is no question about it, one of those accounts will always have the winning trade. And because the first account is doing 70-80% losing trades, the second account WILL do 70-80% winning trades.
It’s not like both accounts will ever get losing trades [B]at the same time[/B].
In one phrase: if one of the accounts makes a losing trade, the other account is 100% certain to make the winning trade.
Yes that would work in a [B]trending market[/B], and with no support and resistance levels in sight. What if the price activates your Buy and gets stopped out, then activates your Sell and get stopped out? It’s happened to me.
That’s one of the bases of a break out strategy, having at Buy and Sell order hugging a certain price range, and then it goes one of either two ways.
It seems simple, that the opposite should be right, but under many conditions, neither a buy or sell is good.
What if you further develop your strategy around the premise that the only good trade is one where the price never drops below your entry price.
Then look through your previous trades to see how often that happened.
If you find for isntance that 1 in 4 trades never dropped below your entry price it would mean you have 1 trade in 4 that was a good and 3 in 4 that were bad.
Now you could say what if I cancelled out the bad trades by having a stop loss at 1 pip.
you would now have 1 trade in 4 that stays open and hopefully makes more than 9 pips profit (the 2 pip spread on the other two trades plus 1 each when it fell 1 pip below entry price)
if your 1 in 4 good trades usually make more than 9 pips you have it made.
I have no idea what you mean. First, are you talking about a bullish or bearish scenario?
Basically the only good trades that I do with my original strategy are the ones where it’s a true breakout and a start of a trend. It retraces back to no more than 61.8%, and then it rolls forward with the trend.
But that happens rarely, once every 5, maybe 4 trades. (the rest of the times, it does hit the 61.8% SL even though it might be continuing on with the breakout and trend) And since my risk ratio is 1:1 or 1:2, I am consistently loosing money that way.
Which means that if I reverse all the trades I do, I would be winning 4 out of 5 trades. Which is still enough to not just break even but also make profits with the 2:1 risk reward ratio.
I guess this is not much related to your post, but that’s just it. Either you misunderstood what I was saying in my original post or I totally didn’t understand what you were talking about there.
PS: I made two demo accounts and was trying this all out using “paper trading” (trading using past time charts). And pretty soon I stopped the first account because it seemed pointless as I could see it was going to wipe soon. But I continued trading the second account… What I do is I simply do the exact opposite of the way I would normally place trades with my strategy. (sounds ridiculous I know, and I found it funny too). But so far I’ve turned 10k in about 17.9k. (although it took about half a year) I will continue testing it out tomorrow to see how it will do in the long run tomorrow. I am suspecting that it will fail after market conditions change, and that the thing I need to learn now is how to figure out what market conditions are at the moment and how to change my strategies at the right times.
What time frame are you thinking for this? It might have to be 4h or 1D to avoid natural ranging which will occur at lower TFs as the price slowly trends up or down. I guess you can just increase your SL to 10 and TP to 90.
I did a similar thing with the daily candles. I did statistics on the probably of having two consecutive bull candles, with the second one closing higher that the first. Ditto for bear candles. I figured if the statistics were favorable, that I can always set a buy order after a bull candle, and sell order after a bear candle. I also check for three candles. I didn’t work out that great. It worked in some market conditions, but it wasn’t a long term thing.
Hello,
George Costanza syndrome
LOL!!!
Another Seinfeld fan!!! I’ve watched all the seasons on DVD so many times that I’m sure I could write down the dialog from memory!!! LOL!!!
the only good trade is one where the price never drops below your entry price
This is indeed a ‘point worth pondering’ and has got me thinking too.
Regards,
Dale.
I totally understand your thinking on this, I thought about doing this many times as I was trying things out. What I’ve realized however is that trades with larger reward/risk ratios give you more opportunities to take the risk out of the trade, or even protect some profits. My account tells me that managing my open trades is by far my biggest edge in this market.
I mean when you are sitting on a position with a stop at breakeven and price suggesting potential volatility in your favour, how is that not the perfect money-maker? 
