System idea by Silverion

FredCaires

Junior member
13 0
This system isn't mine, its from a user called Silverion, he wrote this system in other site (babypips) but he only got one reply, i wanted to know what you think about silverion system? I think its a little risky anyway here's the system.

"This system idea is designed to effectively reduce the importance / necessity of picking a solid entry point into the market. It starts as a very simple, modest 5 pip scalp and evolves into a method of securing profit against a trend. It doesn't require any indicators, just simple mathematics and a decent account size to allow for 200 pip falls in a currency pairing.

The idea is pretty simple - you're opening long positions without stops on every -10pip loss from the initial open. The profit limit is always the median price of the highest and lowest positions. With every other -10 loss, you open an additional lot. You do this so that the "high" positions contain more lots, thus resulting in profit on cash out. Here is the idea in steps -


Step 1 - open a long position, no stop, +5 pip limit.

if....this position cashes out, repeat step one (you made 5 pips)
if....there is a -10 pip loss...

Step 2 - open one long positions, no stop, +10 pip limit. set first position to +0 pip limit.

if.... this position cashes out, repeat step one (you made 10 pips)
if....there is a -10 pip loss...

Step 3 - open two long position, no stop, +10 pip limit. set the first position to -10. set the second position to 0

if.... this position cashes out, repeat step one (you made 10 pips)
if....there is a -10 pip loss...

Step 4 - open two long positions, no stop, +15 pip limit. set the first position to -15, set the second position to -5, set the third set of positions to +5.

if.... this position cashes out, repeat step one (you made 25 pips)
if....there is a -10 pip loss...

Step 5 - open three long positions, no stop, +20 pip limit. set the first position to -20, set the second position to -10, set the third set of positions to 0, set the forth set of positions to +10.

if.... this position cashes out, repeat step one (you made 50 pips)
if....there is a -10 pip loss...

> with every other -10 pip loss, open an additional position. The pattern is like this 11 22 33 44 55 66 77 88 99 and so on. The profit limit is always the median value of your highest and lowest position, though gradually you'll be able to set the profit limit lower if you feel that you aren't low enough to hit a retracement.

From the very start you need to ensure that you can continue buying positions to the point where your initial position may reach -200 / -300 pips as a worst case scenario without reaching a margin call.

Why this strategy works - after a major fall, it is not uncommon for a currency pair to retrace back 1/4 to half of that fall. This is standard psychology- a currency pair drops 100 points and people start buying because it's reached a point where it's oversold. The challenge, usually, is knowing when to catch that retracement and profit.

This strategy puts a damper on the potential profit of catching that retracement, but it allows the trader to continually buy positions without long term risk (so long as you have an adequate cash pool) so that, regardless of when that retracement occurs, profit will occur. Basically, you can follow a trend and catch the counter trend in a way that is entirely automated and not dependant on when you enter the market.

Mathematically it works because as you continue to purchase lots in gradually larger increments, you can set the profit limit lower and lower (always within reasonable reaching distance), following the trend so that it will hit the retracement when it happens. By gradually increasing the increments, you are also increasing your eventual profit as more lots will be in the green than in the red. At -120 pips, a cash out at -60 = 350 something pips.
I modeled this system around the basic concept of the martingale system, but there are a few key differences that completely change how it works in application.

The standard application of the martingale system is doubling your stack with each loss, effectively covering all your losses with a single win plus the amount you would have won with the first position.

The martingale system works well in roulette with small capital because roulette is a game of luck, with a 50 / 50 chance of winning / losing. Playing forex like you’d play roulette is dangerous. Betting on gains or losses like you would bet on red / black is a guaranteed way to lose if you aren’t using tried and true indicators and extensive forex knowledge as an underlining basis for your doubling stacks. There is a human element that determines the movement of the market – scientific and psychological; roulette is determined simply by luck.

The martingale system, when used without a sound education of market trends and indicators will leave you dry when a currency dips 100 pips and you’ve set a profit limit and stop loss of 10 pips. If you continue to “bet” against the market while doubling your lots on every -10, you’ll be completely tapped out even before your tenth trade.

The system I put together is a little different. For one, you aren’t doubling your opened positions with each -10 loss. You aren’t closing your positions either. This is a system that is designed as a way of buying *more* lots, but not double the lots, with each loss. In application you are leveraging more of your lots on the bottom half of the trend. You profit point is always the midway point between your first opened lot and your last.

