In search of Edge #2

Some day, at some point, every great trader gets to the point where the forums just don’t provide very much new or interesting information (ahem). Today, I am not at that point. =p

The “Tsunami Method” thread popped up in my feed (I really do love that aspect of ForexFactory) so I took a browse through it. It’s premise and idea isn’t a particularly new or profound, but if taken to be true it does spawn some new ideas. The gist of the thread is: take a lot of small positions, and hold on to the winners for as long as you can. Aim to have a few winners that are SO large you can double or triple your account in one trade. Obvious pros, with the cons being that:

1. Must be comfortable taking A LOT of losses
2. Must be comfortable holding onto to positions for long periods of times with varying floating P&L
3. Arguably requires a strategy that has a very tight SL

I like it because it’s a lot “safer” then martingale in the regard that you don’t have a ton of floating negative gain. However you’re still taking a bunch of losing trades. I’ve always found these types of strategies more “fun” though for whatever reason. Your entry doesn’t have to be that accurate but it does need to be clean and I’d like to argue that to employ this correctly, you DO need a tight SL. I think somewhere around 15 being max, preferably 10 or 5 (like the OP) if you can manage it. The reasoning is this: If you have a 30 pip SL, then even if you catch a 600 pip move you’re only making (600/30) 20x return. Sounds great but to counteract how many times you’re likely to lose, you should be risking no more than .5% (roughly). The 20x return becomes 10x, and you’ve waited (likely) 2 to 3 months for 10% gain. Realistically, if you’re adding on a bunch of positions, you’ll get maybe 20 or 30% over the course of holding multiple winners. Better, but not HG status. With a small SL, you give yourself more room for error, and require fewer pips to make more gain.  Smaller sniping strategies have a lot more strength with their ability to compound quickly so for a longer time frame strategy to work the gains really need to be big and worth it.

Hence, to trade this ‘style’ correctly, we require a balance of:
1. Small SL (entering extremes)
2. Accurate entry (semi accurate)
3. Ability to hold a trade for a lot of pips (accurately mark and trade HTF swings)

I mean it kinda looks like we just want the farm here but realistically, only a few parts are needed. The accuracy only needs to be decent, the SL is somewhat fixed because we need it to make good R:R, so the ability to actually know when a big move will occur is really one of the bigger parts. The good thing is that we don’t necessarily need to know what direction it will occur in order to trade it. What does this mean? Magnitude.

Again, it has taken some random thread on the internet for me understand and conceptualize a Signal Bender theory in a way that makes sense to me. First the Similarity thread, now the Tsunami thread. However unlike the Similarity thread, the Tsunami thread provides no clues on how to find the answer, only how to manage it.

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