Purely momentum guided trading system for forex

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jthetrader

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What do you propose would happen if someone were to use the following forex trading system over say a 6 month period with the following provisos:

1) Using leverage of 50:1 at all times
2) That there are no more than two positions open simultaneously
3) That all major currency pairs are traded at least once per day

And you simply analyse when a trend turns visually, as soon as it drops by 5 pips you would follow that and immediately jump in with a short position, or vice-versa if it roses by 5 pips:

1) You would hold the position until it had breached 10 pips in your favour or 5 pips against you (notwithstanding anticipated slippage, not that there would be any on a positions of this size) and then, no exceptions, close the position (ideally this would be done via a limit and stop loss order set-up to prevent emotion getting the better of the trader).

All position sizes would be equal, if capital ran too low for this then it would probably be a sign to adopt a new trading strategy.

As for numbers, supposing only a single lot would be used and no more than 2 positions would be open at a given time you would need to put up £4,000 to maintain the positions. You would probably want at least double this, in which case you would need a terrible run of bad luck (so much so that it would be fair to call the system a failure) to end up in a position where you could no longer maintain the two positions.

Max loss on a single lot of USD/GBP per trade would be $50 and max gain would be $100.

So, using your experience in the forex markets do you think this would yield a profit over a reasonable timespan? I know it is basically just very dedicated trend following, but some people claim you can earn money doing that.
 
So your basically saying as soon as price moves by 5 pips your jumping in hoping it moves at least another 5? Remember at least 1/5 of this will be taken up with spread.
The question you need to ask is why should it work? Is there any reason why after prices moves 5 pips that more people will place orders to move price further?
The answer I think is that no it won't work but could be wrong and I suspect you will try it anyway. Why not on demo so you can see for yourself
 
By the way to qualify what I just said 5 pips is nothing. Just noise, even one large order can move price 5 pips so I would say there is no momentum. How about 50 pips with special conditions?
 
jesteruk said:
By the way to qualify what I just said 5 pips is nothing. Just noise, even one large order can move price 5 pips so I would say there is no momentum. How about 50 pips with special conditions?
Click to expand...

Well yeah spotting the conditions is the way to gain an edge but if you're following market momentum and you have your size to your advantage (i.e. you can get in and out of positions with minimal to no slippage) that may be enough to turn a profit, no?

Why not have a system where you just let your losses run to 5 pips and only take your profits after 50 pips? Assuming an equal lot size each time and enough capital to sustain your scheme, you'd only need to get 1 in 10 trades right to break even.
 
jthetrader said:
Well yeah spotting the conditions is the way to gain an edge but if you're following market momentum and you have your size to your advantage (i.e. you can get in and out of positions with minimal to no slippage) that may be enough to turn a profit, no?

Why not have a system where you just let your losses run to 5 pips and only take your profits after 50 pips? Assuming an equal lot size each time and enough capital to sustain your scheme, you'd only need to get 1 in 10 trades right to break even.
Click to expand...

If only it was just that easy.
Get the 5 pips idea out of your head. If you have a 2 pip spread then a 5 pip loss is only a 3 pip move against you. You'd be amazed how easy it is to get stopped out 20 consecutive times that way before getting your 50 pip win.

Peter
 
Have a think about areas where there is a reason for people to trade and push your position in the right direction. Maybe the break of a previous high or low. Just taking any random small move will put you in the poor house!
Yes you would only need one in 10 but a 5 pip stop would need very accurate entry. E/u 5min atr often runs at 10-15pips
 
jesteruk said:
Have a think about areas where there is a reason for people to trade and push your position in the right direction. Maybe the break of a previous high or low. Just taking any random small move will put you in the poor house!
Yes you would only need one in 10 but a 5 pip stop would need very accurate entry. E/u 5min atr often runs at 10-15pips
Click to expand...

Well from what I've gleaned from being here most people operate based on technical movements, candlestick charts & break-out points etc; so maybe I should just be a contrarian and short them when they go long and vice versa. How can anyone who isn't privy to private information and who has no special connection with the brokers possibly obtain an edge? How can a man's ability to spot trends compete with a computer's ability?

