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#SaxoStrats
Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 11 November 2016 at 13:30 GMT

Going up against Lady Luck

Hypothesis Testing
United Kingdom
  • It's time to see how you're performing compared with Lady Luck
  • When knowing the 'at worse' results, consider some filters to enhance returns
  • These require no all-day trading strategies requiring monitoring trade screens

By fxtime*

Way back in January this year I suggested that as a measure of success we should compare our net profits to what Lady Luck would have shown year to date. The original article can be found here: Playing Lady Luck for a profitable 2016.

We can all see the basic strategy if we can call it that. Each and every night just before the market closes we enter a long trade seeking, in the case of the FTSE100, a meagre +5 points.

One of the advantages of the trade is that any gap up events we would benefit from but as the article describes, the stops needed as a preset are large and disproportionate for the returns in the classic sense of a 3:1 profit ratio.

So for this year alone our raw data is the following (up until the time of writing on November 8, 2016):

Trades opened: 209 year to date

Successful trades: 167
Total points booked:  2727
Average points gained: 16.33 points per winning trade

Losing trades: 42
Total points lost: minus 2665
Average points lost: minus 63.45 points per losing trade

Net result: up 62 points
Percentile gain:  2% year to date

As the original article implied, this is a zero sum game play. While the return is better than the free money rate you would gain in a deposit account without risk you are hardly rewarded for your diligent trade placement and risks taken for the trades. 

What it does however show is that if the zero sum strategy performed as expected over time, the worst-case scenario is that you stay at the same financial value and at best you earn revenue.

So now we know the ''at worse'' results, let's consider some filters to enhance returns. In subsequent articles I have suggested the RSI 5 as a means to open a trade using a plimsol line but also for filtering questionable trade entry values. When you enter a trade long such as the above and the RSI 5 daily value shows a value between 20 and 49 do not enter the trade.

Consequently we have the following outcomes:

Successful trades: 151
Total points booked: 2359
Average points gained: 15.62 points per successful trade

Losing trades: 20
Total points lost: minus 947
Average points lost: minus 47.35 points lost per trade

Net result: up 1412 points
Percentile points gain: in excess of 145% which easily exceeds the index return and the free money rate I mentioned earlier.

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 How has your trading account compared with Lady Luck's? Photo: iStock

There were no all-day trading strategies requiring you to monitor your trade screens at any time other than assuming you will open the trade as close to the close in the evening and that when the market opens you seek a minimal +5 points or book any gap up move. The stop is a zero range stop as per the original example. Now ask yourself how your account growth compares to Lady Luck and some slight stats adaptations to ensure your account on balance grows and grows.

The original article gives more detailed data and if need be I can give the links for the zero sum strategy. I must stress the zero strategy is the crux point of all of the above. The RSI filter is a simplistic one that can be enhanced substantially using a ROC model which I will post later.

If nothing else I hope I challenge your views on ''Luck''. As the famous line in the Dirty Harry film goes: ''Do you feel lucky?''

