Fighting an Average Joe

[Max Pastukhov]

I'm relatively new to the Forex market, if not take into account some experiments 10 years ago when I lost about $1,000 and quit

So, here is an idea which I got, which may be naive, but anyway:

What if we try to trade against an "Average Joe"?

What are key characteristics of this person?

1. He takes small profits, especially when they are in danger. It's clearly visible if you analyze Oanda Order Book sentiment indicator for a while. If there are a lot of traders with unrealized profit, they will prevent the market moving further, until they finally close their profitable positions while the market is moving sideways, making them feel danger every time they virtually lose their virtual profits.

2. He never closes his losing positions until they become profitable or breakeven. Yes, there is a hard stop loss every time named "margin call", but I don't think that a lot of traders get it each and every day, so we should not take them into account. It's, again, clearly visible from Oanda Order Book. I feel (yes, it's my opinion, not facts) that there is no correlation between traders with unrealized losses and market moves. They are not eager to do anything, they just wait for something magical to happen until the end.

So, what will be an ideal setup against our Joe?

We can reward ourselves not for the amount of money taken from the market, but for the total time spent in profits, not losses. It means that we will try to enter the market and close losing positions almost immediately, leaving profitable positions almost forever. This way we will have unrealized profit almost all of the time we are in the market, not losses.

But, unlike poor Joe, we will never take these profits from the market, but just be happy that we have some profitable position running. It's not for us to decide what will be the target profit level, it's the market who has the power.

And, taking into account the danger of leaving open positions over weekends and holidays, it may be a good idea to open them throughout the week, then close at the end of the week, in the last hour of Friday or somewhere close to it.

Yes, it still leaves an open question how to find the direction of the market this week, especially when market is moving sideways for a long time. On the other side, these small losses when we try to enter the market until we find a correct direction will be relatively small to the overall gain on good weeks.

This strategy doesn't mean we will profit each and every week, or even on a monthly basis. It will lose money frequently, plenty of small losing trades in a row. But, when we finally find a correct direction by our genius or by throwing a coin, it will reward us for all our losses at the end, with a single big move.

So, what do you think? Is it a solid idea or am I missing something?

 

[tomorton]

I think personalising the game into you against a certain opponent risks diverting your efforts and planning into unforeseen measures. These might win the battle against the opponent but will they mean you take on more risk, or make less profit?

Think of driving a car from A to B. Do you want to drive from A to B quickly and without excessive risk? Or do you want to get to B before the guy in the pick-up in front? The destination is still B, but how does that make your journey better?

As for weekend risk, this surely depends on the instrument you trade. Equities and their indices can have large weekend gaps, but usually in forex these are very small, not worth losing out on a continuing price move.

 

[Max Pastukhov]

I think personalising the game into you against a certain opponent risks diverting your efforts and planning into unforeseen measures. These might win the battle against the opponent but will they mean you take on more risk, or make less profit?

Think of driving a car from A to B. Do you want to drive from A to B quickly and without excessive risk? Or do you want to get to B before the guy in the pick-up in front? The destination is still B, but how does that make your journey better?

As for weekend risk, this surely depends on the instrument you trade. Equities and their indices can have large weekend gaps, but usually in forex these are very small, not worth losing out on a continuing price move.

I feel that driving the car faster than the other guy is not the right analogy. Trading is about stealing other people money. It doesn't create wealth, it redistributes it. So, if we want to win, we must understand that if we win, somebody will lose. Or vice versa

If you want both you and Joe win, who will be the loser?

I feel that the key to the market is in psychology, not in maths. Maths will give you some stats on human psychology, that's all. My teacher on the theory of probability always told us that it's more important to understand what you are trying to measure, than the numbers themselves.

I agree with you on weekend risks, I just want to find some easy way to determine how long should I keep profitable trades running if I don't have any target price level at the end.

Anyway, I'm not arguing you, I just want to find some inner flows in this model, Thank you for the feedback

I'm already trying this strategy on a demo account. I like the feeling of being in unrealized profit all the time

 

[tomorton]

Well, I don't think trading is about stealing other people's money either. And as for the psychology, this is important - but mostly in awareness of your own psychology. Why? - because if you lose, you beat yourself, the market didn't beat you. Another reason why personalisation of this game is misleading.

