Monthly Archives: February 2013

Post for FX: a brief history of my trading system

Tip 1: Trade Style:

In my journey of learning fx, nothing has benefited me more than knowing my trading style. If I ever became a guru or fx teacher, this would be item number 1. The best way to know what kind of trader you are is of course from screen time and demoing.

Scalper: 1m, 5m, 30m

Intraday trader/scalper: 5m, 15m, 1hr

Day trader: 15m, 1hr, 4hr

Swing trader: 1hr, 4hr, Daily

Rule 1: Never let anyone tell you x time frame and x style of trading is the only way to be profitable because damnit I know professional scalpers and I know professional swing traders and everything in between.

Initially babypips school quizzes labeled me as a swing trader so I gave it a shot. And it didn’t turn out well. It’s important to know what goes wrong. Always always always. Why did I fail at swing trading?

For starters, I had a hard time getting the S/R correct. Looking at the chart, sometimes it would work, other times not. It didn’t appear any more successful than anything else i was trying. Often times I would end up over drawing lines, and Sniper would tell me that my levels were either too minor or that better ones were available. This hinted that I paid a lot of attention to minor detail, dispute not having this characteristic in real life and that I expected more reaction at more levels. Secondly, my first stop to learn swing trading was the PA thread by John. Pure PA. No indicators, just S/R, 4hr/daily charts, and reactions at price levels to indicate when to buy and when to sell. This quickly failed too. Why? I wanted to trade too much. I saw price moving up, I knew bias was up, and it was stupid to wait for price to retrace to support before being able to enter. This too gave hints that I should be trading shorter time frames. Trial and error while considering errors gives way to eventual success. As time went on I came up with a good idea of how I wanted to trade: I wanted to catch the swings, but i didn’t exactly want to sit there forever. having a SL bigger than 20-25 was very uncomfortable, and having a TP bigger than 60 wasn’t the most appealing. In fact I didn’t care about R:R at all. I just cared about catching a swing. I liked getting in close to bottoms and tops, but I didn’t mind waiting for confirmation. What bothered me was having to wait 30-40 pips for confirmation. The lower the pip hauls you’re shooting for, the shorter the time frame.

Tip 2: Building a system, and testing the shit out of it. This is retouching the point about going into the forums and looking at their systems.

In August or so I ran across Pipwoofs triple threat system. In a nutshell, it was buy at the previous days high +1 pip, sell at the previous days low -1 pip, with 3 different trailing SLs depending on price movement. Now, lets talk about breaking this down and absorbing the concepts from the system, not taking the system itself.

When I first read the system rules, I was just looking for things I liked that I could incorporate into my own system. What I liked was that it:

1: Scaled out of positions

2: Had potential unlimited gains

3: Had a very basic entry

4: Gave a lot of trading opportunity.

I took all these factors into consideration when I created my very own system, the first of many. I tried to create a spin off of pipwoofs system that would try to get me more pips, and better entry prices. I looked through charts and noticed a few things that I would later incorporate into my system. What elements of someone else’s system do you want in yours? What seems clever or cool about how someone else trades?

Tip 2B) learn learn learn, think think think.

Taking my knowledge of the fx world, I came up with an idea. Following ICT’s advice and knowledge that often times the London session is contra the Asian session, and some other things as well, I thought it would be a good idea to come up with a ‘point’ that would form a bias to trade. I would get a point for the bulls if the Asian session was bearish. I would get a point for the bulls if previous days trend was bullish. Hell I would get a point for the bulls if the number of green candles was greater than the number of red candles during the Asian session (note how dumb but experimental this is) etc.

In the end, the system worked great during backtesting, and good for the first month of demo, but after that it crashed and burned. There was a ‘no trade’ condition I had in the rules that occurred a total of 6 times in the course of 3 months, but occurred 10 times in the last month of demo. Go figure. At this point the wrong mindset to have is that the system had a lucky back test, that is wasn’t really profitable, or that all pure mechanical systems come to an end. The right mindset is to question: perhaps some systems work better in certain market structures, or that 2013 plays by slightly different rules than 2012 did. Maybe try to trade contra to your own system if its so terrible!

However, even though the system crashed, through back testing I began noticing other things about the market. When you’re back testing, looking for your entries and exits is only half of it. You should be slightly skeptical about your ability to be profitable. Look at how price moves. What other tendencies could possibility be exploited? I learned some things. Such as the fact that there tend to be 2-3 “waves” in the London and NY sessions. Or that what seemed like well over 80% of the time, price during the London or NY session would hit the 161 fib level pulled from the high/low of the Asian session. That certain candle stick patterns actually work great on lower time frames even though many say otherwise. When my “mentor” came up with a new system, it took him the whole weekend to back test. Imagine that. Over 24 hours of screen time. 1 pair. On something that could easily flop with a switch in the market that may or may not be detectable. Thats dedication. Have you noticed a difference in the charts from 2013 than 2012? I did.

These new observations in the market led to more test systems, leading to more back testing, more observations, until eventually I hit one that looked okay. I demoed it, ran into problems, added rules, continued, until eventually the demo system had enough rules and covered enough bases to go live. It’s still far from perfect, I still break the rules (just last night), I still have more screen time to put in.

Tip 3: Beginning to think outside the box.

Maybe not completely outside, but on the edges a little can give you an edge. The contender for the January system of the month was certainly one of them. Adding to a position that’s 125 pips down? Sounds so stupid, it might actually work! The fact that is incredibly basic but that we sometimes forget is the following: as long as a system’s R:R compensates it’s win rate, it’s a winning system. The stupid system I talked about earlier is one of these. A myfxbook link can be found somewhere through this blog if you dig enough. It’s simple. It revolves around the idea that If I can accurately predict the market 50% of the time, I simply need R:R higher than a 2:1 to be profitable. If i can predict it 25% of the time, I need it higher than 4:1. Etc. If I trade a volatile market, I’m likely to reach a 2:1 or 4:1 with certain entries and SLs.

When people say study the charts and study price, they mean it. Find an edge. Build a system. Test it, break it, fix it until it works.

Tip 4: the next steps
Imo, the next step after finding your trade style and coming up with a potential system is to just trade it! Don’t just put in orders and hope for the best though. Do what I do,and what jwlee does on his blog (if you want a link to that he’ll be more than happy to give it to you next time he’s in chat). After a trade week, month, session, w/e, review the trades. What worked, what didn’t? Bad entry? Bad bias, missed something on the charts? Something else pop out? Write some notes to help your memory. Write notes to learn. Do you remember how price moved in the past 3 weeks in the pairs you trade? If I asked you to draw a 4hr chart, how would you do? does that even matter to your trade system? This is why they say that beginners should focus on the learning, not the profits. The numbers will the change, the technique remains.

Don’t get too hung up over a system either. Just because you spent 5 months developing it and editing it doesn’t mean it’s profitable 6 months from now. Some things can be repaired and made better. Some things just suck.
If you’re curious as to what exactly is on my charts, they are:

daily, weekly, monthly pivots. 8, 19, 200emas. Sessions indicator highlighting the sessions and their respective pip ranges. ICT’s ADR-provides a possible range of the days high and low. I use fib retracements and extensions. I’m also running 2 systems; the charts on here are from my discretionary system which I have no problem going into detail about. The other will remain as my little gem that could possibly be figured out through stalking my fxbook, not that it’s wildly profitable.

Hope it helps, I’m open to any more clarification or questions. Feedback is appreciated! Either via comments here or in the chat room.