Let’s compare the two systems –

Standard Martingale –

1.200 – purchase 1 lot
1.199 – your position closes at -10, you open 2 lots.
1.198 – your position closes at -10, you open 4 lots.
1.197 – your position closes at -10, you open 8 lots.
1.196 – your position closes at -10, you open 16 lots.
1.195 – your position closes at -10, you open 32 lots.
1.194 – your position closes at -10, you open 64 lots.
1.197 – your position closes at +10

At this point the downward trend reverses and retraces back 50%, returning to 1.197. You are up 30 pips (+10 for the initial win, than +20 for each successive +10 win).

With a 5k account size, 10k lots, you would not have the usable margin to open 128 lots if you lost at 1.150. Losing two more times with 64 lots would drain your account of mostly everything.


My variation of the Martingale system

1.200 – purchase 1 lot
1.199 – purchase 1 lot
1.198 – purchase 2 lots
1.197 – purchase 2 lots
1.196 – purchase 3 lots
1.195 - purchase 3 lots
1.194 – purchase 4 lots.
1.197 –

At this point the downward trend reverses and retraces back 50%, returning to 1.197. You are up +140 pips.

If the trend continued downward, you would have the usable margin to continue for another -60, -70. With a 5k account, 10k lots, I’d use this system but space the bought lots over every 20 pips instead of 10 pip. By doing this you provide yourself a 200 pip cushion and you still win a similar amount of pips in the process.

The martingale system suffers if applied without solid fundamentals. If it’s applied randomly without indicators, without pivot points and without an existing trading system that you’re comfortable with, you will get burnt.

My variation on the system is meant to follow a trend and mathematically provides profits on a 35-50% retracement, wherever it may occur, and amplifying profit the further a currency drops. It works because you’re increasing your stack the further you go. It works because of the psychology involved in forex – when a currency dips by hundreds of pips, it’s typically accompanied by a powerful retracement.

How do you implement this system? For starters you need to assign your maximum risk. The maximum risk is the furthest you feel a currency will drop from your entry point. It helps if this is based in part on fundamentals, but it is not necessary so long as you understand that you shouldn’t ever buy at a resistance point or at a day’s peak.

Let’s fill in some numbers to understand how to assess the maximum risk – our hypothetical account size is 5k, and we’re dealing with 10k lot sizes. The maximum risk that we will assign is 200 pips. A 200 pip maximum risk should be assigned if you feel that a currency will not drop 200 pips; furthermore, there should be evidence to suggest this conclusion in 1 – pivot points, 2- previous dips within the last several weeks.

After we’ve assigned the maximum risk we need to do some simple math. With a 10k lot size each lot is worth 50 dollars on the margin. We want to take 40% of our total balance and divide 50 into it (50 representing the value of each lot). What we have is 2000 / 50 = 40. We now have 40 lots to plot against a 200 pip grid.

Some fundamentals– more lots need to be situated at the bottom of the grid. With each pre-designated pip loss amount, we purchase more lots. Let’s see how we’d do that with 40 lots and a 200pip maximum risk – we will use a 20 pip loss as a trigger for purchasing more long positions.

1.200 - 1 lot
1.198 - 2 lots
1.196 – 2 lots
1.194 – 3 lots
1.192 – 3 lots
1.190 – 4 lots
1.188 – 4 lots
1.186 – 5 lots
1.184 – 5 lots
1.182 – 5 lots
1.180 – 6 lots

40% of our margin is used for positions. Another 50% of that will be used for the maximum potential loss. With a proper maximum risk point and some common sense in market entry, you should never see a 200 pip loss.

Again, your maximum risk should be a point that your currency pair will not dip to. Think of it as an extreme support point, something way off the chart.

With this system, as the currency dips you change the profit limit of all your positions to the median point of your highest and lowest position. Let’s say the downward trend stops at the 1.100 point and you begin to see a retracement, this means that your profit point should be set to 1.150. That is a 50% retracement, or 50 pips.

Using this formation of position plotting, a 100 pip drop, followed by a 50 pip retracement, would net you a 190 pip profit.

Using the martingale in the strictest of fashion's would destroy your account before you reached the -100 pip point. However, if you had the balance to continue from that point, a 50% retracement would net you 50 total pips, a third as much as my variation.


Martingale Pro’s

+a small pip gain is required to regain your profits. In the above scenario, 10 pips is required as opposed to 25.

+works if used against pre-existing indicators and a strong fundamental knowledge of forex.

Martingale Con’s

-Even with huge account sizes, 10-15 losses can sap almost any account of all its money.

