The Dollar Isn't As Weak as THEY Thought!-- IFCN Wk 27 -Tue- Equity: $777.35

After the huge run-ups in all major currencies-not-the-dollar near the end of last week, we are having the exact opposite reaction this week. Maybe the strong currencies of Europe aren't that strong after all.

Contra Felicem vix deus vires habet.
(against a lucky man a god scarcely has power.)

We've had some big profits in Forex this week. Maybe a little better than we normally would, but I can accept any help from chance. Too many times I've been forced to accept the dark side of chance so....

This morning when I opened up Oanda I had a positive surprise, two winning trades I didn't expect. I found I was short Eur/Usd and Gbp/Usd from sell orders I thought I cancelled.

Some details about how I handle the Challenge account. Perhaps understanding the process, AND the trading thought processes for this type of an error may be of use to you. I've had many emails about this part of trading FirstStrike, so here is my way of actualizing the FirstStrike theory.

After putting in the orders early Monday morning, I go back to my regular trading accounts and put orders in for my other systems and markets. After that, sometimes I can get some welcome sleep for a few hours. Mid-morning I check the Challenge account to see which trades got filled so I can cancel the opposite trades per pair.

I've deduced that I only got 3 of the 5 opposite FirstStrike orders cancelled on Oanda when I got one of many calls about the grain markets which are currently in a critical stage. (Read: high potential trades)

The reason I'm not all that concerned about that kind of mistake/slip-up is this--- the reverse orders ARE, after all, viable FirstStrike orders which have a stoploss order attached.  Worse case-- if they get filled, they would either be profitable or be losses like every other FirstStrike trade I take.

But, nevertheless, this occurrence was a mistake in my trading. Overtrading versus your money management protocol is breaking your rules. So, when I observed this breach, I moved the protective stoploss orders to breakeven so no abnormal downside risk will be suffered. Problem solved.

Now the only possibility is extra potential gain from the mistake. A virtual “free trade”.  

If the trade was a loser when I recognized the error, I would simply exit the trade. If the trades got triggered and then stopped out, I would have suffered additional losses not factored into my money management concept. 

I actually keep a record of my mistakes, my corrections and the financial outcomes of each of the episodes. I recommend this highly. Someday I will go into this deeper, and explain how you can gain a huge edge in the market from this “error” log. (I guarantee you that Nick Leeson never did this! Barings Bank will never be the same because of it!)

This brings up another good point. Seeing the obvious success of the “second” trades this week, shouldn't I be taking both trades? Or, possibly even more, if I should get stopped out of the first two?

There is nothing materially wrong with taking the “second” trade. It is a great trade with a fine expectation of just a little less than the first trade of the week. One of the greatest negatives to taking both trades per pair is the real risk of all 5 trading pairs getting “double-thumped” for a total of ten losses for a week. In just the last six months, we've had multiple weeks in a row where we would have lost 9 – 10 times trading both the 1st and 2nd trades. If you were trading in excess of 1% per trade you could have some sizeable losses in a couple of weeks.

But, if you have done the necessary money management research and system testing to confidently take both or more trades every week, it is up to you. As this week has shown so far, the second FirstStrike trade of the week can be a huge winner.

At some time in the future, the Challenge account may expand it's trading to multiple entries per pair. In the meantime, one entry per pair will suffice.

As a side note, if I were only trading 2 – 3 pairs, I would most definitely be taking both trades per pair if the opportunity arose.

This week's current FirstStrike trades:

• eur/usd: long @ 1.5830, stopped out at 1.5770 for a 60 pip loss.
  
• eur/usd: short @ 1.5730, stop 1.5730. Trade in progress.
  
• gbp/jpy: long @ 208.18, stop 207.28. Trade in progress.
  
• gbp/usd: long @ 1.9742, stopped out at 1.9682 for a 60 pip loss.
  
• gbp/usd: short @ 1.9642, stop 1.9642. Trade in progress.
  
• usd/chf: short @ 1.0160, stopped out at 1.0220 for a 60 pip loss.
  
• usd/jpy: long @ 105.83, stop 105.23. Trade in progress.
  

Any trade not stopped out before Friday-- exit on Friday just before 15:00 CST.

Maybe this week will be a generous one. I'll take it.