– Edited by Gayle Bryant

*fxtime is a pseudonym
3y
fxtime fxtime
Zero range strategy attached below;
https://www.tradingfloor.com/posts/applying-zero-sum-games-to-a-trading-strategy-8059575
Obviously the Lady Luck strategy is shown above in the blue text hyperlink.
3y
kom75 kom75
Thanks for another great info. I thought you enter long with rsi above 51?
3y
fxtime fxtime
The stand alone RSI trade is long at 51 and above. The above is not used as a means of trade entry but as a filter for a long only trade seeking +5 or gap up scenario only. The RSI 5 strategy you decribe relies on two signals
A) RSI must exceed the 51 value and,
B) Subsequent candle must exceed the trade range of candle (A)
One caveat however is that you must treat the candle (A) the same as an open range candle in otherwords it can trigger eitherway and then trail your stop.
3y
kom75 kom75
What rsi value would you advice for breakout strategy? Now for long I use >51, but according to article better would be >49, and <51 for short?
3y
fxtime fxtime
Below 49 is great for a short on a breakout strategy but if we close for the first time over/under the central 50 line use that candle as a price break out trade as opposed to the vanilla timed price range breakout trade. Remember also on rsi5 we can trade an opposing contra trade when over bought/oversold as an rsi 5 extreme equates to 98% normal distribution and as such you can regard it as a basic representation as to where the market price is on a distribution curve !! View that on a distribution curve at its max is the 50 value and anything below 10 or above 90 are suitable for the 84% rule etc . Hope this makes sense?
3y
kom75 kom75
It is. Thanks and have a good weekend:)
3y
fxtime fxtime
You too mate :-)
3y
fxtime fxtime
Interesting....something I have mentioned before about berish close prices on Friday invariably ar followed by bullish open prices.
FTSE looks like it will open approx +45
SP500 is currently +8 in globex
DAX is currently +70
All being covered now rather than await the opening 8am time stamp as prefer to bank now and start the week with assured profits :-) I expect some form of pullback to re-enter the trades. But Mondays can be odd things in the opening few hours imho.
3y
fxtime fxtime
typo : berish = bearish
3y
zefy zefy
Great success for lady luck strategy again this morning in Europe equity index contracts :)
If there is a strategy that gives entry signal late evening then lady luck strategy can be interpreted as extra confidence for that signal, I think.
3y
fxtime fxtime
Actually when my systems overlay strategies they form what I call a ''credit score'' for any trade whereby the confidence of a successful trade is measured. Friday had a high score due to the data for Friday bearish close prices to Mondays open also that it closed on the pivot of the wild Trump day move which is often supportive etc etc :-) Lucky in other words LOL.
3y
zefy zefy
I think it is really interesting to combine different frequencies to take something from daily bars and something from minute bars and between those. Some indicators perform very well on daily bars but do no work at all in minute bars and other way around.
3y
zefy zefy
And thanks for providing this summary article about lady luck strategy. It is always good to review results and take longer period to analyze how things went.
3y
zefy zefy
Trailing stop in FESX was hit but it was a good run!
3y
fxtime fxtime
It looks to be a great run....good call :-)
3y
zefy zefy
Perhaps now time to wait new direction from US afternoon... I am livetesting new MA based algo which according to backtests performs well mornings and afternoons but gets whipsaws around noon...
3y
fxtime fxtime
LOL...I know that doldrum period for liquidity is a real pain hence the whipsaws you are getting. My MA systems tend to measure VOLUME only and apply the MA to that and totally ignore price/high or low of the candles ! Although on FX which is a continuous market place a MMA17 works well too for hourlies/dailies/weeklies and even monthlies! (NOTE I use two part signals for the MMA, the first is always the close price the second trigger is the triggering candle range.).
3y
zefy zefy
Good points about volume, MMA17 and triggering candle.
For this algo I try two methods to protect against whipsaw periods: 1) Disable trading during no liquidity period 2) Allow trades only daily filter direction i.e position does not flip from long to short but only closes long position and waits later opportunity to enter long.
3y
zefy zefy
A tradeoff between missing opportunity to short and reduce false entries, it seems today.
3y
fxtime fxtime
If you avoid just one false entry then the system works....it may not be perfect but if it avoids one duff trade then it is still to your long term advantage. Once the filters start spotting the false scenarios you can quickly fine tune the control scenario to enhance profitability.
3y
fxtime fxtime
Zefy this weeks article reviews elasticity as an equal measure for stops and price entry which may be of use for you.
3y
zefy zefy
Sure. I am heavy user of you articles :). Thanks for pre info.
3y
fxtime fxtime
10yr Treasury is showing inelastic price movement on a supply demand curve much as Copper did last week. The direction is immaterial as we see high price movement on constrained vol so a mean reversion is likely as the demand curve for inelastic moves is pretty much vertical. Supply price is simply hyper sensitive for ranges near the 2std dev.
3y
fxtime fxtime
LOL...the good thing about old posts is that TF site tends to bury them. Hopefully you get the gist of supply / demand elasticity?
3y
zefy zefy
Yeah, I see the point in 10yr and Copper examples.
3y
fxtime fxtime
Need to be careful with the markets now imho. As mentioned earlier today I expected a dip. The rally was an ''inelastic'' demand/supply issue only and now a rebalance has occurred. Lets see if we close higher than the current values tonight. If we do I suspect Santa and his little helpers will kick start the index to Black Friday sales.
3y
zefy zefy
Yep, and today is also perfectly in line with your earlier comment that Europe usually makes high in the morning and then stalls/dips a bit to wait guidance from US :)
3y
zefy zefy
Was "inelasticity" rally this morning caused due to positions closed on Friday to avoid holding over weekend?
3y
fxtime fxtime
My guess is that the rally was merely a positional move as you rightly suggest above. Why incur risk and weekend interest charges over the weekend? Most of the trades remaining will have been opened after the election result so are at max risk for drawdowns/losses as a trend hasn't established itself yet so new trades will not have much of a protective trade profit cushion to make the trade exposed to world events worthwhile.
3y
zefy zefy
Thanks, that's an excellent summary and reference to current positions after elections!!!
3y
zefy zefy
I think I can wait until near close to see and decide next actions.
