An interesting few days...

EURUSD

Monday provided a gush of low-volatility entry signals on the EURUSD, NZDUSD, gold and silver.

 

I decided to trade the EURUSD, being the most liquid, and both a long and short were triggered on the break of Monday's high and low.

I initially aimed for a 1.75:1 reward:risk ratio. As you may see, my long didn't go far before I was stopped out. Price broke downwards and after triggering my short, I began to lose confidence about my trading plan and closed my trade with a reward:risk ratio of 0.3:1.

 

Price continued to move down and would've hit my initial profit target. It then reversed, producing a bullish pinbar this morning.

 

The main lesson here is psychological. If I had maintained my faith, I would be in the green right now. My trading plan is complete. I just need to stick with it. Trading is 10% technique, 90% psychology.

Review of November trades

As of the 25th of November, I've taken four trades for the month. Two were losers, while two were winners. Overall, my account is up ~4% for the month, give or take (it's hard to calculate since I am always injecting equity from my day job, obscuring the growth of my equity curve).

 

GBPUSD - 7th November 2012

 

I saw a low volatility candle on the GBPUSD at the end of 6th November, and laid out my pending long and short at the break of the candle's high and low, respectively. Both the long and short were triggered on the 7th November. Sadly, price whip-sawed for the next few days, stopping out both my orders. I was aiming for a 1.75:1 reward:risk.

XAUUSD, NZDUSD - 23rd November 2012

 

There were two low volatility candles that caught my interest during the 22nd November. They were on the XAUUSD (gold) and NZDUSD. There was an additional signal on the XAGUSD (silver), but due to extreme correlation with gold, I decided to skip the silver signal.

Gold:

NZDUSD:

As you can see, the high of both low volatility candles were broken, triggering a long. My reward:risk was set at 1.75:1, which was easily hit. I walked away with two winners. Since my reward:risk is bigger than 1:1, I am ahead for the month.

 

My main concern was the possibly strong correlation between NZDUSD and the precious metals. NZDUSD is a commodity dollar, although I don't believe New Zealand is a big exporter of gold, unlike Australia.

 

Miscellaneous news

 

I'm currently optimising my "Hermes" low volatility breakout system, the system my previous four trades are based on. I'm testing to see what happens if I try to trade with higher values of ATR, up to 67%. I'm also testing an RSI(14) filter to see whether trading with the trend can be advantageous. Results are too early to tell at this point.

Monday breakout backtest is a bust...

I took a break from trading last week and resumed my Monday breakout backtest a few days ago.

 

Results are no longer rosy. I continued my backtest on the AUDUSD from 2004 to 2006, which yielded significant drawdown. I also tested the EURUSD in 2012. With a 2:1 reward:risk ratio and 50% *ATR(14) SL, my profit factor was 0.61. Very poor.

 

Of course, this gives rise to the possibility of a mid-week "Wedneday Reversal" which may be exploitable....

Results so far so good on Monday breakouts...

My preliminary backtest on the EURUSD passed. I gathered 171 sample trades from 2001 to mid-2004. You set a pending long and short each Tuesday. Entry is the break of Monday's high or low. SL is ATR(14) * 0.5.

 

After 171 samples, all R:R above 1:1 showed a positive profit factor, which is healthy. Good Reward:Risk seem to be 2:1 and above. With 2.5:1, profit factor was 1.44, which is very good for a mechanical system.

I've started testing the AUDUSD. If that passes after 100-200 samples, I'll focus on the USDJPY.

General rule: don't talk shop with non-traders?

I generally spend 4+ hours per day doing something trade-related, whether it be research, backtesting, reading or setting up orders. So understandably it's something I enjoy talking about.

 

There's a peril with talking shop with non-traders, though. They usually have a different understanding of the market than you do.

 

When I put on a trade, I try to think in terms of profit factor. Every trade I put on, I win the amount I risk * profit factor, regardless of whether I actually win or lose. It's the long run that matters, and with a thoroughly tested system, your long-term result should be similar to your backtest result.

 

The peril lies when you speak about losses to non-traders. No-one likes losing, but traders (should) understand that a loss is nothing more than an overhead. As long as you're profitable overall, losses should be regarded as a cost of business.

 

Non-traders usually don't understand this, though. When you speak about losses, they may project their own beliefs onto you, e.g. "no-one can beat the market", "the market is rigged", "you'll never win" etc. This is toxic stuff.

 

There's a similar danger when you speak about winners. Non-traders may come to see you as some sort of "guru" who can't possibly fail. Their projection can feed your ego, and make the inevitable loss difficult to accept.

 

And then of course, you will meet individuals who disagree with capitalism, trading and speculation altogether.

 

When conversing with non-traders, it's probably best to be light on the details and protect yourself from outside projections.

 

(and yes, I suffered a loss on the GBPUSD today!)

 

Monday breakouts

 

Spent some time today backtesting the break the Monday's highs and lows. So far I've tested the EURUSD from 2001 to late 2002. Only 81 samples have been collected, but with a stop loss of 0.5 * ATR(14) and a reward-to-risk ratio of 2.5:1, profit factor is 1.32. It's enough to keep me interested in continuing my backtest.

Latest developments...

- A few days ago I decided to daytrade using price action. I knew what I was getting into and only traded single microlot orders. It confirmed my distaste for price action - it is overwhelmingly subjective and I found myself able to draw support & resistance lines anywhere on the chart to justify any price action "signal". I entered three trades - closed two at BE, lost the other one.

 

- Backtested the low-volatility Hermes trading system on the AUDJPY from 2001 to 2012 (it passed).

 

- Now this is probably the most significant breakthrough in the last few weeks. I analysed my entries based on the low-volatility Hermes system, and found that half of my entries were triggered on Tuesdays, meaning Mondays tend to be lowly volatile. Well duh. Mondays tend to 30% less volatile than the other weekdays. I think it's highly possible to design a new trading system based on the breaks of Monday highs and lows. The break of a Monday high or low may set the intra-week trend. I'll do a preliminary backtest to see what values pop up.

Interesting setup on the USDCHF - 1HR chart

I was checking the charts, testing for confluence, and found this interesting setup on the USDCHF.

(you'll probably have to click on the image to see it more clearly)

This was a very good example of a high probability price action setup.