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I guess like most of you, during the last years I became to some degree successful in trading. I make some money on some days. However, on other days I give back most of it, and thus I’ll never make enough money from trading in order to refer to myself as a successful trader. Thus, I’ve thought that it would be time to change my view on the market. And I’ll do this together with you!
I’ve thought that it would be a good idea to first list some ideas, proved facts on markets and widely accepted fundamentals that influences the market. They should be the foundation for our discussion and new ideas. Let’s go …
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During the last years I’ve seen many attempts to apply some statistical models like AR(I)MA or the Wiener process to market prizes or to describe the market distributions with some widely used distribution functions. However, while discussing these ideas with two statisticians from the UCL and the Alan Turing Institute I’ve realized that these applications are not valid. The main problem is that in the same way the random variable is random, in time series the parameters of the underlying processes itself can be random, too. Thus, the only thing we can do is hoping that our conclusions and frequencies that we obtained from a sufficient large sample from the past will in some way resemble future occurences and thus that they have any bearings for our trading.
Thus, the only reasonable way of trading should be trading based on a fundamental understanding of the market that covers as many properties and dimensions of the market as possible. I plan to investigate these properties and dimensions together with YOU based on the below discussed preliminarily assumed (fundamental) assumptions on markets, with the hope to come up with some new ideas that overcome psychological fallacies and subjective strategies:
- Money moves the prize. The more money is invested in either the one or the other currency pair (if we focus on forex), the more volatile ([re-]active) the prize will be.
- The bigger the difference between the money invested in one side compared to the invested sum in the other side is, the faster prize will move. We say: The more momentum is behind a move.
- The more momentum behind a move the more likely it is to continue.
- A “trend” (prize movement with biased momentum in one direction) usually exists quite a while. However, it is usually assumed that a trend reversal happens within 1 or only a few bars. Thus, if we have no quantitative info on the current state of the market, at any time the probability and expectancy for a trend continuation is higher rather than for a trend reversal.
- At each point in time the underlying behaviour of the market is either up or down. There is no such thing as a sideways market. Constant prizes indicate that there is an exact identical trading activity supporting both underlying currencies. However, these instances are usually of short duration and thus aren’t of interest when dealing with bar charts.
- A true sideways market only exists if the fundamental economy behind an asset is dead. Then the prize is in an adsorbing state.
- The market is most of the time h-recurrent (prize is revisted usually at least twice within a given time period).
- The visual impression of sideways markets only appears due to low volatility (low trading activity or momentum) or a periodically changing shift in momentum. However, when dealing with bars of higher TFs, even then it should be possible to make some (small) profit.
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In general, you can break every strategy down to one of two trading approaches:
- mean reversion trading (not applicable on pure prizes and MAs on it)
- trend trading
In both cases we can only succeed if we are able to quantify the underlying state of the market properly and thus to identify situations with higher than average chances of success.
Another thing we should discuss together is that trading may be even possible successfully (making more profits than losses) if we just guess the future direction with an equally distributed probability of 50 %. However, this requires a good money management strategy in order to let winners run and to cut losses early. But even then we need to quantify the market somehow in order to decide when to exit our trades …
I believe that the bold statements in my last post are the most crucial properties of markets and points towards a new and quantitative view of the market. Thus, I’d like to discuss these points with YOU and hear YOUR OPINIONS on it! However, I’d like to talk about concepts and ideas, not about the application of indicators or strategies with no theoretical foundation behind it. We can discuss the application of indicators later on if we found something to stick on.
Happy and successful discussion
Anti
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Another thing we should discuss together is that trading may be even possible successfully (making more profits than losses) if we just guess the future direction with an equally distributed probability of 50 %. However, this requires a good money management strategy in order to let winners run and to cut losses early. But even then we need to quantify the market somehow in order to decide when to exit our trades …
I think, this is both one of the most crucial and underrated points. I’m convinced that a sophisticated trade / money management can generate profits for (a sufficiently large number of) arbitrary entries. However, this is somehow (but not quite) just a problem transformation of the old market state prediction problem again. But in this case you have at least one fixpoint: your trade entry. And you don’t need to make a rather long-term prediction right at the beginning where you hope that it will be valid for the entire lifetime of that trade. Instead, you may decide at every new incoming tick if and how to exit this trade based on the information accumulated so far. This is just another point of view of basically the same thing and maybe it is trivial.