I never enter exit order at profit targets. I let price go as far as it will, and I get out either at the extreme of profit minus my initial capital risk, or if price pattern is so weak its obvious the trend is over. But I also pyramid the winning trades along the way.

 

[Max Pastukhov]

Well, I don't think trading is about stealing other people's money either. And as for the psychology, this is important - but mostly in awareness of your own psychology. Why? - because if you lose, you beat yourself, the market didn't beat you. Another reason why personalisation of this game is misleading.

I never enter exit order at profit targets. I let price go as far as it will, and I get out either at the extreme of profit minus my initial capital risk, or if price pattern is so weak its obvious the trend is over. But I also pyramid the winning trades along the way.

Yes, I agree with you that the main benefit of learning psychology is in getting a better understanding of your inner self. It's funny that I started to learn psychology 15 years ago to become a better marketer. I soon found that I changed the way I feel and organize my business and my life in general. It didn't help a lot in marketing, but I have no regrets about the time invested

You are definitely right in your decision to let profits run. But what if your pattern detection "engine" is broken? Can you please look at your statements and confirm that you could earn less money if you wait a bit longer?

It's not an abstract question: you are an experienced trader, so it's important to understand whether I can rely on my judgment of trend reversal patterns, or not? I talk about the times when I will finally get enough experience to see these patterns and act on them.

The main question for me at the moment is simple: should I exit my trades after a given time, or should I look for some other ways to find the right moment? Technically speaking, by refusing to sell something I agree to buy it at the moment. So, when you close some of your long positions, does it automatically mean that it's a good time to go short?

Is there any more effective way to get maximum profits other than waiting for sime time for a newbie trader? And will it change over time?

 

[Max Pastukhov]

Here is yet another insight on the topic:

I read a lot of "newbie" topics on this forum, I got deeper into threads of those people who position themselves as experienced traders. I see a common pattern here: all of them talk about "trading the market", not trying to predict it. So, you trade what you see at the moment, not what you expect to see in the future. Trade present, not the future, in short.

It's easy for me to get short-term feeling of the market. I feel that it will reverse at the moment, but this feeling doesn't add anything if we take into account spreads and comissions. All these feelings become obsolete when we are talking about higher timeframes. And, if you let your profits run, what is a chance that, when you are closing your long-running trade, you are acting according to a short-term feeling, not the long-term one?

If you decide that it's the right time to close the position, is it according to a momentum? Or is it according to a long-term vision, compared to the length of a trade? Relatively long, sure, if we talk about hours, not days.

And, if you close the position, do you "trade the market" or not?

 

[tomorton]

I don't rely on patterns as such, unless you call a trend a pattern. Most of my trades are long-term trend-following. I enter when a trend is established though that means I miss the reversal at the start. I exit when the trend ends though that means I miss the price extreme at the end.

I could make more profit on an individual trade by holding longer, but this is only visible after price has moved on. Before then, if the trend weakens seriously, the risk of loss becomes greater than the risk of gain and that's a good exit scenario.

Getting out and reversing is an aggressive strategy and usually won't work on a long-term time-frame. It fails to follow any of my rules on trend-following so I don't do it.

Each position stays open until it is stopped out by either hitting the original stop, or by hitting the new stop after it hit break-even (and I opened a new duplicate trade). But all positions are closed if net gain reaches +25% of the account size (and I intend to take a week off if that ever happens again).

 

[gerryg]

I don't rely on patterns as such, unless you call a trend a pattern. Most of my trades are long-term trend-following. I enter when a trend is established though that means I miss the reversal at the start. I exit when the trend ends though that means I miss the price extreme at the end.

I could make more profit on an individual trade by holding longer, but this is only visible after price has moved on. Before then, if the trend weakens seriously, the risk of loss becomes greater than the risk of gain and that's a good exit scenario.

Getting out and reversing is an aggressive strategy and usually won't work on a long-term time-frame. It fails to follow any of my rules on trend-following so I don't do it.