3y
fxtime fxtime
Presume you opened longs near the close for FTSE and SP500 ? :-)
3y
zefy zefy
Everything looked so mixed so I decided to do nothing :)
3y
zefy zefy
Now looking if there would be short opportunities when US open nears...
3y
zefy zefy
Perhaps I have too many tests ongoing at the moment... LOL
3y
fxtime fxtime
The market seems tight imho and we should have a big move within the next 48hrs is my guess but as to direction I haven't a clue.SP500 may well impulse to 2200 or drop down to 2114 so i am trading small stake size and have a long SP500 running now and a pending unfilled order at 2160 to short. These are very small stake sizes which can be rapidly scaled but any drop will in my view be counter trend as I do expect 2200 by Christmas ! The dax has earned easilly enough for me today (price breakout etc) but if we make a new day low today i will follow max stake size. :-) Hope this makes sense?
3y
zefy zefy
Can't disagree with that. My thinking and extrapolation was just showing that Trump rally is losing its steam and we would see a dip next. That was a reason not to do anything last evening.
Next two days should show though.
3y
fxtime fxtime
Yeah agree lets see what Trump causes next.....now if ever there was a time for traders to ONLY trade what they see and not think about what the market should do as we will probably have some knee jerk reaction soon enough either way.
3y
fxtime fxtime
Zefy I am in profit easy enough with the SP long I mentioned somewhere in the commentary above but if we exceed 2178 and fail to close above that level then I will enter a short fwiw.
3y
fxtime fxtime
Also you found a way around the cumbersome TF listings for prior postings and this TF reader is having to scroll back through the 1 yrs worth of articles which is taking a bit of time shall we say LOL.
Can you give him whatever trick it was that you used to get a list of the prior articles please?
https://www.tradingfloor.com/traders/trader-mick
3y
fxtime fxtime
Yeah...thanks Zefy... I knew you had a shortcut :-)
3y
zefy zefy
Well done in SP! I was so obsessed to watch short opportunity that missed that move. But it is not first time I am expecting some move too early so still watching opportunity to go short.
3y
fxtime fxtime
We might get the short opportunity tonight....depends if we fail to hold the breakout above yesterdays high is my guess.
3y
fxtime fxtime
Update SP500 did hold above yesterdays high. However HFT scenario remains a short but cfd doesn't and is simply flat.
3y
zefy zefy
Yeah, also seems my short projection is not valid anymore after today's development.
3y
fxtime fxtime
A lot of dithering in the markets Zefy....there is no conviction for a further rally so around 2180 area i am intending to short...hopefully we get a final impulse up :-)
You already have my levels for a short if the 2180 isn't reached...but my first scale short would now be a new day low today.
3y
zefy zefy
I do not have any projection for direction at the moment so will wait for near EoD today as next decision point.
3y
fxtime fxtime
Amazingly I didn't get filled on my 2180 in globex..I must have missed a fill by a fraction of a point !
Agree we do not have a clear cut signal eitherway at present.
Traditionally the run upto Thanksgiving is a bullish event as expectations for the Black friday sales are high. All we can do is wait for evidence before committing to a trade.
3y
fxtime fxtime
Zefy I assume you traded the spot eurusd? Ice cream trade etc etc...as we near ECB results I have moved my stop to 1.0710 fwiw targetting 1.0769 !!
3y
fxtime fxtime
My trailing stop was hit and profits booked. I will re-enter the same trade tonight at the 9pm time stamp (GMT) if need be.
3y
Crispee Crispee
hi guys. looks good for ice cream in eurusd tonight:). Would you count today as the 6th day using the 9th as the first? And if so, this obviously increases probability significantly.
3y
fxtime fxtime
Yeah thats the plan Crispee....if you done last nights trade you should have earned today with a trail stop as per the post above :-)
3y
Crispee Crispee
what about usdJPY for a wee bit of ice cream tonight? looking attractive at this level
3y
kom75 kom75
I traded this yesterday Crispee, will try tonight as well:)
3y
Crispee Crispee
Kom, I couldnt pull the trigger on jpy last night.
i caught the ftse this morning for many pips using the 15min strategy (thx fxtime). very nice way to start friday.
eurusd ice cream may still play out but not holding my breath
3y
fxtime fxtime
I too have earned...as for eurusd lets give it some duration :-)
3y
fxtime fxtime
Crispee....on the ftse the one hour set up had a range too wide for a normal trade so you move the one hour range across to the 9-10am range...when trading one hour open ranges the max trade range to trade a breakout from is 45pts which was exceeded on 8-9am so we adjust to a Bayesian model just as you would with this mornings 15min trade.
3y
fxtime fxtime
Also to clarify with quite few readers....the 45pt stop is the max you can have before a change in trend but when trading breakouts and the range is less than 45pts then make your stop match the smaller range. So if the open range is 30pts then your stop will match that ! This ensures your account grows. The 45pt stop is a zero sum value. Your profits will be equally matched by overall losses over a year for example. So anything less than 45pt stop means at best you earn and earn and at worse you remain the same. The article about 46pip/pt stop relates to using the end of day close price and has nothing to do with price breakout-open range strategies.
3y
Crispee Crispee
thx fxtime. I agree on exceeding the 45pts for the 1hr range trade. Today was using the 15min range break strategy you have posted in the past. Worked a charm. Have a great weekend!
3y
fxtime fxtime
Yeah the 15min has been good for me too. Well done at trading it mate.
3y
fxtime fxtime
For hourly traders on ftse....
3y
Crispee Crispee
Fxtime, what do you think about the eurusd ice cream trade now? If it doesnt hit my SL, and remains below open, I am hesitant to hold for the weekend. thx
3y
Crispee Crispee
haha...figures when i write that my SL got hit
3y
fxtime fxtime
My trade remains open ! Not a large stake size though and I prefer to build the stake as I do not expect this move to run much further. A fixed monetary stake size is used and when I scale the stop will be adjusted accordingly to maintain the same monetary stop. Hope this makes sense?
3y
fxtime fxtime
FWIW...last night triggered the same ice cream structure for the SP500 but as a short obviously !
2y
zefy zefy
A very late reply from me... Saw the signals but not able to execute all due to not fully automated process yet. Counting the signal is of course straightforward but trade management is not fully coded yet. Perhaps I will next implement trade as simple scalp after entry as a first phase.
2y
zefy zefy
2016-11-21 EUR/USD
Nbr of falling highs = 8

