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Friday, October 15, 2010

A Non-directional Trading System

DIFFICULT MARKETS PRODUCE FINE RESULTS

“A trader acts in a discretionary manner if he uses his own judgment and feels compelled by a special situation to intervene in the clearly defined operations of a trading system. The discretionary part is understood to be part of a trading system that cannot be back-tested.” --- Faik Geise

Hello:

Traders sometimes are concerned with what are happening on the markets right now rather than what happened in the past. A non-directional trading system is also known as a market neutral strategy, for there are some forms of market neutrality about 70% of the time. This is a strategy that capitalizes on the market’s unpredictability. It’s designed to make some profits no matter the direction of the markets. You don’t need to bother whether the market would move up or down or sideways. No matter which direction it goes, you make a profit. So market neutral strategies involve the combination of short and long positions to reach a certain level of neutrality regardless of the price direction. This means that they’re expected to bring profits if the underlying price moves especially inside a price range during the lifetime of the trade.

Trading with this kind of method has become agreeable to some trading minds because they allow passive income generation regardless of the market direction and by the same token avoiding overtrading every time the market changes its trend direction – amounting to lower trading costs in terms of spreads.

My non-directional trading system is used on GBPJPY with consistent weekly profits (no matter how small or big). My minimum weekly profit target is 25 pips and my maximum weekly profit target is 370 pips. I seek to open both long and short positions on the GBPJY at an optimum time. My weekly total trading time on this pair never exceeds 30 minutes. Thanks to a brilliant gentleman named Efe (I named the strategy after him). He explained his trading hunches to me, and I suggested that we try the idea for eight weeks. Amazingly, after the trial period, we were still in a plus zone; we had more profits than losses. We had over 600 pips. Then I decided to create another demo whose account history was attached with this article. Since August 8, 2010, another eight weeks have passed, and we’re still making profits - another profit of approximately 600 pips. What’s the secret?

This trading logic works well on GBPJPY. It’s extremely difficult to find other pairs/crosses on which it works, except on USDCAD. The only problem in using it on the USDCAD is that profits can’t be closed on weekly basis; they may be closed every fortnight or three weeks. Soon the results on USDCAD would be announced by the middle of next month. There are some characteristics peculiar to the GBPJPY which make this trading method ideal on it. My profits in the past two months are displayed below:

Period Percentage Growth

Week 1 0.8%

Week 2 1.6%

Week 3 1.2%

Week 4 6.33%

Week 5 0.79%

Week 6 1.26%

Week 7 0.6%

Week 8 0.73%

You can see that I made roughly 6.5% profit per month. If my position size was three times bigger than this, then I’d have made roughly 40% returns in two months. But my survival secret lies in the use of small lots (I use 0.01 lots for each $500), and rock-solid discipline to stick to my exit rules. Trade management is also critical in producing the expected results: it entails the survival tactics needed to trade another day. Once the exit criteria have been met, the next best action is to get out of the market. Don’t think that the markets could move further much in your favor. Too much confidence about a market direction is definitely not a good thing.

Nevertheless this strategy has two drawbacks:

The first drawback is that this strategy uses no stops, although it’s survived the market consistently for sixteen weeks in a row. This strategy has demonstrated its ability to survive without stops. There’s a technique I apply so as to deal with an open position if things get out of hand, and there can be some improvement to this strategy in the foreseeable future. I’m still thinking of incorporating the use of stop loss into the strategy. A final decision about this would be made in a month’s time. Right now there’s another demo account that’s being traded with this trading logic, and it’s in a profit zone. It uses a wide stop. The possibility of a considerable drawdown exists when a stop is being hit, but recovery is guaranteed (it’s only a matter of time). I’ve seen a swing system which uses wide stops and has been surviving the markets for 5 years! When I was still practicing with EAs, there was one EA called Forex Megadroid. It uses a wide stop and accumulated consistently small profits. It sustained occasional big drawdowns, yet always recovered over time. In fact, the trading premise, “back your winners, cut your losses” doesn’t seem to be always true of non-directional strategies.

The second drawback is that this strategy can’t be used on the trading platforms belonging to NFA-regulated brokers. In a really fair trading world, a good broker should definitely welcome all trading styles and strategies. Albeit certain traders’ freedom of trading styles and strategies are impinged on, NFA certainly think they got good intentions for enacting their recent rules. There are scores of dependable brokers the world over (with all other credibility factors being taken into consideration) that allow hedging. Please note that my other strategies are NFA compliant.

Conclusion: Looking for a trading system that fits you? Then devise a strategy that suits your personality. Successful trading styles are the ones that take advantage of people’s natural strengths; trading will test you to the limit, so make sure your style reflects your personality. Fabio De Castro advises that as with any other type of trading system, one requires a trading plan where the exit points for profits and losses are prepared in advance; and respected. ‘Planning the trade and trading the plan’ is largely recognized by all successful traders as the most important aspect to succeed in trading. And it’s never enough to repeat it again and again.

One of Dr. Van Tharp’s quotes below concludes this article:

“You probably spent years learning how to perform your current job at a high skill level. Do you expect to perform at the same high level in your trading without similar preparation? Most people spend years learning how to do their professional work. Doesn’t it make sense to put the same kind of effort into learning to trade? Financial market trading is an arena filled with world class competition. Additionally and most importantly, trading requires massive self-work to produce consistent, large profits under multiple market conditions. Prepare yourself to succeed with a deep desire, strong commitment, and the right training.”

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha
Forex Signals Strategist, Funds Manager &Coach

Email: amustapha@fxinstructor.com

Yahoo! Messenger ID: saazalmu
Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal

Nice trading tips are available at: www.ituglobalforex.com
And my past articles are also available at: www.ituglobalforex.blogspot.com

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