Each position stays open until it is stopped out by either hitting the original stop, or by hitting the new stop after it hit break-even (and I opened a new duplicate trade). But all positions are closed if net gain reaches +25% of the account size (and I intend to take a week off if that ever happens again).

One question: fundamental or technical? How do you define you are in a trend? Bloomberg or WSJ advice?

 

[tomorton]

Technical only: I never ever follow fundamentals - its not like I can move price or am smarter or have faster newsflow than the banks. But if going to go short on say EUR, I check what all the other EUR pairs are doing.

I reduce charts to simple parameters, and the more of these that are present, the more keen I will be to follow that trend. For example,
Is 20EMA above 50EMA?
Is 50EMA sloping upwards?
Is price above 200EMA?
How many unbroken weekly bars are there above 50EMA?
etc. etc.

Your strategy would drive you to different parameters no doubt, as long as you confirm the trend and trade it by your own system's rules. That's how two people can disagree about trends or not - same chart, different strategies.

 

[Max Pastukhov]

I don't rely on patterns as such, unless you call a trend a pattern. Most of my trades are long-term trend-following. I enter when a trend is established though that means I miss the reversal at the start. I exit when the trend ends though that means I miss the price extreme at the end.

I could make more profit on an individual trade by holding longer, but this is only visible after price has moved on. Before then, if the trend weakens seriously, the risk of loss becomes greater than the risk of gain and that's a good exit scenario.

Getting out and reversing is an aggressive strategy and usually won't work on a long-term time-frame. It fails to follow any of my rules on trend-following so I don't do it.

Each position stays open until it is stopped out by either hitting the original stop, or by hitting the new stop after it hit break-even (and I opened a new duplicate trade). But all positions are closed if net gain reaches +25% of the account size (and I intend to take a week off if that ever happens again).

Thank you!

But how do you determine if you need to open a duplicate trade after the initial one hit a stop loss? Do you use some kind of limit order? Or do you execute it manually?

As for your "+25%" rule: it's really interesting for me, especially in this case, to see if you can earn more if you will be just more patient. And it's not about being greedy, it's about developing better statistical parameters of your system. I asked you to see into your statements and calculate the outcomes if you wait for an extra hour, or two, for example: will the outcomes be different?

The reason why I don't think that closing profitable trades on some hard rules is good, is that we can't predict the future. If you are sure that the trend will end, why not reverse the trade? If you aren't sure that it's not a good time to reverse, maybe it's not a good time to close the winning trade?

It's not a theoretical question, it's about risks. Entering the long-term trade is the riskiest part of the game. And, if you close your winning trades too often to resume trend following a day later, you are getting a risk of hitting more stops than you can if you were more patient.

That's why I will try (theoretically at the moment) to open trades much less often than closing them, and I will not define the closing rules other than time passed. If you open a trade within a day, your maximum risk is what price can move in a day, even if you don't use any stops at all. And, if you close trades not earlier than a week, you get higher chance of meeting a sharp move due to some unexpected news. News by their nature are always unexpected

Technical analysis is about the past, but news happen in the future which you can't predict.

It's one story when you sit in a profitable trade, your risk is zero. All you can lose is a slippage if the price sharply reverses to your breakeven level. And it's completely different story if you need to enter the same currency or commodity yet another time, getting big risks at the moment you enter, because it's almost impossible to catch a perfect entry point.

It's about stats, again: even a single strong move during the year you missed due to some hardwired rules can cover all your risks when entering the trades. But, if you open and close them more frequently, you will need to catch more sharp moves. And it's the market who decides if you are the right person to see them

I don't try to make you change your mind about how you trade. I just want you to tell me if you can get a different outcome if you will be more patient when closing your trades? Is there any way you can simulate your statements this way?

 

[tomorton]

I set a duplicate trade order on every trade as soon as the initial order is triggered (all my entries are via orders). So if Trade 1 goes to break-even, a new identical trade will trigger with the same distance to stop-loss. As Trade 2 triggers, I enter a new order for Trade 3, with the same distance to stop-loss and move the stops on both Trades 1 and 2 the same distance higher each.
e.g.
Trade 1 opens at 5000 with stop at 4900: set order for Trade 2 at 5100 with stop at 5000
Price goes to 5100, Trade 2 opens, move Trade 1 stop to 5000, set order for Trade 3 at 5200
Price goes to 5200, Trade 3 opens, move stops on Trades 1 and 2 to 5100, set order for Trade 4 at 5300
etc. etc.

