The absolute easiest KISS method. Also, how do we measure risk reward? (Absolute Simplest KISS Method. Also, how)
Hello everyone,
Sorry, but I love open discussions around trading theory. I'm not going to give you a system that says buy 3 lots when X currency is above this MA and the RSI, and so on and so forth. This is the latest theory I've been thinking about.
How does the trading system implement KISS? What if I told you that all you have to do is place an order when a new candle opens, regardless of any past price movements? What if I told you that the system is at least 80% correct? Can you tell me about the city? Maybe it's not that easy, but it can be!
It all hit me when d3vil posted a post about the strategy he was considering. You can read it here:
http://www.strategybuilderfx.com/showthread.php?t=17439
My thoughts are almost exactly the same except for one thing. d3vil's system requires the currency to move 50 pips to trigger a trade in that direction. My thought is, why wait for 50 points? I'm talking about taking a trade in any direction on the opening of a new candle on the daily or weekly chart and making a profit of only 10 pips or so. No need to think, just enter the trade.
View daily and weekly charts. These candles have a lot of movement. But this system doesn't care about all movements. This system only cares about a few points, maybe 10. What do you see in each candle on these charts? Rarely will you see a candle open and move in one direction without any form of shadow in the opposite direction. This means that if a candle is a long bull, there is usually still a shadow a few points below the opening price.
That's why I'm thinking. What if when a new candle forms on the weekly or daily chart, you enter a long or short trade and only make a profit of 10 pips? Why do I mind taking only 10 points? Well, look at the chart. How many times have you opened a position when a new candle was formed but did not reach 10 points? (I should point out that I'm looking at GBP/USD, EUR/USD and USD/JPY) I'd say the win/loss ratio is 80/20. I'd say that's a very conservative number.
Also note the issue with the 80/20 number. How many of the trades that could go wrong would you be on the downside? If you choose trades at random, we can assume that in those losing situations you are on the right side 50% of the time and on the wrong side 50% of the time. So the win-loss ratio might actually be 90/10. Not sure how much better practical judgment would help, but consider if you could use some chart reading experience to put yourself in a winning position on potentially losing trades better than 50% of the time. Win/Loss becomes 95/5 or above.
I just got back from the SEMA Convention in Las Vegas, so I haven't looked at the charts to confirm those win/loss numbers. I would say that on a weekly chart these numbers would perform very well.
Here's another idea that came out of this. What is the risk/reward? Why do most of us measure our rewards in terms of points rather than how risky the game actually is? Considering the extremely low pip target and high correct frequency, I think the above strategy is very safe. This is up for debate, but I feel it's very safe to use more than 2% of your account on these types of trades. So, when you're consistently earning $100 per point, do you mind only earning 10 points each week? $52,000 a year is probably a lot more money than most people trading here make. The idea is to keep reinvesting and adding more funds to slowly build up your pip value. As we try to gain more points in any strategy, our likelihood of success starts to drop dramatically.
However, now I'm having a hard time determining an exit strategy for the stop loss system. On such a long time frame, we allow for a lot of volatility and don't want to wipe out our 10 pip profit with one long candle over 100 pips. Many times the currency will retrace 60 pips, thus bringing us profit. This makes me wonder how many of the 80% of good trades that do this and are eliminated by a stop loss reduce our chances of success to only 80% or lower.
Take-profit and loss-exit strategies still need to be developed. I've been considering going from just 5 pips from daily candles to a weekly average of 25 pips. The success rate on daily candlesticks will increase while still giving us more pips than just getting 10 pips on the weekly chart. The system can also be applied to many different currencies at the same time, and it is possible to gain 100 pips per week by using only 4 currencies that work well. The more volatile, the lower the spread, the better. Isn't this cool? A system that handles volatility well. EUR/USD will also perform well. We want currencies with lots of shadows in the candles.
The post also aims to get people thinking about different forms of trading. Many systems attempt to achieve success based on the number of times the thought process is correct. This system is based on the number of times a currency actually does something over a period of time. It's hard for me to put it into words, but do you understand what I'm saying? Like, when a candle first opens on a long-term chart, it's 100% certain that it will move in one direction or the other from the opening. What other certainties can we build systems on? I would look into a similar strategy but enter near the end of the candle and see if the subsequent candles tend to overlap the previous close by a few points. Can we use this to increase the likelihood of success?
The last thing I want to say is one last benefit of this system. So simple, even EA can do it! (Think of the geico caveman commercial, haha) Seriously. No indicators. There is no thought process. Long/short trades can be completely random and there can still be situations where, no matter which position you take, you will still be correct 80%+. However, simple strategies can be entered. For example, when the previous candle is red, go short on the opening price of the next candle. If it is green, enter a long trade. This will add some decision-making to the strategy and may help eliminate those more than 50% losing trades, bringing the profit loss to 95/5 in no time.
