Zone recovery strategy

Trading Systems
3

Thanks for these comments @chesterjohn.

Yes, I too found that getting into an extended series of longs and shorts is a spiral into a big loss. So, I am mulling over what can be done about that -

  • make the zone not too narrow - I hope to be able to derive the zone width from ATR
  • devise an exit strategy to escape a series after, say, 4 positions are open - a minor loss at this point might have to be swallowed - nothing to report yet
  • select a market whose candles are not too spikey - its OK to do this visually, anyway, I can’t find an objective way to gauge this
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Good idea, Is there a way to combine this with a volume indicator and back test?

5

Not something I’m going to take on, though I do see on-balance volume and other volume indicators. Would you agree that as a working guide for this system volume is in proportion to ATR but volatility is the key?

6

Hi,

I may be wrong here, but I see volatility as being derived from ATR(x), and volume being completely different.

These are links in my trading plan to some VP stuff

Ep56: Embrace The Suck

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7

I like these kinds of threads, exploring non-standard techniques.

My initial reaction is that the trader starts to fixate on the loss, rather than the next best trade.
By saying “exit at break-even”, you are focusing on trying avoid the loss, rather than making the next great trade.
Even if you have to take the mitigating trade, rather than let it go for high multiples, you are planning to bail out after getting to break even.
Is that not, fundamentally, a restrictive mindset?

It is incredibly tough to keep trading after several consecutive losses, but that is, I believe, the path to massive returns.

One alternative method, would be keep taking any trades, Long and Short, and then, after you have several open, start taking pairs off, where there is a profit. And keep the losing trades open until they can be taken care of. But you have to keep losing open trades.

For example, if you had many Longs and Shorts, and you had a new Long trade, you would take any profitable Shorts before opening the new Long. (maybe even leaving a couple of shorts to mitigate some of the Longs)
Every time you got a new Short trade, you would take the Short, but cash in all the Long trades.
I don’t know if this becomes a dynamic grid, but I don’t know if the next trade is going to be a runner or not.

This is something I am trialing on EURUSD and CADJPY.

8

Cheers for this.

Yes, the focus is on not losing rather than on winning. Of course, if the first trade goes straight to the TP, then an early re-entry would be the next thing to consider.

Zone recovery is a technique to deal with the times when the market does the less probable thing. The downside is that once you’re committed to zone recovery because the leading trade has initially failed to hit target and you elected not to use a stop-loss, then you’ve got a tiger by the tail. Without one or other target being hit, its hard to get out without a loss and difficult to even calculate what it should be. Still, minimising the loss from a trade is a legitimate aim and this is a way to potentially minimise the loss all the way to zero.

If we could just figure out the details…

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The biggest issue I’m finding with this strategy is certainly a psychological one.

I made great money doing this the first 3-4 weeks, even paid for my EA. But I look back at my journal and all those accumulating, negative numbers leading up to the big positive one that finally closed the trade and now I seem to have lost my nerve. Even when starting with a small position size, after opening 7-8 positions fear/panic starts to set in.

Overall I have found this strategy to work better with indices, using a wider SL/TP as opposed to currencies. I will look at this again this week on my demo account to see if I can somehow come up with a system that allows you to safely exit after only opening 2-3 positions. So far, I have been unable to do this.

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10

The standard r:r on these trades is 1 to 3, i.e. the TP is 3 times further from entry than the width of the buy/sell zone. But in practice it seems two factors are essential to make this strategy work - one is to have a wide zone so that minor levels of volatility do not trigger banks of opposing trades, the other is to make sure price reaches one target or the other before margin is used up.

I’m starting to wonder whether 1 x ATR(14) is too narrow for the zone and 3 x the zone distance to the TP is just too ambitious.

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Trader’s are always looking for ways to beat the market, afraid of losing money. Just listen to the information the market is giving, the market speaks, we just don’t listen. You’ll never fly if you don’t know the name of the wind.

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Hi,
I took this to the extreme, and decided to trade since mid 2021 with 0% leverage. I can tell you that about half my trades still held are down by up to 50%, but they are more than offset by the number of trades that doubled or more and part of my plan is to take off 1/3 or 1/2 if and when trade values double. It probably helps that my stretch goal is about 25% per year profit for the whole bank.

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13

Looking back to this strategy. I ran in at a very small scale last week (starting at 0.2 units) for 3 days on the US RUSS only, since indices seem to work best. Here are those results:

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Again, this is a very small sample, too small to base any conclusions on.

To get around margin issues, I’ve calculated 8 different options using multipliers from x1 (no multiplier) to our standard x1.33:

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I’ve calculated 25 trades, but realistically I think worst case scenario would be 12-15 max.
As you can see, by using a smaller multiplier you don’t have margin issues at all. However, after the 4th trade on x1 multiplier you start to see a loss.

Another thing with using a smaller multiplier is you would have to let the trade run to the full 60 pip TP to get these results. Anything less results in less gain/further loss.

Since most trades run no more than 4-7 positions, I will be trying this next week using a smaller multiplier, but I haven’t decided which one yet. Possibly x1.10

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14

Still running my zone recovery trial and slowly building profits.

I have worked out I will only have a losing trade (or series of trades on the same market) if either I make a cock-up with my maths or order positioning, or I let the series run into a sequence of multiple opposing trades.

