Video

Ian Coleman - First 4 Trading
Ian Coleman of First4Trading.net explains in a technical analysis of charts why he is trading EURUSD. Coleman is looking to sell EURUSD at 1.1660 with a stop at 1.1690. His target is 1.1565.
Article / 08 June 2016 at 13:00 GMT

Forex and the 'law of large numbers'

Hypothesis Testing
United Kingdom
  • The law of large number positives outweigh the negatives
  • Fund managers will trade strength/weakness in a currency across the board
  • Such strategies can help to maximise profit

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Big Ben is an integral element in the New-Year countdowns and the 
large-number law is not a bad maxim to follow as a trader. Photo: iStock


By fxtime*


Any indicator you utilise on your charts will in effect be a smoothing out average that replicates in a microscopic fashion the law of large numbers. An average will thus show current on balance direction and average values.

There is no need for me to describe the advantages and applications of such indicators as it is obvious to us all....likewise, I assume we all acknowledge the disadvantages and weaknesses of these indicators.

However, as we all continue to utilise them, we unconsciously recognise that overall the positives outweigh the negatives.

The subject of chance is a lengthy topic so perhaps we should confine ourselves to a minor area first and then enhance the trade strategy afterwards. Perhaps a better strategy is to focus on how major fund players avoid risk and compound profits?

We are after all when trading, effectively acting as a business. We seek profits whilst minimising costs and of course risk factors. We may have trading accounts substantially smaller than a full CTA fund but never assume you cannot mimic their actions. 


First, major fund traders will obviously assess markets seeking an edge that they can profit from. They will review each and every major forex market and assess pairing strengths/weaknesses for opening, closing or turning a trade.

Equally they will review their drawdown position and consider trade duration as a trading parameter. If drawdown remains high, then perhaps they are over trading or not being efficient with their funds as releasing funds by covering a trade reduces duration and frees funds to be more proactive and profitable in other marketplaces.

Remember CTA Funds need to pay bills just like us so they seek revenue streams too.

Next do you think that a forex fund will look at say the cable or dollar/yen and determine their trade stance? It is usual for such fund managers to consider each major trade pairing just as we do but the difference is that they will each day determine a FX bias not for a single currency pairing but for the single currency on the whole.
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A fund manager will look at yen, but not in isolation. Photo: iStock


For example, I posted advance notice about a potential trade change for the euro on June 1 and highlighted it a the prior week too as a ROC marker. Prior articles have described how you can build a ROC model for yourself and this takes that bias a little further.

On June 1, I suggested the euro has become the dominant currency in ROC values, thus a long on EURUSD made a simple enough profit of 30 pips. But the fund manager would see the same trade and consider using the new bias to do the following:

  • LONG at 7am BST EURUSD

  • LONG at 7am BST EURGBP

  • LONG at 7am BST EURCAD

  • LONG at 7am BST EURCHF

They would not have traded EURJPY as Japan was suffering a major move from delaying its VAT policy. No fund manager would trade before announcements or from panic moves.

Consequently, once the dominant currency value is known, you trade all the liquid pairings and cover when the market moves to an illiquid stance at approximately 5pm BST currently.

The meagre single-trade profit I posted of 30 pips would then become a profit in excess of 200+ pips using the simple bias of the markets, (or if you like the market skew.....an often repeated topic in prior articles) and you can compound profits dramatically.

However this works mainly because of the law of large numbers....being exposed across all of the forex playing field maximises the potential for catching a big move. Thus you need to be in each and every pairing with the dominant bias as your focus.

Your normal stop management rules apply. Trade each pairing with the same stake size. You don't have to increase your market exposure as you can dilute your normal stake to cater for the extra trades....so risk remains as fixed as your normal trade values but you are trading the law of averages and not one single market place. 

Thus, the example above for simplicity sake.... if I traded £50pp on EURUSD, I would have amassed only 30 x £50 for a £1,500 profit.

The alternative wasfive5 trades opened at £10 per point so my true market stake is still effectively £50pp but the overall profit was 200 x £10pp for a £2,000 minimum profit.

Now I could easilly maximise potential profits in a variety of ways but lets stick to the pure basics here. The overall result enhanced the return on capital employed and spread the risk. Usually the predominant pairing would have a larger stake size than the others for me but we all have different trade parameters.

A word of caution though. Should you get a strong rally in one pairing, then assume 85 pips or greater is your take-profit level. When one pairing storms away, but not the others, then the law of averages also means it will drag that impulsive move back to its fellow FX pairings, so take the profit when this event occurs. Play the maths to your advantage.

Can this be improved?

Yes an obvious method is the converse of the above....look for the weakest currency weighting and short all the relevant pairings....this is where the JPY looks interesting but we also saw weakness in sterling which is what I traded. Remember the yen was due to a market panic after the event and this trade structure isn't about panic moves. The cable overall only accrued 140+pips on the day.

The real take away for any reader is that perhaps trading more as a business and establishing a fx weighting model such as the ROC/Skew scenario will compound your successes. Obviously I will post live updates to show what values I am looking at. Clearly as today is June 2nd I cannot post a chart for next weeks article posting as I do not know what the weightings will be next week but will post real time values as usual.