Current equity is $777.35.

Joel Rensink
www.infiniteyield.com

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: newsletter@infiniteyield.com and tell me to which address you would like it sent. Please do not use AOL, Yahoo or Hotmail addresses. Nothing personal, but they've been known to filter out more good mail than actual spam. Try a Gmail address. It's free, simple and perfect for traders!

Equity 523.10-- Forex Meltdown comes late in week

Hi everyone:

The huge moves in GBP/USD and GBP/JPY to the downside in the last few days brings up a good topic. Whether one, when trading a straddle-type trade such as FirstStrike or some other type of volatility breakout system; should continue buying and selling all breakouts from the beginning of the week until you get profits or the end of the week comes.

This week in GBP/USD, if you started at the beginning of the week and took the original sell, got stopped out for a 60 point loss, then the second sell for a 60 point loss, and the third sell, which also got stopped out for a 60 point loss-- if you continued and took the 4th sell you got rewarded for a move exceeding, at this moment- 268 pips. This seemingly absorbing the 180 points of loss that you would have accrued in the first 3 trades and adding 88 more. Of course, this isn't factoring in that each time you're having a loss, your account size is decreasing, meaning that each succeeding trade has just a little less position than the trade before. More on that in a minute.

The GBP/JPY pair also had a fantastic move down from the open of the week. But if one had continuously taken every FirstStrike straddle trade, the first sell and it's 60 point stopout, the next 2 losing buys, the next losing sell, the next two losing buys, and the next losing sell (seven consecutive losses in a row, totaling 420 pips)--- then you could have gotten to the winning sell at 227.81 which now is ahead 310 pips. Still down 110 pips for the week in GBP/JPY, despite its terrific performance the last couple of days.

A little more about factoring in a decreasing account size affecting your return when you do win.

If you had just been trading GBP/JPY by itself and were risking just 1% of your capital per trade you would be working from a capital level of 93.2% of what you had started the week with. If you were trading the GBP/USD pair too, the two earlier losses in the week would have further reduced your account to 91.3% of what it started with at the beginning of the week before getting to the last two winning trades.

After 3 losing trades, equity loss is very noticable. After additional losing trades from other markets you are trading, like 7 of them in the example above-- your position size may be very severely reduced even trading a small percentage of your trading account. (People trading 5% of their accounts per trade would go screaming out the door)

What this means is, that 268 pip potential profit from the last GBP/USD trade..., doesn't have as much return as a 245 pip trade would have had if it been the first trade.

And who knows if the markets won't rebound.

WARNING: I have traded FirstStrike through periods where I had 19 consecutive losses including the multiple pairs I was trading.

This week was just a good example of the actual dynamics of how volatility breakout methods can be very good but also very difficult for the human to trade.

In my personal trading this week, I did quite well. My best week in a month, actually. I caught the downside breakouts of the GBP/USD and GBP/JPY at 3:00 AM on the 19th. I didn't get the whole move with all of my contracts, but about 200 points on the pound/yen and 150 on the pound/dollar worked just fine.

As a side note, The discipline it takes for me to trade this account "straight up" according to the rules is incredible, since I do trade for a living and have to take dozens of additional trades every week to keep my funds working correctly.

After one knows many good methodologies to trade, trading for this challenge is like being at a smogasboard and only being allowed two things to eat and only eat twice a week. At least the two methods I chose for this blog are good ones.

Until tomorrow.

Joel Rensink
www.infiniteyield.com

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: newsletter@infiniteyield.com and tell me the address where you would like it sent.

Current Equity - $520.24, Forex Challenge Money Management

My trading is done for the day...,

It's a perfect time to talk a little about money management and how it applies to trading, and specifically how it applies to this Forex Challenge. 

There are tons of different schemes that have been invented for trading the markets with "special" money management so as to turn mediocre methods into higher performing methods. Some are better than others.

Why so many? Because of the difference position size can make on your trading outcome. If your winning trades consistently have smaller position size than your losing trades, you have a very hard road to overcome. That is the road almost all fixed fractional followers have to traverse. You lose, lose, and lose-- and each time drop by another fixed percentage of capital. Then, when you finally get a winner, you will definitely be trading a position that has less size than when you started before the losing series.

You will read something you've probably never read before..., right now!