I can deal with the personal errors: its not a simple strategy but more care and practice will resolve these.

But an extended series of positions is very probably a route to a big loss, especially if you let the series run so that you use up all free margin. Two answers - 1) don’t open a position in a sluggish market; 2) if a nicely trending market turns sluggish, get out early; three positions are enough - I’m aiming to not even let the fourth one open - a fourth position indicates energy is gone out of this for now.

GBP/JPY and EUR/JPY are energetic pairs, they’re most active in the London market morning session. AUD/USD is worth a look. GBP/USD moves well. EUR/USD and USD/CHF might be options if there’s no other choice.

Some other Australasian pairs are highly volatile, good in this context, but they eat up margin (at least under UK FCA limits).

EUR/CHF, EUR/GBP, AUD/NZD, AUD/CAD, USD/CAD feature currencies that are just too highly correlated to make for energetic movements so they should be discounted from this strategy.

My favoured time-frame right now is m30.

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15

I like this idea, you won’t take a big hit nor do you need to worry about margin.

How are you finding currencies with the spread? Also, are you still testing using 1:3 ratio?

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I have no worries with spreads on the majors (including AUD/USD). I am sure the bigger problem I find with the Minors and Australasians, although they do have wide spreads, is the margin requirements. Unless starting with minimum-sized allowed positions these are quickly going to become prohibitive. Spreads are a real problem around market closes/opens.

I’m actually just now finding 1:2 ratio is good enough. The pro is you get a profit and get out quickly enough to have an option for more trades in the same initial direction on the same market. The con is the hedging positions need to be that much bigger, so the margin requirement makes it almost impossible to run two sets in parallel. Though running two zones in parallel quickly becomes frantic. For the first time I can see why people using a strategy want to use an EA to run it.

Overall I have few losing days and it looks like I will on average be profitable over any periods of more than 6 trading days.

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17

This is where any strategy converges.
You still have to apply some reasoning to be in the market, or to stay out.
Some analysis is being applied to determine entries with a probability of a winning outcome, this is where you and all traders meet, whether classical take a trade and win/lose, or to take a trade and win/hedge.

As a guess, do you trade your system at a breakout of range? :slight_smile:

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The initial position follows the prevailing trend on the m30 chart, but for me I want it backed up by D1 trend. I also check that the comparative strengths of the two currencies are correctly aligned and that there hasn’t been an ominous D1 candle such as a counter-trend outside key reversal bar.

So far it looks like about 50% of the initial trades go straight to TP without the opposing trade being triggered - one position. About half the remainder hit the initial trade TP after triggering the counter-trend trade and a second trend-following trade - 3 positions. The remainder are split between those that hit the counter-trend TP - 2 positions - and a smaller number, maybe 15%, that trigger both counter-trend and second with-trend orders but then meander between the two TP’s.

But what you say is right, the trader really ought to take a view on the market, not just enter randomly and let the hedging sort it out.

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Monday saw a great bullish run by GBP/JPY during the London morning session. This allowed me to run 3 consecutive single-shot longs which hit their TP’s without their hedging shorts being triggered.

This was a very pleasing way to start the week but I think what I’d like to do in the future is after the first win, run the second bullish trade without a TP. So after I’ve made my target net gain for the day in one shot and price is still pushing forward along the trend, take the brakes off the second one and let it run. Maybe use a trailing stop. Maybe add to it with a pyramid. This is how trend-following trading really makes money.

In this particular case, letting the second winner run / pyramiding it wouldn’t have worked very well. Price reversed early in the session and fell consistently until later afternoon. But the tactic is good.

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Even the best traders in the world will tell you that if you are so good with trading, you can only win 40% of the time, Risk management is king

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If you can “only win 40% of the time” then all the people sitting on trading floors earning 7 figure salaries and bonuses (even if they’re almost all virtual trading-floors, these days) must be doing something terribly wrong, because they seem to believe the exact opposite!! :open_mouth: :laughing:

This myth just won’t die out.

At least, in forums full of struggling retail traders it won’t die out.

And it gets continually reinforced on Youtube, in PDF’s and on websites where people are selling stuff to ill-informed audiences of struggling traders who all believe that (because it’s what they all tell each other all the time, regardless of it being totally wrong).

In other places, where people are actually making a living from their trading, in circles frequented by successful traders, in the world of professional trading, it didn’t have to “die out” because nobody ever believed it to start with.

There’s a kind of beginners’ myth that you need a high reward to risk ratio (and can therefore only have a fairly low win rate) to do well.

In Babypips (and at one other trading forum) there’s a kind of nearly universal assumption that win rates “shouldn’t” be too high, because distances from the entry to the stop loss “have to be” quite a bit bigger than distances from the entry to the stop loss.

It’s complete nonsense.

But heaven forbid that anyone should ever try to have a high win rate and a lower “R”.

They might be hounded out of the forum! :open_mouth: :laughing:

In professional trading circles, of course, there’s more or less the opposite assumption: that stop-losses are wider than targets, and win rates high-to-very-high.

That’s what most people who are actually making a living think.

But you won’t often see them saying so, because they don’t post at Babypips or in forums generally, or in the comments on Youtube or on the commercial websites so many people use, to try to learn to trade.

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22

Hey MattyMoney I can make you a specific MT5 robot to end the zone recovery after a maximum of 3 trades. I can also add conditions for the initial trade to be taken.