If Trade 1 is stopped out before Trade 2 is opened, its back to square 1 - the Trade 2 order is cancelled and I look for the trend to strengthen so I can enter again.

Yes, we can't indeed predict the future. I never set profit targets for this reason. But in capital terms, if my basket of trades makes an unrealised gain worth 25% of my account, I can afford to let any additional gain go from these positions: I can always find some more trends to enter a week later.

I don't trade reversals at all, the future is just too uncertain. Then end of a trend isn't often a reversal into an immediate and opposite trend. It could take me 2 weeks to see a trend strengthening before I will enter anyway.

Actually, it is possible to predict the future in one way - price will either go up or it will go down. Once in a trade, you can have two plans, one for each. The initial stop on Trade 1 is the maximum capital I would risk from the account, and that never increases even if I had 20 parallel trades open on the same instrument. All that is at risk then is unrealised profit as all the trades are in profit by that time except the last which is down (by e.g. 100pts) and the next to last which is at break-even.

For interest, the r: r after 1 trade held for 20 x initial risk is of course 1:20. The r:r after 20 parallel trades is 1:190. I'd be happy for that to happen just once a year!

 

[Max Pastukhov]

I set a duplicate trade order on every trade as soon as the initial order is triggered (all my entries are via orders). So if Trade 1 goes to break-even, a new identical trade will trigger with the same distance to stop-loss. As Trade 2 triggers, I enter a new order for Trade 3, with the same distance to stop-loss and move the stops on both Trades 1 and 2 the same distance higher each.
e.g.
Trade 1 opens at 5000 with stop at 4900: set order for Trade 2 at 5100 with stop at 5000
Price goes to 5100, Trade 2 opens, move Trade 1 stop to 5000, set order for Trade 3 at 5200
Price goes to 5200, Trade 3 opens, move stops on Trades 1 and 2 to 5100, set order for Trade 4 at 5300
etc. etc.

If Trade 1 is stopped out before Trade 2 is opened, its back to square 1 - the Trade 2 order is cancelled and I look for the trend to strengthen so I can enter again.

Yes, we can't indeed predict the future. I never set profit targets for this reason. But in capital terms, if my basket of trades makes an unrealised gain worth 25% of my account, I can afford to let any additional gain go from these positions: I can always find some more trends to enter a week later.

I don't trade reversals at all, the future is just too uncertain. Then end of a trend isn't often a reversal into an immediate and opposite trend. It could take me 2 weeks to see a trend strengthening before I will enter anyway.

Actually, it is possible to predict the future in one way - price will either go up or it will go down. Once in a trade, you can have two plans, one for each. The initial stop on Trade 1 is the maximum capital I would risk from the account, and that never increases even if I had 20 parallel trades open on the same instrument. All that is at risk then is unrealised profit as all the trades are in profit by that time except the last which is down (by e.g. 100pts) and the next to last which is at break-even.

For interest, the r: r after 1 trade held for 20 x initial risk is of course 1:20. The r:r after 20 parallel trades is 1:190. I'd be happy for that to happen just once a year!

Thank you very much! You are a genius

Didn't yet think about the "averaging aka pyramiding" aspect of an Average Joe

Yes, pyramiding into the direction of the trend makes perfect sense. I will try it in my setup, too.

Next week I will open a demo account for this purpose, it will be fun!
I already miss next week, because at my current demo trade I'm already 588 pips positive. I can imagine how cool it may look if I created a pyramid instead of just a single order.

Thank you again!

 

[tomorton]

Thank you very much! You are a genius

Didn't yet think about the "averaging aka pyramiding" aspect of an Average Joe

Yes, pyramiding into the direction of the trend makes perfect sense. I will try it in my setup, too.

