High-Probability Techniques for Trading Forex

[M.W.]

Well, to be honest I am not sure what the purpose of this thread to begin with is. If you had to look up what an edge is or did not understand that an advantage over other players in a zero sum game translates into profits for you then perhaps you are not yet in the position to teach or share with others? I would have thought that your books at least mentioned the concept of edge.

NPP is my own proprietary system of Forex trading. If I'm trying to sell it, I'm doing a terrible job at it, seeing as how you had to ask me what it was.

 

[expiated]

perhaps you are not yet in the position to teach or share with others

Thank goodness the primary purpose of this thread is not to teach or to share with others, but rather, my own growth and edification as a retail trader (as I stated in my original post).

 

[M.W.]

Well, best wishes to you in doing that...

Thank goodness the primary purpose of this thread is not to teach or to share with others, but rather, my own growth and edification as a retail trader (as I stated in my original post).

 

[expiated]

Well, best wishes to you in doing that...

Thanks!

 

[Sekiyo]

What is an edge in trading?

PB-Q > 0

P = % Win
B = Average Reward / Average Loss
Q = 1-P

A fair coin - No edge
0.5 x 1 - 0.5 = 0

A biased coin - 20% edge
0.6 x 1 - 0.4 = 0.2
Per unit of risk.

Wager 1% and earn 0.2% per bet in average.

Information is probabilities.
Price is payoff.

Usually they go hand in hand.
If the implied probability is 50% then the payoff should be 1 to 1
If the payoff is 1 to 1 then the implied probability should be 50%

If someone has superior information,
It means it can exploit a mispricing.

 

[expiated]

PART II

THE "DO THE RIGHT THING" CCI TRADE

This technique is designed to empower traders with the ability to trade breakouts confidently and successfully by recognizing when to buy or sell when most other market participants are averse to doing so, thereby putting them on the right side of the trend at a time when many other traders are trying to fade the price action, and ultimately allowing them to exit profitably within a very short period of time after putting on a trade due to the capitulation of top and bottom pickers who are forced to cover their positions in the face of a massive buildup of momentum.

The directions say to use this strategy with daily or hourly charts, and since I neither swing nor position trade, in comparing this tactic with my own system, I dropped the indicator on a 60-minute chart. Traders are also instructed to use the standard input of 20, but my charting program used a default setting of 14, so I had to make the adjustment.

For long positions, traders are to note the last time the CCI registered a reading greater than +100 before dropping back down below the +100 zone, measure and record the peak CCI reading, and go long at market at the close of the candle if CCI once again trades above not only +100, but also above the prior peak reading.

The low of the candle is used as the stop. Half of the position is sold if it moves in the trader's favor by the amount of the original stop, which is then moved to break even. Profit is taken on the rest of the trade when position moves to two times the stop. (The exact opposite is done in the case of short positions.)

In comparing this methodology with the application of Numerical Price Prediction (NPP), it's possible that a pattern is beginning to emerge that might soon amount to a broken record. More specifically, the omission of any kind of measure of typical price ranges is going to put any Forex trade strategy at a disadvantage (in my opinion/experience). Even worse, the Do the Right Thing (DTRT) CCI Trade doesn't even make use of a single trend line.

So if you look at the image below... I counted at least three instances in which the projected price range suggested a potential breakout that was NOT recommended by the DTRT CCI Trade strategy.

Moreover, Trade A, which was not very profitable, might very well have been discouraged by the thee (purple) trend lines which were neutral at the time. And if you take a look at Trade D and Trade E, you'll note that they weren't very profitable either (which is no surprise given that they did not break out of the projected price range).

On the other hand, not only would the use of NPP's projected price range and purple trend lines included the suggestion of a potential breakout at the very profitable Trade C; but entering long positions at support levels suggested by the lower band of the envelope when the purple moving averages were climbing probably would have resulted in profitable trades at the three green arrows, and doing the opposite for short positions might have led to a successful sell at the red arrow.

Finally, if traders remained in profitable trades until there was a reversal in the bold black baseline, it's theoretically possible that, when price went on a run, they might reap even MORE than the amount equal to two times the stop set by the DTRT CCI Trade instructions.

 

[expiated]

In comparing this methodology with the application of Numerical Price Prediction (NPP), it's possible that a pattern is beginning to emerge that might soon amount to a broken record. More specifically, the omission of any kind of measure of typical price ranges is going to put any Forex trade strategy at a disadvantage (in my opinion/experience).

I typed the above because I mentioned projected price ranges when I evaluated the FIRST technique explained in Part II of the book: The Five-minute MOMO Trade. However, I don't see it here!

Did I get so wrapped up in responding to comments that I forgot to post it?

