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Published On: Mon, Dec 10th, 2012

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!

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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