This stuff's hard isn't it :LOL:
 
Probably less hard than your making it. First off what computer? Remember computers don't think. Most people don't have any more information than you do. They sit there with a chart and news feed and place trades. So forget the other crap. What makes people place trades? Is it because the price has just moved 5 pips? Or because 2 moving averages have just crossed? Or because we just hit a trend line?
Or might it be because the euro is in dire trouble? Or there are rumors of the SNB getting involved in the markets? Or people want a safe haven? Or they are looking for higher yields? The list is endless!
Markets are driven by present and perceived future events and how people feel about them. If people are worried the euro will collapse which way do you think the market will be biased?
 
jesteruk said:
Probably less hard than your making it. First off what computer? Remember computers don't think. Most people don't have any more information than you do. They sit there with a chart and news feed and place trades. So forget the other crap. What makes people place trades? Is it because the price has just moved 5 pips? Or because 2 moving averages have just crossed? Or because we just hit a trend line?
Or might it be because the euro is in dire trouble? Or there are rumors of the SNB getting involved in the markets? Or people want a safe haven? Or they are looking for higher yields? The list is endless!
Markets are driven by present and perceived future events and how people feel about them. If people are worried the euro will collapse which way do you think the market will be biased?
Click to expand...

I was referring to the computers used by hedge funds & banks which make trades based on a lot more data than a human or a normal computer can make use of.

The fact that people think the Euro is in trouble is already written into the value of the Euro against other currencies. Will it rise or fall is the real question. I'd say it will fall, so maybe I should buy options betting on the Euro falling against various currencies; but even if you're right once what's to say you'll be right more than you're wrong? :|
 
jthetrader said:
And you simply analyse when a trend turns visually, as soon as it drops by 5 pips you would follow that and immediately jump in with a short position, or vice-versa if it roses by 5 pips
Click to expand...

This works... In theory. I've seen plenty of strong reversals turn out to be 10 pip retracements because traders were attracted to a higher/lower level.

I prefer getting in right at the turning point since this makes it so your risk is like 1 pip if your execution is God-like. Great when it works, but this is mostly wishful thinking in the long run, imo. More likely you'll get in at the wrong moment and it'll just blow through you. I've had that happen plenty, too.

How do you even know the trend changed? What if it's just a retracement like stated above? You need more than just a static stop/take profit strat here...
 
jthetrader said:
What do you propose would happen if someone were to use the following forex trading system over say a 6 month period with the following provisos:

1) Using leverage of 50:1 at all times
2) That there are no more than two positions open simultaneously
3) That all major currency pairs are traded at least once per day

And you simply analyse when a trend turns visually, as soon as it drops by 5 pips you would follow that and immediately jump in with a short position, or vice-versa if it roses by 5 pips:

1) You would hold the position until it had breached 10 pips in your favour or 5 pips against you (notwithstanding anticipated slippage, not that there would be any on a positions of this size) and then, no exceptions, close the position (ideally this would be done via a limit and stop loss order set-up to prevent emotion getting the better of the trader).

All position sizes would be equal, if capital ran too low for this then it would probably be a sign to adopt a new trading strategy.

As for numbers, supposing only a single lot would be used and no more than 2 positions would be open at a given time you would need to put up £4,000 to maintain the positions. You would probably want at least double this, in which case you would need a terrible run of bad luck (so much so that it would be fair to call the system a failure) to end up in a position where you could no longer maintain the two positions.

Max loss on a single lot of USD/GBP per trade would be $50 and max gain would be $100.

So, using your experience in the forex markets do you think this would yield a profit over a reasonable timespan? I know it is basically just very dedicated trend following, but some people claim you can earn money doing that.
Click to expand...

sorry but you'd be whipped to death...:cool:
 
Cost of doing business means a) it hasn't got a chance of making money but b) you'll be a 'well respected and important client' for the broker.
 
There are a lot of variables, and the number of pips you're looking for in a move is low even for EUR/USD. You're also using a ton of leverage, which could burn you very quickly.

You should try this (along with any new strategy) with a demo account first. I think you'll find a few more things you'll need to consider when you take it from paper and into trading. You've got a decent start of a strategy, just need to demo it to find out what else you need or what you need to adjust/remove.
 
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