Anyway, let me briefly redescribe it. If you got an entry signal based on any prediction, the prediction itself might be a very good one (the best that was possible at this time) but with the next candle it might totally collapse. Alternatively, you might want to define the quality of predictiveness also in terms of a time span where it should be valid with some probability. But how long must that time span be? Ideally, just as long as your trade takes to become profitable, i.e. the time that the market requires to fulfill your prediction. I don’t think that we can find any model which yields a suchlike “invariant”, continous predictiveness in a market where even the prediction of the direction of the next candle on the lowest time frames is so challenging. Instead, predictiveness is likely dependent on a particular point in time. Essentially, that is closely related to your statement above:
The main problem is that in the same way the random variable is random, in time series the parameters of the underlying processes itself can be random, too.
So, the model generating the time series is itself time-variant (and probably also dependent on additional dimensions). For that reason, I think, it is much more important to manage a trade in each point in time as soon as it is alive than to find the right time to initialize it. Is this change of perspective helpful in practice? I don’t know.
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@flx23: Thank’s a lot for your reply. With the statement you cited in the first place, I’ve thought in some ways like it was described in a recent FF thread: The Monty Hall Problem applied to trading. I believe that the equity curves there show that it is possible to be successful without ever knowing which way to got. However, that might be a dangerous way where you may be always near to a margin call …
The validity of my primarly point can also be seen from the formula of the expected return:
expectation = (amount won) x (probability of a win) – (amount lost) x (probability of a loss)
In a random market both probabilities as well as the amount won are uncontrollable. The only factor of the equation on which we have a direct influence is the money that we risk and that can be lost in a trade.
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5. At each point in time the underlying behaviour of the market is either up or down. There is no such thing as a sideways market. …
6. A true sideways market only exists if the fundamental economy behind an asset is dead.
These two statements appear contradictory to me. Looking at both statements individually, I’d like to add following thoughts to the discussion:
re. 5.: Just have a look at EURCHF a few years ago, or EURDKK now: pegging a certain currency to another one by central bank activity can certainly lead to a sideways market in FX, until CB strategy is changed.
re. 6.: In FX, we always have to look at the fundamentals of at least two currencies / economies, if we want to consider economic fandamentals in our trading decisions. So in order to consider the ‘pair’ character of FX I would say something like ‘A true sideways market only exists if the fundamentals of both economies behind an asset are developing exactly in the same direction.‘
So I would say that a ‘true sideways market’ can exist in FX for a certain period of time.
A good trader is a realist who wants to grab a chunk from the body of a trend, leaving top- and bottom-fishing to people on an ego trip. (Dr. Alexander Elder)
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Surely, central banks may have an influence …
I’m not really sure if we really have to look at the fundamentals/economies for both currencies. I’d say it depends on one’s market view (do you believe in efficient markets or not?). Yes, there will be also a sideways market if the fundamentals of both economies develope the same (maybe with a particular factor correcting for the impact of the asset’s home market). But even then we will see that the prize is constant for particular time range. I believe that these events are very improbable and thus we may even have a good model assuming that sideways markets don’t exist (my personal opinion).
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Ok, let’s start with some simple observations and try to figure out how we could use them in our trading. (Disclaimer: All ideas presented in this and all of my other posts are just for demonstration and discussion purposes. If you apply some of these ideas to your trading you’ll do it on your own risk!)
Morning break
My first observation is, that during
- an up day the low is usually developed before the high.
- a down day the high is most of the time established before the low of that day.
Additionally, I see from my broker’s data feed (and thus its time zone – GMT) that either the high or the low of a day is usually set before 12 a.m. (noon) (75 – 80 % of the time depending on the pair). Thus, it should be possible to take some profits by trading the breakout of the prize range from 0 to 12 o’clock in order to ride the market until the low/high has been hit. Surely, we don’t know what that low/high will be, but usually we can make enough money to pay the spread and take some profits.
Look at the chart above. There you can see the daily candle drawn in the background. Additionally, I’ve drawn the highest/lowest prize between the 0 to 12 a.m. time span. The idea is now to trade in a direction of the breakout out of that prize range after 12 o’clock.
Day I and II break some of the observations mentioned above because in day I neither the high nor the low of that day has been established before 12:00. In day II the high has been established before the low although the day ended in a green candle (bullish doji-like candlestick). However, in both cases one could have made some profits trading the break out of the 0-12 zones.
I think it is possible to trade the breakouts multiple times. But what do you think is a good place for a SL? I’d set the SL at the opposite border of the 0-12 range (opposite border to the breakout border of that zone).
Your opinions …
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Repainting idea
I think my next idea is quite old although I believe that nearly no trader ever applied it to her trading … The idea is: Take a repainting indicator and trade in the direction of the last signal.
