Avoiding Stressful Forex Designing
Envisage that you have decided to create a quite complex trading strategy which involved continuously capturing 5 pip profits as shown in the next chart. However, a price retraction can always occur at some time which can severely impact the results because of the strategy’s poor risk-to-reward ratio.
For example, the above chart illustrated the ideal conditions for this design to work since it displays nine straight wins in a row. However, such a sequence does not happen often and when it does it can easily be negated by losses. In this case, the above results were subsequently followed by a sequence of three losses and two wins.
As such, 11 wins were registered recording about $500 profit each while 3 losses were produced of about $2,000 each. So, an overall loss of $500 was recorded despite achieving 11 wins after a lot of hard work. This why you should avoid complex designing and keep to the simple basics. Otherwise you could only waste your time and subject yourself to undesirable levels of stress.
The following table displays sample results that were recorded using a strategy based on the one just defined and clearly shows the impacts of the problem outlined above.
Ticket Open Time Type Size Item Price Profit
43895671 2011.03.01 buy 12.00 EURUSD 1.38254 312.00
43896978 2011.03.01 sell 12.00 EURUSD 1.38194 564.00
43917812 2011.03.01 buy 12.00 EURUSD 1.38254 372.00
43919425 2011.03.01 sell 12.00 EURUSD 1.38253 432.00
43921456 2011.03.01 buy 12.00 EURUSD 1.38371 468.00
43923984 2011.03.01 sell 12.00 EURUSD 1.38375 420.00
43929151 2011.03.01 buy 12.00 EURUSD 1.38311 -1 956.00
43929811 2011.03.01 sell 12.00 EURUSD 1.38171 504.00
43931890 2011.03.01 buy 12.00 EURUSD 1.38180 396.00
43942436 2011.03.01 sell 12.00 EURUSD 1.38045 -1 596.00
43945089 2011.03.01 buy 12.00 EURUSD 1.38208 444.00
43949024 2011.03.01 sell 12.00 EURUSD 1.38271 396.00
43952058 2011.03.01 buy 12.00 EURUSD 1.38186 -2 220.00
43953780 2011.03.01 sell 12.00 EURUSD 1.38010 408.00
43959386 2011.03.01 buy 12.00 EURUSD 1.37794 336.00
43963750 2011.03.01 sell 12.00 EURUSD 1.37761 444.00
43964502 2011.03.01 buy 12.00 EURUSD 1.37731 408.00
43965680 2011.03.02 sell 12.00 EURUSD 1.37679 312.00
43987045 2011.03.02 sell 12.00 EURUSD 1.37776 -2 208.00
43987913 2011.03.02 buy 12.00 EURUSD 1.37968 420.00
43997845 2011.03.02 sell 12.00 EURUSD 1.38240 -2 136.00
43998629 2011.03.02 buy 12.00 EURUSD 1.38412 -2 076.00
44000426 2011.03.02 sell 12.00 EURUSD 1.38237 444.00
44003572 2011.03.02 buy 12.00 EURUSD 1.38253 -1 224.00
44004752 2011.03.02 sell 12.00 EURUSD 1.38150 48.00
44006926 2011.03.02 buy 12.00 EURUSD 1.38206 384.00
44012660 2011.03.02 sell 12.00 EURUSD 1.38425 -1 632.00
44013323 2011.03.02 buy 11.00 EURUSD 1.38568 396.00
44020970 2011.03.02 sell 11.00 EURUSD 1.38758 440.00
After analyzing the above results, you can confirm that the strategy registered an overall loss of over $6,500.00 despite achieving a win-to-loss ratio of about 3:1. Such a performance leads to intense frustration and stress.
The above chart shows another undesirable feature of such a design. In order to combat the problem described, a number of different delays and other software techniques were used to ensure that positions were open only after the new entry criteria was satisfied. However, as the above chart shows the main problem that then arose was that only a 5 pip profit was claimed leaving a large number going to waste.
This feature of the design again had a very depressing influence on trading results. Basically, whereas the general advice is to ‘let your profits run and cut your losses’ the current design did the exact opposite by ‘letting its stops run and cutting its profits’. This is not a situation that can be permitted to happen because you cannot afford many losses to occur because of the poor risk-to-reward ratio of the current design.
On the chart below, you will first notice that a bullish crossover occurs towards the left of the chart. Essentially, the optimum opportunity for acquiring a profit would be if we could enter a long trade just following the crossover. The problem is that by the time the current design complies with its entry criteria, price has already progressed substantially into its new oscillation. You can detect this feature by noting the long trade activation point near the ‘Very Late Entry’ caption.
Such developments often create issues because the new trade is then very susceptible to a major reversal, which did happen as shown in the above chart. In fact, as you can also confirm the position was eventually stopped out at a loss.
The above examples are intended to demonstrate the frustrations that can be generated by over-embellishing the design of strategies. Essentially, solutions just lead to more problems generating high levels of stress. Keep your trading simple!
