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I thought about this system several months ago. I wasn't able to find a suitable implementation, because I tweaked it to the point I completely screw it up, so I'll put it the way I initially thought it. Trader's Fallacy: Hey, I can follow that trend and make cash like a pro! Traders love charts. Perhaps our reason for entering stock , forex or other markets was watching trending markets and simple indicators. The simplest indicator that someone gets in touch with when entering forex or stocks is the Moving Average (MA). Look how beautiful it is: http://img259.imageshack.us/img259/4120/beautifulmatk0.jpg You always used the MA as an indicator and always it tricked you! Damn whipsaws! But the MA is pretty neat. Whatever happens and wherever far the market will go, eventually it will slow down and be catch up by the MA. Haven't you ever dreamed that the MA to be an asset to hedge against the market itself ? Say go short the market, long the MA, and get profit on cometogether? Look at the highest peek, it's so far from that 200 values MA at about 183 pips! But how in the world could we trade that way...?! The value of a MA is roughly the arithmetic average of the last N values (We consider Simple Moving Average). So if we have N trades, done at these prices, this composite asset will have been traded at about the MA value! Well, you may say...how we do that? How do we know if we buy the MA and sell the market or we do the reverse ? I have an answer...Good news and bad news. Starting with the bad news: it's gonna cost. Not a killer cost, but it will be. And the good news: you will be able to trade both ways, without needing to know what will happen and without being whipsawed! Not knowing what will happen It's gonna be either BUY or SELL. But until then, it's gonna be both: You construct the moving average, every bar, until it's ready: on every bar, buy and sell the Nth part of the position you take. Once the moving averages, completely hedged of course, will be ready, on every bar you will close the oldest pair buy/sell and place a new pair of buy/sell, keeping the moving average "assets" in line with the moving average itself. How much it will cost ? Well, you get slipped on both placing and closing trades, and you will pay the spread on both buys and sells. That means that after the first N bars you will have a spread cost of about 2 x spread (for buys and sells) Any other series of N bars came in will produce this cost, plus the slippage costs: ((2 x average slippage) for opens and closes ) x 2 for buys and closes) Now once the basis (market minus moving average) jumps over a fixed , predefined value (say 50 pips), we will trigger the "trade": say the market trades at 1.4503 and the moving average is at 1.4320 . That means, sell the market, buy the moving average. We keep the series of BUYS, since its ready, and close the sells. Nothing happens, we were hedged. We place another sell at about 1.4503 , a huge trade, by the volume equal to the series of closed sells. We continue to "refresh" the moving average, replacing the oldest buy with a new entry on every bar. When the market will join the MA, we will have a fixed profit on the SELL side, some profits made by current BUYS and closed profits of the older BUYS. Of course, the extra spread and slippage costs for maintaing buys will be added. We close all trades and start rebuilding the moving average. Until the moving average is finished, no "trading" will be allowed ; at the moment when this is ready, we barely start up waiting for a new "trade". Problems to think about 1. Enlarged spread Once you take a "trade" you will be exposed to the basis going higher thus generating virtual losses. Take care not touch the margin call! 2. Broker limits You need a broker that allows microlots and an outrageous number of trades. More trades possible, the bigger moving averages used, the higher number of pips caught! 3. Market delay If the market will come together with the MA too late, hedge maintaing costs may be significant! I'm awaiting comments!
Have you ever considered that a large amount of brokers work as online casinos trading against their clients and getting not only the spreads, but also their money? What makes them "play the house" in this game? Newbie traders greed and confidence? They know that the traders that make money are only the 10%, why not taking the money of the rest... Let's think for a moment: what kind of money management do you need to have in order to see the broker as a player, while you have the house? How to make the a large number of losses not affect you and boost up equity during small gain series? Let's consider the market as a binary stream of situations that are equal (as a huge stream of 0 and 1 digits). Let the 0's be the loss situations and 1's the win situations. How not to lose to much cash? Don't play too much on each situation. Suppose you divide your capital in 256 parts, and play each part to be won or lost. That means that after a huge number of say 20 consecutive losses, you lost 20 units from 256. The broker, on the other side, what did it win? Small gains "pip wise". Now pretty many times the randomness of market will put you in win situations. A played unit that is won remains and generates a unit of profit. So now on the next trade you have available 2 units from the previous trade + 1 unit (the one allocated for the trade). If the next trade is won, it will double the played units, which will be 6. You already have 6 units and play for the next one. That means 7 units available. You win this one, thus making 14 units. If you win the next one, it will be (14+1)*2 = 30 units. After a series of 4 wins you already recovered the 20 units and made 10 as profit. Did the broker lost 30 units in just 4 trades ? Yes. Did it play stupidly trading against you ? Yes. Was it "pound foolish" ? Yes again. Of course if you lose the last trade, you lose 4 units of the original 256 making the equity. Another version of this would be not adding an unit every won trade. Once the first wins another unit, play these 2 units and so on. On the loss moment, only the original unit is lost from equity. It is up to you to decide how many consecutive wons will be doubled. After N predefined wons, you may consider breaking up the series and redefining the unit size, then start from the beginning. However, wons will be from a lot smaller to slightly smaller that losses. Because of the spread. From 10 pips, 3 pips spread is 30%, but from 50 pips, 3 pips spread is just 6%, so you could consider a binary "fair" distribution of 53% losses to 47% wins, more similar to roulette distribution (remember they have the 0 and 00 numbers that reduce the win ratio). Isn't this a form of statistically arbitraging the win chances by taking advantage in small series of wins and losing a little during larger series of consecutive losses?