Trading System


Don't read it, I will use some other approach after I analyze the market for the next several weeks. I also switched from Forex to the stock market, by the way.

More details: /2018/04/22/sixths-trading-week/


I call it "Trading Against The Average Joe".

The idea is simple: find all reasons why newbie traders fail and do the opposite. While it may sound naive at the very first glance, it makes complete sense after you practice it for a while.

Daytrading is a zero-sum game. When you win, you should understand whose money you are taking from the table. I always picture myself trading against all these losers. It's more effective than just "following the rules". While it may seem rude, this inner picture really helps me to stop making the same mistakes again and again.

It doesn't mean that I'm actually robbing somebody. It's just a psychological trick that enables me to learn faster. Even if there are people actually losing money on the opposite side, it doesn't mean that I earn from their mistakes. I earn because I strictly follow my rules.

Let's first define the most common failure points:

1. Poor risk management. It's the cornerstone. Newbies often risk up to 100% of their accounts in a single position. It usually takes them just a few days to lose everything. They don't even have a chance to learn because you can learn nothing from a single week of trading.

2. Not cutting losses. As a rule, newbies never close losing positions. Unrealized losses don't hurt. There is an illusion that they still have a chance to recover when the price finally returns to breakeven. Yes, taking into account their risk management habits, they still have a tight stop loss called "margin call".

3. Taking profits too soon. They are happy and relaxed when they see unrealized profit grow. It hurts when they see it go back to zero or even into the red zone. While newbies know the mantra "let your profits grow", it takes them just a few lost profits to get used to hitting really small targets. Combined with the previous point, it makes it impossible to become profitable even when they are right on entry points.

4. Trying to catch tops or bottoms. From a statistical standpoint, it means that they aren't following the trend. They miss big moves, trying to catch the reversal. At the end, they take just few percents of the backwards move and quit, looking for the next reversal.

5. Averaging losses, adding to the losing position. It's a common practice between newbies to buy more when price goes against them. This way they get an illusion of safety. What they don't understand is that they take exponential risks/linear profit. More about it later.

6. Overtrading. It's an urge to trade which they can't resist. Trading is highly addictive, there is nothing surprising about it. As a result, they take plenty of random trades, unsystematically.

7. Impatience. FOMO (Fear of Missing Out) and taking profits too soon results in positions with poor reward/risk ratio.

8. Lack of persistence. Instead of polishing a single setup they constantly jump from one idea to the other. Random trading makes it impossible to learn.

What can I do about it?

I should not risk more than 0.1% of my money when I enter the positon. This way I get plenty of room for errors, especially at the very beginning. I need to learn to trade, not to lose this chance in the very first week.
 
For example, if I decided to start with $1,000, my position entry risk must be not higher than $1. It also means that I don't need to send all my money to the broker. Something around 10%, or $100 is more than enough to start. It's better to have a chance to start over 10 times with a new account than to lose everyting in a single day due to some event. Shit happens, you know.
 
I know that it sounds boring. We all want to double our money in a week!
 
The most interesting part of my idea is that I can get really high profits with really small risks. I was able to get about $50 in a single day with $5 risk on a real $150 account. I still need some time to polish entry and exit points, but I already feel that I'm on the right way.
 

Let me show you some maths so you can feel the magic:

Let's imagine that I see that a strong move has just started. It may be some news, economical event, everything. I'm sure that this move will last for sime time. Let's find how I can take Joe's money from the table (or buy him a beer if I was wrong).
 
Both me and Joe see the move on EURUSD and expect it to last about 800 points. Both of us have the urge to enter it.
 
Let's imagine that Joe is a complete newbie. He will take his $100 and enter the market with 1.0 lots. This way each point will make him about $1. Taking into account his bad habits in taking small profits, I doubt that he will sit still for several hours even if he is right. More probably he will quit something about 2x profit and be happy. So, on the upside he will make about $100. On the downside he is limited to $80 where margin call will happen. What's more important is that it's a "win or lose all" situation where RR ratio is almost zero. Just a single losing trade will kill his account.
 
Let's imagine that Joe is not a complete newbie. He will take all his $100 and enter the move with 0.1 lots. This way each point will make him about $0.1. If the price moves 800 points up, he will earn about $80. He will also set up 100 point stop loss. If the price immediately goes against him, he will lose about $10. So, his RR ratio is about 8.0. Not bad! The only problem is that he needs just 5 losing trades in a row to lose 50% of his account. Really bad!
 
What about me?
 