If nothing else hopefully this article will challenge your normal view of the markets and perhaps let you consider a new strategy to build on. Should you want to operate the ROC/Skew model then you can scroll through my weekly postings and slowly overlay each weekly article to get the full set up. Each and every week a different snippet has been posted that will always overlay another strategy to build a stronger trade signal.

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Sometimes, it's about looking for weakness, not strength. Photo: iStock

— Edited by Martin O'Rourke

*fxtime is an alias
1y
fxtime fxtime
Update...scroll down the conversation and you will see yesterdays results as a screengrab and prediction for today and the revenue gained today as described using the above article.
https://www.tradingfloor.com/posts/almost-an-inverted-hammer-on-sugarlooking-to-see-if-any-downside-follow-thru-today-wow-was-7730426
I have posted other screengrabs alluding to these strategies. Not sure if they are needed here now.
1y
fxtime fxtime
Intraday roc/bias model has moved gbp to a bearish skew in relation to eur bias.....all this means is that the euro should rally faster than the cable or the cable falls but the euro still remains dominant in consequence we should have a bullish eurgbp pairing for obvious reasons.
1y
fxtime fxtime
Screengrab of yesterdays results....also a prior ROC/bias trade
1y
fxtime fxtime
Todays results......
1y
dockl dockl
Hi Fxtime. i have 3 request. Is there an archive of your articles somewhere? Can you recommend a couple of FX books towards development a trade system. lastly, could it be possible to communicate directly with you? Thanks a lot.
1y
fxtime fxtime
You know I struggle to find the trade strategy articles as they are lost in a list of other articles so Hopefully the TF site will give a solution? Especially since the strategy articles are supposed to overlay each other to make stronger trade signals.
As for recommending books...sadly the classic ones are well known these days....but I often suggest to students that never accept pre-determined values....eg if your charting suggests a 14 input for the RSI look at 5 or 7 and see if that improves your results and don't look for extreme highs and lows...look where the trade initiates a move which is usually the centre line (plimsol line) as that usually gives a greater profit stream. If you are new to trading may I suggest these 2 articles;
https://www.tradingfloor.com/posts/sentiment-momentum-and-the-perfectly-timed-trade-7019540
and
https://www.tradingfloor.com/posts/skewed-thinking-7593071
I did write about std dev trades and trading missed moves but I will have to find them for you.
1y
fxtime fxtime
Found some more...
https://www.tradingfloor.com/posts/mechanical-swing-trading-full-facts-and-real-figures-6968989
https://www.tradingfloor.com/posts/what-aztec-gold-and-llamas-can-teach-us-7335495
https://www.tradingfloor.com/posts/trading-a-missed-move-7206136
Sooner or later I will find the standard deviation trade which will probably earn you the most. Just remember these trade strategies interact with each other. Pick and choose which parts you prefer.
1y
fxtime fxtime
Ref books...I have just realised Andreas Clenow on this site is an author and pro trader and usually his books are highly rated.
https://www.tradingfloor.com/traders/andreas-clenow
The trade structure he uses are certainly areas that I follow and I always follow his postings.
1y
Michael O'Neill Michael O'Neill
Another great article. It is rather funny. I have executed similar strategies often, but never as formalized as what you described. Hell, I was being technical and structured and never Knew it. lol
1y
fxtime fxtime
LOL..brilliant :-)
Interestingly tomorrow looks to have a dollar bias!
1y
dockl dockl
Thanks a lot. i am indeed new to trading, though i am amassing enough battle scars. plan/conceptualising trading in statistical terms is something i can relate to. thanks again.
1y
zefy zefy
I have found Google search:
site:www.tradingfloor.com fxtime article
useful when working with articles and strategy overlays.
1y
zefy zefy
Fantastic stuff :)
1y
zefy zefy
These articles together with books from Andreas Clenow are definitely best trading education I have ever read (and I have read a lot).
1y
Martin O'Rourke Martin O'Rourke
Hi zefy, if you follow fxtime, then you will receive a notification every time he posts on TradingFloor. Alternatively, you can go to his home page https://www.tradingfloor.com/traders/fxtime and make your way down through the page to find articles which date back to the first week of January. Fxtime is a prolific squawker and commenter of course but you will find the articles soon enough.
1y
Martin O'Rourke Martin O'Rourke
And it is because fxtime is such a prolific contributor to TradingFloor that we like him so much! :-)
1y
fxtime fxtime
Thankyou Martin and Zefy :-)
In the comments above I suggested today to be a dollar bias/strength and the article is about trading the major liquid markets only;
thus long on $chf and $cad has so far made +54 and obviously shorts on euro$ and cable have totalled +91 so the day has started reasonably well so far :-)
As mentined above....avoid yen as this hasn't settled yet.
1y
fxtime fxtime
There is no real bias on the roc model for today !! Nothing stands out for strength but the EURO which is currently down on the day is showing a potential turn so if you want a higher risk than norm perhaps it is best to consider the euro bias :-) Normally these turns are really to look for buying the dips scenario as opposed to outright strength but still useful none the less.
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