Low Risk / High Reward Trading System

[Itme]

This is a semi-discretionary multidisciplinary Forex trading system that I am in the process of developing. It falls into the form of trading which I refer to as "Scientific".

Generally, I divide trading styles into six varieties. The first is personal and chaotic, and usually results in rapid liquidation of capital. The second is trading signals, which is an excellent option for beginner traders and people without the requisite time, personality, or skills to do their own analysis. The third style of trading is system based. Systems can either be created, found on forums, or purchased. Systems must be learnt and implemented by the trader, which requires alot of time and commitment. The fourth style of trading is by subscribing to an online chatroom and taking live trade recommendations from one or more experienced, expert, successful traders. The fifth style of trading is by employing an EA or expert advisor - essentially a trading robot. Robots can either be created, found on internet forums or purchased. The sixth style of trading is scientific. To the best of my knowledge, there are only a handful of scientific traders in the world. A scientific trader employs standard scientific (mathematical / engineering/ physics) approaches to forex market analysis.

Within each of the above categories there are other categories, such as short term (scalping or momentum), medium term (swing trading), and long term (position trading). Trading systems can also be categorized as either technical or economic fundamental based, or a combination of the two. They can also be divided into those that are more mechanical, and those that are more discretionary.

A "trading system" is a set of rules or computer algorithms which decide when to buy or sell, what to buy or sell, and how much to buy or sell. Trading systems (sometimes called "black boxes") replace emotion, intuition and instinct in trading. Many hedge funds, banks, and large corporates employ trading systems to guide their trading.

Trading systems are typically generated by complex computer software (but not always). Each is organized around a general set of principles: "buy undervalued stocks," "sell futures when price movements accelerate", "enter a trade on an intersection of moving average lines, or the passing of an important trend line", etc.

My scientific trading system (the LRHR Trading System) is still in development, and it incorporates a Four Force Theory, one of which is my own mathematical approach, which I have previously referred to as the "Q Theory", that is somewhat unconventional. It identifies High Probability Reversal or Bounce Values. (Other ways of determining critical bounce values are support and resistance lines, pivot lines, camarilla lines, trend lines and fibonacci projection and retracement lines.) I also employ Elliott Wave theory (my own personal brand), plus Macro-Economic General Sentiment Analysis and Economic Announcement Science (the study of short term market response to economic data releases and world events). These four separate yet inter-dependent approaches to the study of price movement are then interconnected in the framework of one harmonious theory.

I seek for market set-ups where all factors are in alignment, which I consider to be high probability (of success) trade opportunities.

I also assess the strategic merit of the trade set-ups. The strategic merit consists of the Reward / Risk Ratio, the probability of success, and the anticipated duration of the trade. The ideal trade will have a high (approx. 4:1 - 5:1) Reward / Risk Ratio, a high probability (more than 90%) of success, and an anticipated duration of less than 48 hours.

If the trading system works, then we will have a higher than normal rate of return on capital. For now, we will call this the Low Risk / High Reward ( LRHR ) Forex Trading System.

The general game plan is to monitor GBP/USD, EUR/USD and USD/CAD carefully, plus monitor a half dozen or so other currency pairs as well on a more casual basis. We hope to find about one system compliant trade per week. The trade will be either a short or longer swing trade, with an upside of from 50 to 250 pips. We hope to win about 75% of the trades. We hope that the average Reward / Risk Ratio is better than 2:1. We hope to complete about 1 trade per week.

This level of performance will warrant a high risk factor (about 40%), which will produce a very high rate of return on capital. According to the Itme Theorem of Return on Capital, the return on capital as a percentage of the original capital from a winning trade is equal to the Risk Factor times the Reward / Risk Ratio. The multiplier of capital from a winning trade is thus (1 + (RF * RRR)). The loss from a losing trade as a percentage of original capital before the trade is equal to the Risk Factor. The multiplier for a losing trade is (1 - RF).