Well I used the phrase “never dropped below your entry price” I used it loosely.
I meant in any long position where the price never dropped below the entry price and in any short position where the price never rose above the entry price
Basically the only good trades that I do with my original strategy are the ones where it’s a true breakout and a start of a trend. It retraces back to no more than 61.8%, and then it rolls forward with the trend.
But that happens rarely, once every 5, maybe 4 trades. (the rest of the times, it does hit the 61.8% SL even though it might be continuing on with the breakout and trend) And since my risk ratio is 1:1 or 1:2, I am consistently loosing money that way.
Which means that if I reverse all the trades I do, I would be winning 4 out of 5 trades. Which is still enough to not just break even but also make profits with the 2:1 risk reward ratio.
I guess this is not much related to your post, but that’s just it. Either you misunderstood what I was saying in my original post or I totally didn’t understand what you were talking about there
.
Well If you have a strategy that is working for you I wouldnt advise you to change it on my account, I just had some concerns for you because the idea of finding a strategy that consistantly loses then trading the reverse of it has been talked about before and the consensus was, it doesnt work because you dont know why it is losing therefore you cant guarentee it will continue to lose and you could lose a lot of money by trading a system that appears to work at the moment for no apparent reason.
So thats why I suggesteed you try closing out any trade that starts to lose immediatly at 1 pip.
For instance take a scenario where I entered 20 trades the profits from the good trades was 600 pips, but the losses on my stopped out trades was 700 pips. Obviously I’m trading a crappy system that should be discarded right ?
At first appearances it seems so but then what if I analyse it further and discover of the 10 trades that made 600 pips profit, 4 of them were great entry positions that made profit from the moment I opened the trade and never went negative and made 200 pips between them.
Now I have a system that had:
10 trades made 700 pips loss in stopped out trades
6 trades made 400 pips in profitable trades that initially went negative then reversed into profit.
4 trades made 200 pips in profitable trades that never went negative.
So what would happen if I used a 1 pip stop loss
I would have 16 trades that stopped out at 1 pip negative = 48 pips loss (assuming a 2 pip spread)
4 trades that made 200 pips profit
Total would be 152 pips profit with almost zero risk
Like I said i wouldnt advise you to change your system because of my thoughts on it, I just thought I’d give you something to think about.
at one point i tried some breakout system, and i found that it is very tricky to make a successful one that give me high enough success rate not to be turned off by the losers.
I found it difficult to decide on what counts for breakout…break support by 1 pip, 5 pips, 10 pips? guess it depends on the timeframe too, but i saw too many time the price to pierce support/resistance with a pip or 2, and retreat.
I somewhat found more success to fading the first time breakouts, even the second ones too. what i mean on fading? wait till it advance some pips, then go opposite, expecting it to re-test the just broken support or resistance again.
maybe buying/selling the turn to breakout direction from there is a way to go.
another suggestion to use some indicator to filter the breaks. stochastic, rsi, cci, or such would be all fine, i am a big fan of rsi, but that is me.
on filtering i mean if they are kind a extreme territory, and maybe on the top they set a divergence as well ( either of the 2 is enough, but better together) then i definately want to fade any breakout/breakdown.
it should be not too difficult to go thru some of your trade with any of the indicator as a filter, and see how the reading were at the losing trades. maybe you find some common points that give you a clue when not to trade breakout, and in turn improve your success rate enough to make profit. On top alternative when to fade breakout to profit the move even if the breakout fails.
OK, I see what you mean now. But the thing is. I can’t imagine how you would have 20% of all your trades not to go down opposite way even 1 pip, unless you mean 1 pip just for example. I mean really 1 pip stop loss will probably make 99.9% of all my trades losers.
5 pips is a bit more realistic. With 5 pips SL I might have about 5% win ratio, which means my trades would need 100 pips TP to break even. I guess it’s worth giving a try to this.