What do you think? It will be slow at first, but once you start making $50 or more per point, profits will add up quickly. Matt
Sorry, but I love open discussions around trading theory. I'm not going to give you a system that says buy 3 lots when X currency is above this MA and the RSI, and so on and so forth. This is the latest theory I've been thinking about.
How does the trading system implement KISS? What if I told you that all you have to do is place an order when a new candle opens, regardless of any past price movements? What if I told you that the system is at least 80% correct? Can you tell me about the city? Maybe it's not that easy, but it can be!
It all hit me when d3vil posted a post about the strategy he was considering. You can read it here:
http://www.strategybuilderfx.com/showthread.php?t=17439
My thoughts are almost exactly the same except for one thing. d3vil's system requires the currency to move 50 pips to trigger a trade in that direction. My thought is, why wait for 50 points? I'm talking about taking a trade in any direction on the opening of a new candle on the daily or weekly chart and making a profit of only 10 pips or so. No need to think, just enter the trade.
View daily and weekly charts. These candles have a lot of movement. But this system doesn't care about all movements. This system only cares about a few points, maybe 10. What do you see in each candle on these charts? Rarely will you see a candle open and move in one direction without any form of shadow in the opposite direction. This means that if a candle is a long bull, there is usually still a shadow a few points below the opening price.
That's why I'm thinking. What if when a new candle forms on the weekly or daily chart, you enter a long or short trade and only make a profit of 10 pips? Why do I mind taking only 10 points? Well, look at the chart. How many times have you opened a position when a new candle was formed but did not reach 10 points? (I should point out that I'm looking at GBP/USD, EUR/USD and USD/JPY) I'd say the win/loss ratio is 80/20. I'd say that's a very conservative number.
Also note the issue with the 80/20 number. How many of the trades that could go wrong would you be on the downside? If you choose trades at random, we can assume that in those losing situations you are on the right side 50% of the time and on the wrong side 50% of the time. So the win-loss ratio might actually be 90/10. Not sure how much better practical judgment would help, but consider if you could use some chart reading experience to put yourself in a winning position on potentially losing trades better than 50% of the time. Win/Loss becomes 95/5 or above.
I just got back from the SEMA Convention in Las Vegas, so I haven't looked at the charts to confirm those win/loss numbers. I would say that on a weekly chart these numbers would perform very well.
Here's another idea that came out of this. What is the risk/reward? Why do most of us measure our rewards in terms of points rather than how risky the game actually is? Considering the extremely low pip target and high correct frequency, I think the above strategy is very safe. This is up for debate, but I feel it's very safe to use more than 2% of your account on these types of trades. So, when you're consistently earning $100 per point, do you mind only earning 10 points each week? $52,000 a year is probably a lot more money than most people trading here make. The idea is to keep reinvesting and adding more funds to slowly build up your pip value. As we try to gain more points in any strategy, our likelihood of success starts to drop dramatically.
However, now I'm having a hard time determining an exit strategy for the stop loss system. On such a long time frame, we allow for a lot of volatility and don't want to wipe out our 10 pip profit with one long candle over 100 pips. Many times the currency will retrace 60 pips, thus bringing us profit. This makes me wonder how many of the 80% of good trades that do this and are eliminated by a stop loss reduce our chances of success to only 80% or lower.
Take-profit and loss-exit strategies still need to be developed. I've been considering going from just 5 pips from daily candles to a weekly average of 25 pips. The success rate on daily candlesticks will increase while still giving us more pips than just getting 10 pips on the weekly chart. The system can also be applied to many different currencies at the same time, and it is possible to gain 100 pips per week by using only 4 currencies that work well. The more volatile, the lower the spread, the better. Isn't this cool? A system that handles volatility well. EUR/USD will also perform well. We want currencies with lots of shadows in the candles.
The post also aims to get people thinking about different forms of trading. Many systems attempt to achieve success based on the number of times the thought process is correct. This system is based on the number of times a currency actually does something over a period of time. It's hard for me to put it into words, but do you understand what I'm saying? Like, when a candle first opens on a long-term chart, it's 100% certain that it will move in one direction or the other from the opening. What other certainties can we build systems on? I would look into a similar strategy but enter near the end of the candle and see if the subsequent candles tend to overlap the previous close by a few points. Can we use this to increase the likelihood of success?
The last thing I want to say is one last benefit of this system. So simple, even EA can do it! (Think of the geico caveman commercial, haha) Seriously. No indicators. There is no thought process. Long/short trades can be completely random and there can still be situations where, no matter which position you take, you will still be correct 80%+. However, simple strategies can be entered. For example, when the previous candle is red, go short on the opening price of the next candle. If it is green, enter a long trade. This will add some decision-making to the strategy and may help eliminate those more than 50% losing trades, bringing the profit loss to 95/5 in no time.
What do you think? It will be slow at first, but once you start making $50 or more per point, profits will add up quickly. Matt
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