If the % of winning trades is W%, and the number of trades is N, then the likely number of winning trades in N trades is W%*N, and the number of losing trades is (1 - W%)*N. The end capital after N trades will be (1 + RF*RRR) ^(W%*N) * (1 - RF)^((1 - W%)*N)

Employing W%=75%, RRR=2, RF = 40% and N=26, we find the multiplication of capital will be 3,434 times. If we can complete 1 trade per week, then an initial capital of $1,000 will grow to $3.4 million in 6 months, and about $11 billion in 12 months. That is the plan.

Trade 1: April 11 at 2:30 ET
Short GBP/USD at 1.9815
This is a Strategic Entry Value according to my reversal probability value theory.
This could be the the top of Wave B of an A-B-C downwards correct pattern. The Wave B consists of an upwards a-b-c. This price could be the top of the smaller wave c.
Stop is 1.9831
The target is 1.9590

Depending on the announcement results and wave patterns, we may move the stop to break even at a certain point. We may also modify the target. The goal is to minimize the frequency and size of losses, and to maximize the frequency and size of wins. The system object is at least 75% wins, and at least average Reward / Risk Ratio of 2.0.

Here are the recent economic announcement results:

Monday April 9

All Day ALL Holiday: Easter Low Impact
1:00 JPY Eco Watchers Survey Low Impact 50.8 49.2
18:00 NZD NZIER Business Confidence High Impact -15 3
19:30 AUD Construction PMI Low Impact 51.1 51.7
21:30 AUD NAB Business Confidence Low Impact 10 12
Tentative JPY Interest Rate Statement Medium Impact 0.50% 0.50% 0.50%

Tuesday 4/10

Tentative JPY BOJ Governor Fukui Speaks High Impact
1:45 CHF Unemployment Rate Low Impact 2.9% 2.9% 3.0%
2:00 EUR German Trade Balance Low Impact 14.2B 15.4B 16.2B
2:00 JPY Machine Tool Orders y/y Low Impact 9.5% 16.5%
2:45 EUR French Industrial Production m/m Medium Impact 1.1% .5%
-0.2%
9:30 USD Fed Governor Mishkin Speaks Medium Impact
19:01 GBP BRC Retail Sales Monitor y/y Medium Impact 3.9% 3.9% 3.3%
19:50 JPY Core Machinery Orders m/m Medium Impact -5.2% -0.4% 3.9%
19:50 JPY M2+CD Money Supply y/y Low Impact 1.1% 1.0% 1.1%
19:50 JPY Current Account Low Impact 2.42T 2.20T 1.19T

Wednesday 4/11

2:00 EUR German Wholesale Price Index m/m Low Impact 0.5% 0.5% 0.4%
2:00 JPY BOJ Press Conference Medium Impact
2:45 EUR French Trade Balance Low Impact -2.7B -2.8B -2.6B
8:15 CAD Housing Starts Medium Impact 211K 214K 196K
10:30 USD Crude Oil Inventories Low Impact E 0.7M 4.3M
10:30 GBP Leading Index m/m Low Impact 0.8% 0.3%
13:00 USD Fed Chairman Bernanke Speaks High Impact
14:00 USD FOMC Meeting Minutes High Impact
19:01 GBP RICS House Price Balance Medium Impact 26% 22% 24%
19:50 JPY CGPI m/m Low Impact 0.3% 0.1% 0.0%
20:30 USD Chicago Fed President Moskow Speaks Low Impact
21:30 AUD Employment Change High Impact 10.5K 15.5K 22.0K
21:30 AUD Unemployment Rate Medium Impact 4.5% 4.6% 4.6%

[Sonic]

Are you trading using Elliott Wave Theory???

[Itme]

Felix Homogratus, who is a consummate announcement trader, has this to say about the announcement trading opportunities for today:

1. Wednesday, April 11th (1:00 pm to 2:00 pm NY Time) USA
We do have Ben Bernanke making a speech about market discipline and regulation. That starts at 1:00 pm, and it will be followed by FOMC meeting minutes at 2:00 pm. I personally will be watching and possibly trading both events in my forexdiamonds.com room. So if you are a member, I'll see you there. But I am really not expecting anything good out of it. The Fed is all mixed up, and the FOMC minutes is the old stuff that came in before the recent super strong non-farm payroll reading. The recent non-farm payroll reading literally has shifted expectations of a rate cut in this quarter from 80% to about 10%. So I think large portions of the minutes will be disregarded by the markets. So honestly, I have nothing to tell you here, because the trading decisions will have to be made as things unfold in the speeches. If anything, just stay out of the markets during those times.