It is getting really interesting. Such an extreme situation.
2y
zefy zefy
Wouldn't be late if entry now instead of previous evening.
2y
zefy zefy
If I enter it now with previous bar tp and sl it becomes quite straightforward to manage.
2y
zefy zefy
Or even scalp with fixed tp and sl.
2y
fxtime fxtime
As you say it still qualifies for the trade :-)
I now have two long entries...Thurs and Fri close values....lucky eh? :-)
2y
zefy zefy
Yeah :)
2y
fxtime fxtime
LOL...we are both having a bit of luck (ofcourse) it seems ....I can guess where your stop is....prior candle being used? It is always a good way to start your day with a profit imho.
2y
zefy zefy
Sure, great stuff :)
I have two instances running
1) predefined profit target and stoploss. That already closed in profit
2) no profit target and trailing stop. I am not fully tested how good that trailing implementation is so that might require manual intervention at some point.
2y
fxtime fxtime
They both have their merit.
Eurusd exceed prior trading day high so intial trade structure completed for an easy profit. I have a different trade structure that suggest eurusd may well rally to 1.0800 MAX before a further drop to parity but this is a a medium term trade based on weeklies. Well done with your profit mate....I guess we've earned our cornetto's now if you see what I mean. :-)
2y
zefy zefy
LOL. Indeed!!
2y
fxtime fxtime
ZEFY did you do the SP500 short and usdjpy short on Friday? I did and am awaiting a result today I hope !
2y
zefy zefy
Only EURUSD today.

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