All market methods do not have the same edge. So, why trade them as if they all have the same edge?

You will see people boldly state, "Never risk more than 1% per trade or you will lose all of your money." And that without knowing what you are risking your trading capital on. All trades are not created equal.

What if you were in possession of a special trading system, based on identifiable market tendencies that repeat over and over---that has a true profit factor of greater than 2.5 to 1 (wins $2.50 for every dollar risked) and a win rate over 60 percent? Proven over thousands of 'real' trades, not theoretical ones? Are you going to just risk 1% of your equity on that trade?  (Systems like this do exist!)

If you don't like making money, I guess you could.

It comes down to how much you know about your system or method and the edges available from it. Notice I said "edges".

Even with relatively simple-looking trading models like OneNightStand and FirstStrike, each trade is not created equal. If you just look at the total raw system outcomes (trades) that these methods produce, you could figure out an approximate profit factor, and undertrade that figure to allow for errors in calculations and actual trading costs. In fact, that would be the absolute minimum of due diligence you would have to do to consider trading with real money.

What if you "knew" something extra about a system that most examining traders might miss? "Knowing" that certain subsets of trades definitely had greater potential than others? Wouldn't that encourage your adjusting a larger size for those trades if you could quantify that greater edge?

Think about the game of Blackjack.

The ONLY reason that casinos fear professional blackjack players is because they can determine when they have the advantage over the house..., and monopolize that advantage by putting on larger bets. The professional counters are able to win consistently because they are more likely to win their largest bets and only have to put up with many small losses and small gains when the "house" has the advantage. Professionals only bet small when their edge is small or non-existent.

Traders should too if they can identify higher reward opportunities.

On this topic, I received another nice email from a subscriber: (Below the email is my reply)
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One more quick question. With the 50:1 leverage, what is the current (Oanda) unit size that you use?
I understand that you are using your money management algorithm to determine that, but I am just trying to stay close to the result, that you publish. You mention a 0.5% to 4% range for equity risk per trade.
So what % equity risk per trade would give approximately the same result as your blog?
Sincerely,
-M-
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Answer:
For you to get exactly the same results as my blog you would have to have my exact money management algorithm. Unfortunately for many, that is unavailable except to my professional clients. (Last year a trading company licensed my money management algorithm. It cost them $17,000, based on the size of their trading operation.  Additional note: They earned $200K more this year with it than without it, and had 20% smaller drawdowns.)

My position size is based directly proportional to the probabilities of the specific trade I am taking. As I am aware of the precise edge of my systems, I can be much more precise than someone who has the rules for the trade, but not the exact figures for its edge(s).

Advantage is in the advantage.

I understand your wishing to emulate my results. (I personally don't think it is a good idea though, for reasons I will mention a little lower) My best advice is to test the methodology to the degree that satisfies you as to having sufficient edge for you to trade, trade very small for a month or two, and then step up your size as you gain experience. Within a short time you will find a percentage that approximates my gains and losses, probably between .75% and 1.5% per trade.

I encourage you to do a lot of research on money management for trading systems. Ralph Vince has written some great books on the subject.

What you don't realize now is how bad future drawdowns can, and likely will be. 60%, 70%, 80% drawdowns or even more from time to time are possible. I would prefer that it wasn't so, but it is. I've been down this road before.

Start small, build up your ability to execute. The markets aren't going away anytime soon.

My Forex Challenge is for my own trading test and proof of concept.

I'm sure you've already realized that I am definitely not running a charity. This trading challenge is also not meant to be an advisory service for me to drag all the world's forex traders into a profitable state.

I am willing to show traders a way to success. It may appear to be somewhat simple, but it is definitely not going to be easy.

Have a great week, and holiday season.

Thanks for the note.
JR
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Thanks - M -

Well that is enough for now on this subject.

It would have been great if we hadn't gotten stopped out on the GBP/USD pair. By checking the price action on GBP/USD, if we had kept reinstating the sell side after getting stopped out the first time, we would have been stopped out 2 consecutive times before the big move down. 180 pips in losses before having a slim chance to recoup some of the equity lost. That is the way trading goes. It is all about probabilities.

Joel Rensink
www.infiniteyield.com

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: newsletter@infiniteyield.com and tell me the address where you would like it sent.