Next week I will open a demo account for this purpose, it will be fun!
I already miss next week, because at my current demo trade I'm already 588 pips positive. I can imagine how cool it may look if I created a pyramid instead of just a single order.

Thank you again!

Its kind Max but I used to think I was bright enough to be a genius, but now I know better.

Do run this as a demo. An opinion I respect says only to pyramid when you get a new entry signal that is as goods as the original entry signal. Otherwise you are just entering on momentum. As well as that, the stops I place on the pyramid trades after Trade 1 are not based on TA, they are just the same distance back as the original TA-based stop was from Trade 1.

However, the worst that can happen is that you get to Trade 2 and it and Trade 1 get stopped out. So what would have been a reward of 1r becomes a 1r loss and this is more likely than with just a single trade as the position is exposed and not in profit for longer. However, if Trades 3, 2 and 1 are stopped out the worst result is break-even. By the time you get to Trade 4, the worst result is still as good as holding just 1 trade for the same gain. By Trade 6, r:r has shot to 1:9.

 

[Max Pastukhov]

Its kind Max but I used to think I was bright enough to be a genius, but now I know better.

Do run this as a demo. An opinion I respect says only to pyramid when you get a new entry signal that is as goods as the original entry signal. Otherwise you are just entering on momentum. As well as that, the stops I place on the pyramid trades after Trade 1 are not based on TA, they are just the same distance back as the original TA-based stop was from Trade 1.

However, the worst that can happen is that you get to Trade 2 and it and Trade 1 get stopped out. So what would have been a reward of 1r becomes a 1r loss and this is more likely than with just a single trade as the position is exposed and not in profit for longer. However, if Trades 3, 2 and 1 are stopped out the worst result is break-even. By the time you get to Trade 4, the worst result is still as good as holding just 1 trade for the same gain. By Trade 6, r:r has shot to 1:9.

Yes, the main fun of averaging is that your risk is linear as the price fluctuates, but rewards are growing exponentially. So, even if you take some losses in between, you will still get higher outcome at the end, than if you just enter the market with a single position.

Anyway, I will test it on a simulator first, then on a demo account for a few weeks.

 

[gerryg]

Yes, the main fun of averaging is that your risk is linear as the price fluctuates, but rewards are growing exponentially. So, even if you take some losses in between, you will still get higher outcome at the end, than if you just enter the market with a single position.

Anyway, I will test it on a simulator first, then on a demo account for a few weeks.

How can we expect exponentially growing rewards? Can I know how you define risk? Asset variance?

 

[tomorton]

How can we expect exponentially growing rewards? Can I know how you define risk? Asset variance?

Excuse me for jumping in, maybe I can answer.

Reward grows exponentially as you add each pyramid trade as long as you keep open all earlier trades. Entry points are at same distance ahead, stops are moved to same distance behind.

So, one trade entered long at 10,000 with a 100 stop-loss will produce a reward of 900pts if price goes to 11,000 and then falls back to hit the stop 100pts lower. This is r:r of 1:9. Risk to capital was 100pts, which fell to 0 at 10,100.

But if opening a new trade at every 100pt increment, and moving stops on all older trades 100pts higher as each new buy order is triggered, will produce a reward of 4,400pts. This is a r:r of 1:44, more than 4 times better than a single buy-and-hold long over the same price movement. Risk to capital was still 100pts, but this did not fall to 0 until 10,200. If you could exit all parallel trades at the top, 11,000, the reward would be 5,400pts!

 

[Nowler]

I've never seen a trend one way just turn into a trend the other way.
There has always been a degree of ranging after a trend ends.

 

[mpups]

2. He never closes his losing positions until they become profitable...

This isn't Average Joe, it's Enlightened Joe :cheesy:

 

[tomorton]

I've never seen a trend one way just turn into a trend the other way.
There has always been a degree of ranging after a trend ends.

In order of probability, IMHO, I can suggest that long-term trends:
1) continue
2) pull back and then continue
3) consolidate and then continue
4) consolidate and range
5) consolidate and reverse
6) reverse

 

[darktone]

I've never seen a trend one way just turn into a trend the other way.
There has always been a degree of ranging after a trend ends.

know that you dont know, then youre one step ahead of the average joe.