I will enter the position with 0.01 lots and gradually add 0.01 lots to the winning direction every 50 points. This way, when price finally goes up 800 points, I will have 15 total positions open, 0.01 lots each. The total profit will be about $68. Yes, I will earn $12 less than "Non-newbie Joe". My RR ratio will also be a bit smaller, something around 4.4. I expect to lose about $16 during this setup. But, what's more important, is that I risk only $0.5 when entering the positon! I can survive 100 losing entries in a row and still have about 50% of my account left!
 
So, technically speaking, I can go for $68 profit with $0.5 risk.
 

How can it be possible?

By gradually adding to the winning direction I increase position size as the price moves up. When it bounces back, I cover it with small 50-point stops. So, when the price moves up, I get exponential profit grows. If the price suddenly drops back, I get linear losses. And, the longer I stay in the profitable position, the higher RR ratio I get. For example, at 1250 points I can get earn up to $165.00 with $25 risk!
 
Unlike our poor Joe who usually averages losses, I average profits.
 
Here is a calculator so you can play with the numbers:
 
If you try this approach, you will find that it solves almost all of newbie fails. It forces me to immediately close losing positions and stay in the winning position much longer than I was able to do before. It also beats me hard whenever I try to catch tops or bottoms :)
 
And, from the RR ratio perspective, it's just amazing!
 
From a technical point of view, it's just building a huge position with minumum risks. If I decided to enter the market with 0.1 lots, for example, I will lose about $10 when price moved against me for about 100 pips. But, if I enter with just 0.01 lots initially, this loss will be just about $1. Plenty of room for errors.
 
And, as price gradually moves into profitable direction, I add more and more into the position. This way I get more and more position size with limited risk. Even if the price reverses in the middle and goes against me, I will get just linear losses equal to the pyramid size. Stops of each level are on the previous level.
 
So, if price moved forward for 500 pips, I will build 10 levels total. If the price instantly reverses at this point and I'm unable to close all my positions, I will take $5 loss. But, if the price moves forward for the same 500 pips forward, I will take $50 profit.
 

Can I automate it?

 Yes and no.
 
Yes, because managing plenty of small positions is hard and time-consuming. It's something I really need to automate. I'm already working on it.
 
No, because I still need to find correct entry and exit points. I can't develop a robot that can automatically trade using this idea. Maybe if I combine it with some good entry/exit signals, it may help to boost RR ratio.
 
Here are some results of my automated trading experiments:
 
I did a lot of experiments to find that it's better to execute this idea manually, not automatically. This way I can feel the market and make better entries and exits. I even managed to compress pyramid building by 2 times without taking extra risks. Now I build new levels every 25-30 pips, not at fixed 50 pips increments as before. It means that I need just 250 pips move to build 10 levels.
 

As for the automated trading, I'm against it. From my previous business I know that everything you can automate loses efficiency. It means that I should avoid automatable areas of expertise.

I prefer to automate self-training, data analysis and trade execution. But I strongly believe that human+AI will always win agains pure AI. I want to combine the best from both worlds. It's the goal.

I see my future as a playing expert with a set of great tools that help me to trade, not replace me as a trader. I doubt that I can automate my part of the work and I have no such goal

My personal journey isn't about developing yet another all-dancing all-playing trading robot. I want to learn, practice and automate my work which will gradually improve my own performance.

 

Risk Management

The most important part of it is to limit the total cost of position building by $30, or about 0.3% of my total risk captial. This way I will be able to avoid losing all past and future profits in a single position. Taking into account high leverage, I don't need to keep all my money in a broker. I limit this amount to about 5%, which is enough to take 0.3% risk per trade.
 
I also limit pyramid size by 10 levels. The reason is simple: if the price moves really fast, I can build it with minimum losses of about $3-$5, then I become absolutely safe. It doesn't matter if the price stops at a support or resistance level. All its fluctuations will no longer result in accumulated losses for me.
 
Yet another important idea is to limit myself to a single entry per day. This way I can avoid consequitive losses in a sloppy market.
 

What's next?

I will practice finding good entry and exit points for my system. I plan to develop it in my simulator first, then self-train on historical data alonside with real-time practice.
 
I have already found a right approach to trading. I'm switching from daytrading to longer-term trading. I no longer trade on M15 or even on H1, I mostly look at D1. I enter the market 1-3 times a month for 1-3 weeks or even more. It may sound like earning less, but it's exactly the opposite.
 
Here are some stats and ideas on benefits of long-term trading against daytrading: /2018/04/15/fifth-trading-week/
 
I hope that it will make me a consistently profitable trader in few weeks :)