2. Wednesday, April 11th, (9:30 pm New York Time) AUSTRALIA
Then we have employment change coming out of Australia, along with their unemployment rate. Australian employment consensus has been very steady in the last few months, at around 15K. So they are expecting that in the month of March, there were around 15,000 new jobs added in Australia. If the number comes out at 54K or higher, it would be the highest reading since April of 2004, and AUD/USD may possibly increase by 70 pips or more in the first hour of the report. If the number reads at -32K or more negative, it would be the lowest number since September of 2005, and AUD/USD may possibly decrease by 70 pips or more in the first hour of the report. Remember, next time Australia releases interest rates, there is about a 50/50 chance of a hike, and whether RBA (Reserve Bank of Australia) decides to hike the rates or hold it, will largely depend on the health of their jobs market. So the timing of this indicator is crucial, and the level of price unwinding will largely depend on where the AUD/USD is trading before the report. If you like, you can of course use smaller triggers for this trade, to get a smaller move of 70 pips. That's what I would probably do. My triggers will largely depend on the price situation before the report. Also...please be aware of the AUD unemployment rate, which is expected at 4.6%. If it conflicts by 0.2% or more, I would be extra careful."

Preview of the FOMC Meeting Minutes

Today's release of the FOMC minutes will probably continue the theme of "mixed" messages sent by the U.S. economy. In the statement accompanying their rate decision last month, the Fed noted that “recent indicators have been mixed.” The Fed pointed to the housing sector's "adjustment" as a noteworthy area of concern. Nonetheless, the Fed went on to project that the economy will grow at a moderate pace. Much attention was given to the Fed removing their "additional firming" phrase. Since they stopped raising rates last year, the Fed continually used such language to suggest that they leaned toward tightening rates. After hearing the Fed remove this phrase, traders sent the USD to new multi-month lows against several currencies. By the next day, traders analyzed the statement more carefully and the USD retraced a large chunk of its losses. While the removal of the "tightening" language caught everyone's attention, the key phrase may have actually been that the "predominant policy concern remains the risk that inflation will fail to moderate as expected.” So the tug-of-war between slowing growth (encouraging a rate cut) and inflationary concerns (encouraging higher rates) should be carefully monitored tomorrow. If the minutes reveal a bias that wasn't evident in last month's statement, there could be a strong reaction. If the minutes simply expand upon the statement and leave the tug-of-war in equilibrium, the reaction could be mild.

Other Fundamental Factors

The dollar fell against other major currencies Tuesday amid worries over trade troubles between the U.S. and China and persistent concern about the strength of the U.S. economy.
The dollar had strengthened Monday, boosted by figures showing stronger-than-expected U.S. job growth in March -- tempering expectations for a cut in U.S. interest rates.
However, data due this week -- including U.S. trade figures -- may be less supportive.
On Tuesday, the United States filed two new complaints against China at the World Trade Organization over copyright policy and restrictions on the sale of American movies, music and books. The Chinese Commerce Ministry expressed 'strong dissatisfaction.'
'The fear is that China will retaliate to U.S. action and sell U.S. treasuries or simply not buy more,' analysts at Brown Brothers Harriman said in an e-mail note.
GFT analyst Ian Copsey said the FOMC minutes will be watched closely as the market clearly sees the downside risks from soft data, while the Federal Reserve's hands appeared tied in terms of lowering rates due to persistently high inflation.
'Growth projections are still firm but there does seem to be a degree of vulnerability which could generate a slightly longer US dollar decline if economic numbers remain soft,' he said.
Traders now look ahead to corporate earnings season in the U.S. and a meeting later this week in Washington of finance officials from the Group of Seven industrialized economies.