As for my other strategy, I am gonna try it out more today after work.
just try and improve your entry points so less of them reverse at open
Well I figured if most of the time they do, why not simply reverse my trades?
I managed to double the account using the reverse strategy over almost a year of paper trading eur/jpy.
I am now trying this out on eur/usd and going to test it out over a few more years, maybe even up to current day
Because it seems like a dangerous strategy to trade the reverse of a system that was losing when there is no good reason why it should have lost more than it won, other than randomness of the price action.
You have hindsight to tell you over the testing period it was losing more than it won so therefore with the aid of hindsight you know the reverse of that system over the same time period would have won.
That doesnt mean it will run that way in future.
For instance I just tossed a coin ten times it turned up 7 heads and three tails so with hindsight I could assume I should bet on heads from now on because heads win more.
Obviously this would not be a good idea as it could just as easily show up more tails for the next ten tosses.
another example pick 3 random indicators, fractals, rsi and stochastic choose a level from each say
fractals = a fractal has to be on the last bar
RSI = RSI has to be at 75%
CCI = CCi has to be more than 50% higher than its average over the last hour
If you backtest that over a year, even though you picked the indicators and levels at random, its either going to show more winners than losers, or more losers than winners nothing is ever going to break 50/50 over a year.
After that 1 year test you then have hindsight, even though there is no good reason why that system should have won or lost over a year you have the data at your disposal.
Do you then trade the reverse of that system because it lost more than it won last year ?
Obviously not because it was just a random result that has no reason why it should repeat itself over the following year, the same as the coin toss experiment.
I am pondering that too, why is it that most of the time my original strategy was making losing trades? I mean I thought that most breakouts only do 38.2 or 50% retracements. But from all my testings so far, most breakouts always go back to 61.8% after their first high. And I think Ive been a fan of dealing with breakouts and fibs so I’ve tested this out many times on different currency pairs, different time frames, paper trading and real time trading.
That is why I’ve come to the thought of trying to do the exact opposite of what I do, logically expecting it to work.
I think most likely the reason why my original strategy didn’t work is because most of the time I go for short term breakouts, and often probably fake ones. Because I also noticed with this reverse strategy is that it loses trades when there has been a clear trend line prior to me placing the trade (which is no surprise really), and does the best when the trend line (I use 200EMA on 30 min chart) is near flat.
So in conclusion, at this point I am thinking it may work well in the long term if I use my original strategy when I see a good trend line, then switch to the reverse strategy when the trend line flattens.
OK, so you are saying basically that a strategy needs an explicit reason why it should work?
Well I don’t know for sure, but as I said the best I can say is that the reverse strategy should work when there is no trend line, because that means there will be a lot of those short term fake breakouts that will most of the time retrace back to at least 61.8%. I guess it’s basically range trading.
Yes because if there is not an explicit reason why it should work then the backtest result should be considered random.
I guess that might not always be the case, there may be some hidden factor that the reverse of the sytem hit on by some lucky chance that is not obviously apparent but it is unlikely to happen that way and to risk real money on the chance that you hit a hidden system by pure luck would be highly risky.
so let me ask you something, am I understanding your original strategy correctly was it to catch the reversals at the 38.2 or 50 level during a retracement ?
Yeah, look for a tall bar breaking out a resistance or support line, then wait for retracement, enter trade, put stop loss at just below 61.8% (if it’s bullish trade) and limit at a long term resistance/support point which would make 1:1 to 1:2 risk reward ratio.
I’ve tried not using limit also, but that doesn’t seem to work well. Even though I might ride far along the trend, I also need a good convincing move to the opposite side to be sure that the trend has stopped, which can lead to loss of many potential pips.
I haven’t read through the entire thread, so I’ll just make sure that are you aware that ONLY if you go exactly in the opposite direction, meaning that if you’ve had a 1:2 risk:reward you will now have a 2:1 ratio on the opposite trade, will you win 70% if times.
otherwise you definetly CAN lose both trades.