-the profit earned (10pips) is incredibly small compared to how much you’re putting on the line (everything after only a few losses)


My alternation on the system – Pro’s

+ Much more profit within the same market conditions. In the above example, X4 more.

+ Fairly safe if a safe maximum risk is set: it’s based around the fundamentals of Elliott Wave theory and human psychology.

+ More longevity in a consecutive trade scenario – you can set your maximum risk to 200, 300, 400 + pips, even as far down as 1,000 + pips with larger accounts, whereas you are almost always in the red after 15 trades with the martingale system.

+ Takes much of the science away from determining a safe entry point and automates the trading process around a money management system.

My alternation on the system – Con’s

-A 50% retracement might not seem like much with a 100 pip loss, but with larger maximum risks, particularly with larger accounts, if a currency drops 500-600 points, a 50% retracement might take days, or even weeks. (I can’t say that this happens very often at all, at least with the euro / usd pairing)

-If the currency dips below the maximum risk point, you will lose half your account. It’s very important that you set a safe maximum risk point.

I think the two systems work differently – my system is meant more as a way of following a downward trend while ensuring that you profit as soon as a 50% retracement happens. Will a 50% retracement happen? Go look at the Euro / USD history and count the number of times the currency didn’t experience a 50% retracement within a week or less after a huge drop. Within two weeks?

It always retraces at some point. The idea is the further it dips, the more profitable this system becomes in the long run, so long as you set a proper maximum risk point. Setting a solid maximum risk point and properly plotting your available lots is the basis for modeling this system to your needs.

This system works best with larger account sizes leveraging smaller amounts. With conditions like that, you can set a trigger on every -10 pip loss as opposed to -20, which is more consistent in catching profitable retracements You can also set a larger maximum risk point, meaning it’s simply safer in the long run if a currency pair is extremely volatile or experiencing a huge downward trend. Honestly, while I acknowledge that I am not nearly as experienced as most, I don’t see many points where a logical entry point wouldn’t help someone avoid a 200 pip maximum loss.

Any feedback at all would be greatly appreciated. I'm testing this system on several demo accounts and it's been quite profitable so far. I really want to test it for several more weeks before I try it on a normal account, so I can better gauge it's success rate. So far, I haven't hit a margin call and I've garnered as much as 500 pips a day. Again though, I want to keep testing it to get a better idea of ultimately how viable it is.

Fundamentally and mathematically, I think this is a pretty sound looking system. What do you guys think?


If you guys could I'd love to hear some feedback on this systems idea. "
 

foredog

Experienced member
1,879 314
You're clearly mad.

As you get it wrong keep getting it wrong.

A quick question:

You get on the motorway/freeway at junction/exit 111 needing to get off at junction 55.

The next exit you see is 112. Do you

A Get off and get back on going the right way having only wasted a little petrol/gas

B Keep driving and hope it's a circular freeway/motorway that will eventually get you to exit 55 before you run out of time and/or petrol/gas?
 
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trendie

Legendary member
6,840 1,398
reminds me of the Seykota saying about some trading system designs are like "picking nickels from in front of an oncoming steamroller".
 

NetTecture

Well-known member
403 12
Yeah. All "increase risk blindly when thigns go wrong" is as stupid as it gets.

The only risk increase ever should be if a failure actually MEANS a high probabiliy of the next trade. like making a small entry for a trading range breakout, and then, when this fails and the indication is on the range being "intact" a higher risk reversal trade. Note "higher", not "double blindly". And it should always come with accompanying control.

But this strategy here really is "picking nickes from in front of an oncoming steamroller".
 

FredCaires

Junior member
13 0
I didn't think it would work anyway, its too risky and can swipe your account, i was asking for a second opinion. Thanks, is there any system that just envolves strategies like this one where you don't need indicators or any other type of analysis? A one that works.
 

NetTecture

Well-known member
403 12
No way. No system can "not use indicators OR ANY OTHER TYPE OF ANALYSIS". This would mean entering positions PURELY random, and having no sensible risk control / exit strategy.

A system, per definition, must work on a theory, so it must observer and analyze - somehow - the markets. Even "price action" is based on an analysis of trades.
 

foredog

Experienced member
1,879 314
I didn't think it would work anyway, its too risky and can swipe your account, i was asking for a second opinion. Thanks, is there any system that just envolves strategies like this one where you don't need indicators or any other type of analysis? A one that works.

click the link in my signature, food for thought there
 
 
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