Possible Contributing Factor in Todays Rapid Rise in GBP/USD

Tax speculation supports Sterling

The GBP/USD gained ground in Asian trading on Wednesday with an advance to 1.9817.
Sterling was supported by a media report that the UK Treasury will consider allowing tax-free repatriation of overseas profits. Such a measure could be important in strengthening the UK capital account, at least in theory, as these inflows could amount to several billion pounds. The tax changes could be similar to those contained in the US homeland act of 2005 which generated one-off dollar flows back to the US of at least US$50bn
In subsequent comments, the UK Treasury has stated that a discussion had been underway for some time and that any changes would be revenue neutral. Overall, it is unlikely that changes would be on a large scale and legislation would probably not be introduced for several months at least. Flows would tend to be much smaller that in the US example, but sustained over a period of years rather than concentrated over a one-year period.
The Sterling reaction is also a function of underlying strong market interest in high-yield currencies with Sterling also gaining support from a firm BRC retail sales report overnight with like-for-like sales rising by 3.9% in the year to March.

[suzane]

Hi Itme,
I entered 2 lots with your trading signal and i got 80 pips . Thanks for your help.
By the way , are you the same trader in forex factory ? Why do you quited forex factory ?
Do you mind to give some explanation. .
Thanks.
Suzane

[Itme]

Originally Posted by suzane

Hi Itme,
I entered 2 lots with your trading signal and i got 80 pips . Thanks for your help.
By the way , are you the same trader in forex factory ? Why do you quitted forex factory ?
Do you mind to give some explanation. .
Thanks.
Suzane

Hi Suzane, yes, I maintained a long thread on the Trading Journal section of Forex Factory with over 3,200 posts and 305,000 viewers, but I was recently suspended for two weeks for basically no reason. The "owner" of the forum, who calls himself Merlin, said that he took a disliking of me from my very first post because I expressed the opinion that it might be possible to make comparatively high returns in the Forex Market using some new methods, and I also referred to the idea of a signal service. It turns out that Merlin thinks all signal services are scams. There is also a general concensus among the Forex Factory regulars that one cannot make high returns in the Forex market, and that anyone making claims that they have done so (or knows anyone who has done so) must therefore be a liar and scammer.

Later on, Merlin developed the notion that I hate Americans because I posted some articles about the dangers of US foreign adventures involving illegal invasions, illegal occupations, mass murder, mass torture, targeting civilians and civilian infrastructure, failing to maintain security after decapitating the governments of foreign countries, and other flagrant violations of the UN Charter, Geneva Conventions, Universal Declaration of Human Rights and International Criminal Court statutes, that also risk undermining the security of Americans and hurting the value of the USD. I know that these views are shared with over 50% of the US populace, and over 90% of the world's populace, and represent nothing less than a conviction that international law (and the rule of law in general) are worthy of respect, and are superior to anarchy and state terrorism.

A couple of days ago I posted an article in one of the discussion forums called "Why You Need to Understand Forex". It is an excellent article, and stimulated some discussion about potential fluctuations in the relative value of the USD. After about 50 comments I made the following comment, which Merlin used as an excuse to freeze all my privileges on Forex Factory for two weeks. He also placed the slanderous statement " Spreading USA hate whenever I can!" under my name (where normally individuals place some personal descriptor) in order to defame my character.

This is the comment that got me banned:
Quote:

A few CHF could make one sleep better at night

Perhaps a few contracts short USD/CHF could provide insurance against a sudden drop in the value of real estate and stocks in the USA. If the large military / industrial consortium decides to liquidate some of their overstocked cruise missile inventory, and test their latest model of nuclear bunker busters, and they choose the wrong target, then there could be some significant geopolitical and economic repercussions in the context of China holding hundreds of billions of dollars in US currency and assets, the heavy reliance of the USA on imported oil, and a somewhat fragile real estate market, a possibly overpriced stock market, many people heavily indebted to mortgages and credit cards, and a government that has lost the confidence of the majority of the citizens.