If so, I'll post it next, because BEFORE I looked at the CCI tactic, I had wanted to compare the MOMO Trade with the Opening Range Breakout Strategy describe in the Currency Trading for Dummies book.

 

[expiated]

THE FIVE-MINUTE "MOMO" TRADE

This strategy is called the Five-Minute Momo Trade because it looks for a momentum burst on very sort-term five-minute charts (to paraphrase the author). However, it uses the 20-period Exponential Moving Average (EMA) to help determine the trend, and this actually corresponds to a simple moving average on NPP charts that is used to tract what it considers to be a longer-term trend at the intraday level.

The strategy also uses the Moving Average Convergence Divergence (MACD) histogram with default settings to gauge momentum. (Numerical Price Prediction [NPP] prefers to accomplish this by measuring the slope of a designated baseline or baselines.)

The basic idea is to wait for reversals and trade only when momentum supports the move enough to create a large extension burst, as signaled by price crossing above the 20-period EMA at the same time that the MACD crosses from negative territory to positive territory. Of course, this would be if the trader wished to enter a long position. (In the case of entering short positions, traders do just the opposite.)

The strategy calls for traders to sell half their positions at entry plus the amount risked, and then set a trailing stop at either breakeven, or at the 20-period EMA minus 15 pips, whichever is higher.

But rather than use a single moving average, NPP tracks the fast, slow AND intermediate price flow using, not moving averages, but moving average envelopes. NPP sets the take profit level in accordance with the typical price range corresponding to the slow price range envelope rather than 10 pips above the 20-period EMA, as the Five Minute Momo Trade calls for.

Moreover, NPP calls for positions to be exited as soon as the longer term trend reverses direction, rather than waiting to exit at the swing low, or more conservatively, at 20 pips below the 20-period EMA.

If, when using the NPP system, the short-term trend continues to climb after price makes contact with the upper or lower band of the slower price range envelope, traders remain in the trade until and unless the faster measure reverses direction. If the faster trend then resumes a course matching that of the slower (and intermediate) envelope(s), traders then re-enter the position, and continue this pattern until and unless the longer-term (and the intermediate) channel(s) reverse direction.

On the chart below, I deleted the signal line from the MACD, and added SMA (5), EMA (58) and EMA (68) from the "Dummies" book breakout strategy. The result is a configuration that, with a couple of addition graphics, I think could provide a very workable basis for a profitable trade plan...

 

[expiated]

The strategy also uses the Moving Average Convergence Divergence (MACD) histogram with default settings to gauge momentum.

The MACD uses two indicators—moving averages—turning them into an oscillator by taking the longer average out of the shorter average. It means that the MACD indicates momentum as it oscillates between moving averages as they converge, overlap, and move away from one another.

 

[expiated]

3. MOVING AVERAGE MACD COMBO

For this approach, Prescott says to use hourly or daily charts.

The corresponding indicators supposedly answer questions like:

1. What is the direction of the trend?
2. Should I get in now or wait for a retracement?
3. When does the trend end?

Though to some, this procedure might seem similar to the "momo"” strategy, it is supposedly far more patient, using longer-term moving averages to capture larger profits. (Again, as a trader, I am going to use 60-minute charts.)

For long positions, one waits for the currency to trade above both SMA (50) and SMA (100), executing the trade if the MACD crosses to positive within the last five bars of price breaking above the closest SMA by 10 pips or more. (Otherwise, wait for the next MACD signal.)

The initial stop is set at the five-bar low from the entry, and half the position is exited at two times risk, at which point, the stop loss is moved to breakeven, with the second exit occurring when price breaks below SMA (50) by 10 pips.

(Obviously, for short positions, one does just the opposite.)

From the perspective of NPP, the two longer-term moving averages intended to capture larger profits are actually too long; and personally, to my eyes, it is obvious that the (yellow) 100-period SMA evidences serious lag (see the image below). Even the (white) 50-period SMA does not, in my opinion, follow price action all that closely.

So then, this approach might answer the three questions listed above, but NPP would take the position that each one of those answers is going to be incorrect!

And as for the MACD, NPP sees absolutely no need for it.

Again, the longest/slowest moving average NPP would suggest plotting on 60-minute charts would be the green baselines, followed by the (red) intermediate moving averages, and then the black, frequently fluctuating measures.

Finally, instead of exiting positions at two times risk or 10 pips below SMA (50), it would make more sense from the perspective of NPP to pocket gains as soon as the green baseline turns back (or frankly, when rates make contact with designated levels as determined by projected price ranges, which have not be plotted on the above chart).

And if traders TRULY wished to capture larger profits, they would use two even LONGER moving averages, the two plotted on the chart below…