A NON-DIRECTIONAL TRADING APPROACH
“For traders and investors, finding low risk ideas is one
of the most important tasks no matter what asset class you trade.” - Gabriel Grammatidis
The world of speculation is replete with strategies that are aimed at
making profits. The strategies can be ones that follow the lines of the least
resistance or ones that make use of mean reversion; there are many ways to skin
the cat. No matter what methods we use, we’re either following the dominant
biases or going against them.
Let’s face it, the reason why we invest our money in the markets is to
make profits. We’d also prefer to enjoy permanent success in the markets. The
sure way to achieve this is to go for small and consistent profits that become
great over time, and to employ safe risk control measures that make sure that
our portfolios remain intact in spite of the vagaries of the markets.
For more than a century, trading legends have made use of market-neutral
strategies. A market-neutral strategy is a non-directional trading approach
that enables us to harness profits from the unpredictability of the markets. An
overextended bullish market can still remain more overextended: and vice versa
for an overextended bearish market. Whether the market goes up or down or
sideways, we end up making average gain that is much bigger than average loss.
This kind of trading approach is very popular among expert traders – it’s
one of their most closely-guarded secrets. Non-directional trading approaches
can be used in any types of financial markets; they can be used in Forex
markets. For example, one method is to go short on both the EURUSD and the USDCHF
a few hours after the open of the markets, especially when it’s observed that
they’re in a trending mode. This is one effective way of making money from the
negative correlation of the two pairs. Using an RRR of 1:3 enables traders to
gain about two times the loss that is sustained from one trade.
A habitually choppy trading instrument would tend to remain choppy in
spite of being punctuated by sustained trending moves. In the face of a
sustained trending move, there would normally be occasional pullbacks. Given
this, optimal stops ensure that normal market fluctuations wouldn’t stop us out
quickly, nor would we experience a huge negativity on a position because of a
protracted loss trade. In order to run our profits for a considerable amount of
time, fairly wide stops must be put in consideration so as to make room for normal
market fluctuations.
Trading Like a
Market Wizard
The trading methodology that’s discussed here is the one that makes use
of positively correlated pairs in Forex. It is completely NFA-compliant, and
thus, it can be used by all traders the world over. The risk is low and
limited. With this non-directional strategy, we consider instruments that are
in positive correlation only, not the ones in negative correlation like the
EURUSD versus the USDCHF. There are many examples of positively correlated
instruments in Forex, but we want to watch for opportunities on those which are
somewhat popular. The highly correlated pairs we’d like to use are:
EURUSD and GBPUSD
EURGBP and EURCHF
EURAUD and EURNZD
EURJPY and GBPJPY
AUDJPY and NZDJPY
AUDUSD and NZDUSD
GBPAUD and GBPNZD
AUDCAD and NZDCAD
AUDCHF and NZDCHF
Gold and Silver
Let’s consider AUDUSD and NZDUSD. Both are positively correlated, i.e.
when one goes up, the other goes up, and the other way round. When one moves
sideways, the other also moves sideway. Meanwhile, a good non-directional
trading signal occurs when one of the highly correlated pairs goes north
significantly and the other one goes south significantly. How do we know this?
We put the RSI period 14, levels 70 and 30 on the 4-hour chart. When one of the
two normally correlated pairs has recently gone above the level 70 (or 30) and
the other one has recently gone below the level 30 (or 70), we open new orders.
We want to bet on the transitory negative correlation of a normally
highly-correlated pair. We short the instrument that goes north and purchase
the one that goes south. In time, the
two instruments would become positively correlated again, and that’s how we
make our profits.
The only issue with this strategy is that its trading signals in Forex markets
(especially on popular pairs and exotic crosses) are few and far between.
Both trades make money in 60% of cases. About 70% of cases, one trade
makes less loss than profit in the other trade. Please take note that when a
stop for a trading method is wide, this would make sense only if the method has
a hit rate of at least 60%. A wide stop with a very low hit rate won’t improve
any statistics. Combining medium-term and long-term speculative outlook enables
us to close trades that quickly meet our target and at the same time, create
more leeway for those that take longer time to meet our target.
Trade, Money and Risk Management
Once new orders are opened,
trading becomes managerial and discretionary.
We risk only 1.5% per trade, setting our stop at 150 pips. The take
profit is usually 300 pips. A breakeven stop is triggered when a trade has at
least 70 pips in profits. A trailing stop of about 100 pips is triggered when
the trade has at least 170-pip profit. When two open trades of a correlated
pair have profits that are up to 200 pips in total, the two trades are smoothed.
When the difference between a negative trade and a positive trade is at least,
200 pips in profits, the two trades are smoothed.
The duration for a positive trade
is about one month. A negative trade may reverse or it would be left alone
until it hits the stop (but the stop wouldn’t be widened under any circumstances).
In most cases, we look for trading opportunities every Monday. We look at
4-hour charts for this purpose.
Conclusion: In
addition to the JPY Pairs Pullback Trading Signals and Premium Signals on selected
pairs/crosses, this Non-directional Trading Signals would be sent to our
readers as soon as they’re pinpointed. This article is important in that it
reveals the rationale behind the signals that would be generated with the
trading approach, plus the stop, the breakeven stop, the trailing stop, risk
per trade, exit possibility and trading duration. These facts won’t be repeated
in coming signals – only signals would be sent.
This article is ended by the quote below:
“If I get
into a protracted drawdown, I reduce trading size until it stabilizes, or my
positions start working again.” – Larry
Tentarelli