The image above shows beside the prize chart the ZigZagCallRepaintLegs indicator. This indicator uses the ZZ code and prints formerly repained legs in the indicator window. A positive value indicates an up leg, a negative value a down leg.
As I’ve postulate in my 2nd post in this thread and shown here, especially in the beginning phase of a trend it has a higher chance to continue than to reverse. Thus, my second idea (again quite simple) is to follow the signals of a repainting indicator. However, I believe the safest place to trade is to only use the first signal opposing to the last signal. Maybe a good place for the SL would be the extreme value of the former bar with a signal. If we would trade long with the first long signal in the chart above, the SL should be on the low of the candle with the most recent down signal.
Again, I don’t like to talk to myself and want to hear your opinions … Where would be the beste place to enter, where to exit and where to put the SL?
However, maybe there are some interested readers that like to build an EA in order to test the performance of some of these ideas (as well as on the ideas that may be developed here in the future). The idea is to use these EAs in order to find optimal settings for he used indicators as well as the SL, exit (and TP?).
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Hello Anti,
This could really be an interesting idea.
Pllease can you share this indicator, ZigZagCallRepaintLegs.
I try to search but it seems i cant’ find it.
Thanks a lot !
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Well, I’ve programmed it. But you can do the same with the ZigZagN indicator. Just define your period (ExtDepth) and set ExtDeviation & ExtBackstep to 0.
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Thank you !
That’s really a very interesting idea !
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You’re welcome. But please discuss some of your findings here (unfortunately I see that there is still not that much response to the forum activities (although there are a lot of visitors …).
However, whenever you use some longer lookback periods you’ll see that most of the time there are repainted signals on at least 2 subsequent bars … (maybe you can see this better with my attached indicator; it requires the standard MT4 ZigZag indicator)
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@Anti: Regarding your morning break idea (and also the repainting indicator): Did you already (back)test them or would the results of suchlike setups also be still of your interest? Are you especially interested in finding “optimal” parameter sets?
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@flx23: I’ve just shared some ideas that deal with quite simple assumptions. I haven’t backtested them (although I did some “visual” backtesting). Thus, I surely would be interested in the results of backtests. And if you (or others) think the ideas are worth studying I think it would be a good idea to find optimal parametrs. For instance, for the morning break we could also play with the morning time, SL and TP in order to obtain the best expected value of profit …
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… over and over again, there would have been the won trades on EURUSD for the last 3 trading days. It’s really a shame that my dayjob hinders me to test this strategy and to make some easy pips …
However, there still is the question when one should exit a trade and take a profit or accept a loss … Still waiting for your input.
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Hello Anti, first of all, a great thanks for sharing your zigzag indi !
For the exit, i apply a fixed take profit, i mean something we could achieve everydays easily, something like 10 pips.
For some traders, it’s really low low profit, but only the true knows that if you think about very long term, if you achieve 10 pips every day, then you have find your grail.
For the stop losses, i’m also very classic, i like 40 pips.
Then after, comes the recover, here considering the volatility i go one shot for 40 pips, or i divide by 2 and try to make 2 x 20 pips.
You morning break idea is great, but i think i have already hear something like this, maybe the “london breakout”, ha i didn’t remember well.
But it’s interesting.
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Hi @littlecaro,
thanks for your comments.
Yes, you are right – the idea don’t seem t be new. However, the only similar way I found it was applied is by trading the Asian session breakout. However, during the Asian session normally neither the high nor the low of the day is established …
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Yesterday was a bad day using the morning breakout strategy. However, today yielded 125 pips within 2 hours … Seems to be really worth trading this thing – can it be that simple?!
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@Anti: The morning breakout reminds me a bit of Udine’s 00 level Strategy on FF: https://www.ff.com/showthread.php?t=487923 I implemented this strategy some time ago because it had very clear, codeable rules. It was quite good in backtests and almost profitable in live demo trading, so it was clearly one of the better systems I’ve seen on FF. Many traders seemed to be quite successful applying this rules manually and the majority argued that you cannot simply put the rules into an EA because of the missing vodoo component, err… well, the indispensable wisdom and experience of a human trader in pulling the trigger at the right time. Anyway, I think I should give that basic idea (with even simpler rules) another try.
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Have some of you ever created some statistics/indicators/frequency distributions that show during which daytime highs and lows of days usually occur?! If so, I’d be happy if you’d share it here …
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It was quite good in backtests and almost profitable in live demo trading for example I had been try [spam removed] in my platform mt4 or mt5 it was to take practices.
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