Lessons From the Published Trades in May
Cory Mitchell, CMT
Being right and making money are very different things.
Below I discuss a strategy with a low win-rate of 33% but huge profit potential of 46R for the month of May so far.
A win rate of 33% means only one out of three trades is profitable. 67% of trades taken were losers.
Risking 1% per trade, 46R means a 46% return on the account a balance so far in May.
I went through all my forex "Trade Idea" articles for the month of May so far on TheStreet/forex. I do this periodically to make sure that the trades I publish have a positive expectancy (not all my own trades make it into the articles, so I check the trades that do make it into the articles).
What did all the Forex Trade Idea articles reveal?
With the reward:risk there is huge profit potential despite winning less than half the trades.
For the following I assumed NO trailing stop loss, since it is hard to implement consistently in a 24-hour market (and turns out, a trailing stop loss kills performance!).
Therefore, these trades are based purely on letting the trade either hit the stop loss or profit target.
There was only one trade stopped out early due to a NZD interest rate announcement and one not taken due to this news event (this actually resulted in making 10R less, theoretically).
R refers to reward:risk, with 5:1 being 5R. Therefore, you know that if you risk 1% on a trade you know that if you are up 30R for the month you are up 30% on the account (approximately, since compounding can skew this slightly). If you risked 2% per trade, that's a 60% return on the account. R represents your risk, so the R multiple is your profit expressed as a multiple of your risk.
I added up all the trades published so far in May.
I included multiple stop-outs if I got triggered into and stopped out of a trade more than once.
I assumed re-entry if another signal occurred, but only if it is during US market hours and within two days of the original signal. For instance I got stopped out of NZDJPY three times...that is a lot, and of course frustrating, and yet the trades still tend to pay off.
I trade a signal until it is no longer in the appropriate area or something changes. Just because a trade didn't trigger right after publication or it got stopped out doesn't necessarily mean the trade is no longer valid.
So far this month, the published trades are up 45.9R, or 45.9% if risking 1% of the account on the trade or 91.8% if risking 2% per trade. See the position sizing article if you aren't sure what risking 1% or 2% of the account means (most people don't understand this).
The stats don't include currently open trades in, GBPUSD 6R potential, EURUSD 12R potential, and GBPJPY with 11R potential (open trades not included in any stats). There are several other pairs I am awaiting entries in.
Win rate: 13/38 or 33%
Average win: 5.45R
Leverage: About 4:1 per trade, and there are typically multiple trades held at one time. The leverage has also been creeping up as I have found ways to narrow the stop loss. Some recent trades have used 10:1 leverage.
You could add in another 10 stop-outs and still do well.
I have been using a trailing stop loss this month and my personal performance is well below the "leave it alone" approach discussed above!
I have done the comparison many times before, and for forex trading my results are almost always better with the "leave it alone" approach
- Side note: with stocks, a trailing stop loss works much better...the stocks I trade are far smoother and less choppy.
Individual trades may benefit from a trailing stop loss but the big winners start to disappear anytime we start trying to reduce risk. Losing 1R is way better than missing out on 10R. And yet psychologically it is tough to be a huge amount in the profit and not move the stop loss to break-even or better!
I am not saying stop losses are bad. Stop losses can also vary drastically, so one version may perform better than another. The results are just meant to show the raw data with a leave it alone approaches. If someone wants to start interfering in the results that's up to them.
Most people think a winning system looks like this +2R +3R +4R +2R +1R +2R -1R -1R +5R +2R +3R -1R +4R -1R...no big losing streaks and just steady gains.
Maybe that possible. Here's how the results look from the published trades. Often, when there are a few negative numbers next to each other, that means the trade got stopped out and then a re-entry occurred, sometimes multiple times.
+9 +4.5 -1 -1 +8 +4 -1 -1 +7 -1 -1 -1 -1 +4 -1 -1 -1 -1 +4 +3 -1 -1 +6.9 -1 +6.5 -1 +5 +1 -1 -1 -1 -1 -1 +8 -1 -1 -1 -1.
The R is being magnified by leverage. The typical leverage on these trades about 4:1, but sometimes there are multiple trades at one time, so total leverage could be 10:1 or more. Some of my more recent trades have had leverage of up to 10:1 individually, and I often have multiple trades at one time.
This helps compensate for the smaller moves in the currencies. The big range in the EURUSD is 2%. Capturing that with no leverage results in a 2% profit. With 5:1 leverage, we make 10% on our account, with 10:1 leverage, 20%. That's more in line with what I would expect to make on a typical stock swing trade.
So leverage isn't a bad thing, but it is important to be aware that it is pushing up the R-value relative to what it would be without leverage.
The articles I publish under the Trade Ideas tab each day are like my trading journal. The articles describe the pairs that are near potential trade levels.
Sometimes the trades don't work out, but if the trade is still near the trade level, there may be more trades in that pair to come, even though I don't write an article about it.
Therefore, it's best to understand the strategy for yourself.
The articles are based on price structures.
I will watch for consolidations on the hourly chart near a key level to signal a possible trade, but sometimes that doesn't happen, or I am not around to see it. In that case, a price action entry is needed. Reading price action isn't easy. It takes a lot of practice and patience.
This pre-trade checklist is a good one for this strategy.
By Cory Mitchell, CMT @corymitc
Assume I have positions, all the time, in many pairs.
Trades are based on strategies and are not meant to be predictions. The number of trades won varies between 30% and 60% based on the strategy. My objective is to make money based on solid reward:risk ratios, not try to predict every move of the market.