Actually, right now might be a good time to buy. The price is 1.2170. A major financial crisis will probably move USD/CHF down to about 1.1000, which is an about 10% rise in the value of CHF vs USD. Ten regular contracts would earn about $11,700 less interest. This would be at least a consolation in the case of substantial losses elsewhere. Buying gold or silver would probably be an even better hedge." Unquote.

_______________________________

Forex Factory has some very strange rules that make it impossible to speak freely about various trading systems and services, or even to mention any person, site, book, or service that isn't a partner of Forex Factory, or to state any opinions about the impact of various world situations on the US dollar that don't agree with the Bush administration position. I even pointed out on the above mentioned thread that US Vice President Dick Cheney has hedged his personal investment portfolio by investing strongly in the EURO. However, the article I posted that analyzed Cheney's personal investments was totally ignored.

When I first visited Forex Factory about 10 months ago there was no reference to Elliott Wave theory. So I started a thread in the Educational Section to cover this topic, which has become one of the favorite threads in that section, with over 100 posts and 7400 visitors. I think this is another reason why the Forex Factory "Taleban" don't like me. They tend to disapprove of what they don't understand, and prefer to attack things that are unfamiliar to them, rather than welcome and explore them. However, since I never broke any of the rules on Forex Factory I was tolerated by Merlin and his moderators without any difficulty, until I suggested that the "Classified Section" be re-instituted after it disappeared during a site renovation. I also suggested that the site regulars try to be more considerate of people posting comments about banned subjects, thereby inadvertedly violating the "Rules" that are obscurely hidden in the "faq" section only on the main page of the forum. After this discussion Merlin accused me of breaking a forum rule, although I didn't, and put a vague gag order on me. Now he's accused me of violating this special gag order he imposed only on me, accusing me of allegedly indulging in excessive "anti-American" politicizing, for making the above quoted comment, which only states accepted and pertinent facts, and has nothing to do with hating anyone, least of all Americans.

The Forex Factory administration simply silenced me, and placed a misleading label under my name, making it appear like I put it there, and provided no explanation to the site members and visitors why I suddenly disappeared, and why my descriptor had suddenly morphed to this puerile comment. All my posting privileges were revoked, so I had no way to express myself or state my side of the story.

[FRiverola]

Hi itme

Would you mind to post your article "Why You Need to Understand Forex" here as well?

I would love to read it

Francesc

[FXDementor]

Sorry to hear your story, ltme. Anyway you're welcome to FXstreet.com Forums, feel like home. But remember that you have to respect our Forum Rules, that can be found at http://www.fxstreet.com/forum/faq.php?faq=modpolicy. Essentially, while you don't post spam or sell any services, you won't have any problem. Hope you enjoy the experience at FXstreet.com Forums, an open trading community .

Regards,
FXD

[Itme]

Originally Posted by FXDementor

Sorry to hear your story, ltme. Anyway you're welcome to FXstreet.com Forums, feel like home. But remember that you have to respect our Forum Rules, that can be found at http://www.fxstreet.com/forum/faq.php?faq=modpolicy. Essentially, while you don't post spam or sell any services, you won't have any problem. Hope you enjoy the experience at FXstreet.com Forums, an open trading community .

Regards,
FXD

Thanks, FXDementor, for your sympathy and invitation, and for directing me to the forum rules. I have nothing to sell, but at the same time I feel that useful ideas, information, methods or tools coming from people that expect to make some money from their efforts are potentially valuable for fully capitalising on all the available avenues of assessing this complex market. A forum that can allow people to discuss and evaluate various approaches to trading is what people really need, otherwise the trading community is isolated into individuals, and there is no way people can benefit from the research, opinions, experiences and insights of others, which are often dearly won.

[Itme]

Originally Posted by FRiverola

Hi itme

Would you mind to post your article "Why You Need to Understand Forex" here as well?

I would love to read it

Francesc

Here is a link to the article "Why You Need to Understand Forex". (Note that I didn't write it.)

http://www.fxstreet.com/fundamental/...007-04-05.html

[FRiverola]

Originally Posted by Itme

Here is a link to the article "Why You Need to Understand Forex". (Note that I didn't write it.)

http://www.fxstreet.com/fundamental/...007-04-05.html

THANKS!

Francesc