Wednesday, January 23, 2008

Forex Challenge: Wk 7 -Wed- Equity DOWN: $514.88

Hi, fellow trading masochists-

The difference a day can make.  (I know I've said that before.  It will be said many times!)

When I made the last post, the FirstStrike trades were all profitable. At one point the account was up almost $40.

Then within a few more hours, all of the trades were stopped out. The current equity stands at $514.88.

I lost 60 pips each on 4 of the trades, with the GBP/JPY got stopped out at breakeven. It was almost profitable for 300 pips at one point. I couldn't countenance losing even 1 pip extra on it with all the other market trades reversing too. I probably could have exited some of the other trades earlier, but they hadn't been anywhere near as profitable as the GBP/JPY.

W.D. Gann always noted that the first 3 weeks of a year were the most important for setting up a market for at least the first six months. Now that we've seen them, the highs and lows made in this period should be crucial for this year's trends.

I got an interesting email this week:

I hope you have had a good day in the markets - volatile as ever! I know I have said this to you already in a mail but I cannot believe that you are taking such a public position with your trading on forex and providing such outstanding realtime coaching and trading edge. I have been working on testing the ONS system as I really like the concept of taking those positions others dont want to. It has been a life philosophy for me so I think it will fit will with my personality quite well.

I have tested it out by building an excel spreadsheet and have discovered that the stop plays quite a big role in the edge this system achieves.

(-S- goes on to explain some of the nuances he discovered that can cause flaws in his testing and then the adaptation he implemented that will understate the edge of the system)

Even with this
(adaptation) I am blown away by the edge. However, I calculate that the edge comes in above a 200pip stop and maximizes the return at a 300 pip stop for the major currencies. I have included as screenshot here of the summary of the excel spready I prepared to do these calculations. I have checked and double checked my logic so I hope this is accurate. (It was)

As someone who has traded this system for years (and therefore has the benefit of a real 'feel' for the system), why do you think I am getting a positive edge over a stop of 100pips when you have clearly found 55 pips to be ideal for you? Do you think this could be down to the fact that my 'flaw' above has this much of a positive effect on the system? Regardless this system certainly has an edge and I will be adding it to my current long term trend following system as a portfolio of two I trade live.

I would be interested in your perspectives on bet sizing. I have done the Kelly Calcs and it tells me to bet 22.21% of my stake on each bet using a 275 pip stop. I doubt you would be this aggressive? I currently trade 2% on my Long term trend system (dual moving average cross over system with trade filter and ATR stop). I was thinking along the lines of 2-4% on each trade. In any week this could mean that I am risking (4*4% of my stake) 12% which still feels high. I am particularly concerned given that you stated that you have had 8 losses in a row before a winner hit you (at least I think this was for ONS not Friststrike). - this would effectively wipe out the stake (I know it wont actually but the drawdown will be material). I have run through the results of my tests and seem to see that an 8 in the row losing bet streak is the worst on the history I have. I am tempted to go with 2% as the max in any week could therefore by 8%.

Thanks for the letter, (-S-).  And you are pretty close on the Kelly numbers too.  Not many people will be able to trade even half Kelly values due to the incredible equity swings that transpire.

Less might be more, at least in the beginning!

And, congratulations!

You've discovered what I found out about ONS with much more difficulty earlier in my life, when programing systems was not as easily accomplished and data was not easy to come up with. I probably spent over $5K and weeks of programing and assembling data--learning what you accomplished in an hour or two. But, then again, that money was returned in just a few weeks trading it. :)

About OneNightStand (ONS). It's principle was "discovered" without any consideration of a stop being used.

If you trade it without a stop, it works fine. But it actually improves somewhat by use of a stop loss.

I don't even begin to like a 55 pt stoploss. It is definitely sub-optimal, and when increased, the edge is greater, just like you discovered. 55 pips "works", but may be increased in the future trading the Alpha account due to volatility concerns.

Your ideas about ramping up the risk are valid. Only you will know if you can handle the strings of losses that can take place before a string of winners.

I am glad you are reading the blog and find it useful. More people should have the attitude towards risk and "edge" that you hold.

Note: I may use some of this exchange on the blog, but rest assured I keep everyone anonymous unless instructed otherwise.

Thanks -S- for the intelligent correspondence!

We'll see what the next day has in store.

Joel Rensink

PS: To receive the FREE! trading rules for the Infiniteyield Forex Challenge ($499 value) and the semi-monthly newsletter about this challenge, send an email to: and tell me to which address you would like it sent.

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