Automatic Loss Recovery System (ALR) - read this first

[Dewey McG]

Can you share this formulated spreadsheet, as well as ALR version.( I am not good with spreadsheet calculations)

I really need to head to bed, so I will clean up the spreadsheet I am using and then post it tomorrow

[garyfritz]

Hm. You know, there might actually be something here.

I knocked out a little spreadsheet to test this. Using the EURUSD example posted earlier, it doesn't work:

ALR.gif

The "Size" column shows the size that you buy or sell.
"Net Pos" shows the net long/short position, so e.g. when you buy 0.10 and sell 0.13 you are net short 0.03.
"SL Loss" shows the loss for that position size; in this example we have a 50 pip SL and the first trade (turn 1) has a 0.10 size so you'd lose 5.0 if you hit the SL and reversed.
"Total Loss" shows the total losses from hitting a bunch of SLs in a row, so if you hit the SL twice you'd lose -5 and -1.5 for a total loss of -6.5.
"PT win" shows the win when you finally hit the PT, so after Turn 2 you are net short 0.03, times 150 pips = 4.5 won.
"Total Trade P/L" takes the "Total Loss" from the *previous* line and adds the PT win from the *current* line.

So for example if you hit the SL and reverse 3 times, then hit the PT, you would be short 0.05 on Turn 4. You would have lost -8.5 on the three SLs, then you win 7.50 on the PT. Net is a loss of -1.00.

That was what I expected to see.

But then I realized, with a 3:1 PT:SL ratio and no fancy ALR stuff, you only need 25% wins to break even. But if I get 25% wins with this ALR setup, I'd win 15.00 one time and lose about 1.00 3 times -- and I'm way ahead of the non-ALR case. Hmmm.

I started playing with numbers, and -- if I haven't fooled myself somewhere here -- it **IS** possible to set it up so you DON'T lose, and the sizes don't get too excessive. Here's an example taking it out to 15 turns:

ALR2.gif

So if you have a 25% winning trade signal, 25% of the time you win 15.00. The other 75% of the time you will bounce back and forth, hitting SLs and reversing, until you finally break out and hit the PT. With the sizes I chose here, when you finally hit the PT you will make a small profit overall, not counting costs. So 1/4 of the time you make 15.00, 3/4 of the time you break even. And you can reverse 6 times before your net position even exceeds your original 0.10 trade size!

The size DOES keep increasing, so it IS basically a Martingale. If the market reverses enough times -- which it can and eventually WILL -- it'll blow up on you. But at least it grows slower than most M's. If you have a 50% winning signal, the chance of hitting 15 losses in a row is 1 in 2^15 or 1 in 32767, and in the meantime you never lose. That's better than most Martingales.

This is almost a perpetual motion machine! And I don't believe in those. I MUST have a mistake here somewhere but I'm not seeing it. I've attached the spreadsheet. Play with the SL/PT and the Size values. See if you can figure out where I went wrong.

[Dewey McG]

The more I play with this the better I like it. I am posting a spreadsheet so people can play with things like win rate, loss rate and see at what turn they would stop adding positions. Use the SL number next to the number of turns to play with.

Now imagine using this with a system on the H4 or D1 charts like Nanningbob's where your tp would logically be at least 150 pips on pairs with higher volatility. You can check that here:

http://www.myfxbook.com/forex-market/volatility

I would even consider adding a filter where volume was above average.

Unlike a martingale, the maximum risk is not that bad. Use a max number of turns of 10 and it's almost 1:1, yet your chances of taking a loss are very, very remote. Unlike a martingale, it won't kill you when it does eventually take one.

Someone please check my math before we look at coding this, but I am thinking we are on to something that could be very big.

[SpiderX]

Thinking out loud:

1. Can recovery zone size be a function of the volatility ?
2. Must the tp be so huge ? What is preventing us from setting a smaller tp like 50 or 80 pips ? (Guess this somewhat ties in with Question 1).
If the tp is huge, then the risk of stop out is bigger when there is no life in the market.

Cheers

[wealthmaster]

How did you come up with lots like 0.12 ,0.21, 0.38? I can not see any calculation for this in relation to 50 pips zone and 150 tp.

The more I play with this the better I like it. I am posting a spreadsheet so people can play with things like win rate, loss rate and see at what turn they would stop adding positions. Use the SL number next to the number of turns to play with.

Now imagine using this with a system on the H4 or D1 charts like Nanningbob's where your tp would logically be at least 150 pips on pairs with higher volatility. You can check that here:

http://www.myfxbook.com/forex-market/volatility

I would even consider adding a filter where volume was above average.

Unlike a martingale, the maximum risk is not that bad. Use a max number of turns of 10 and it's almost 1:1, yet your chances of taking a loss are very, very remote. Unlike a martingale, it won't kill you when it does eventually take one.

Someone please check my math before we look at coding this, but I am thinking we are on to something that could be very big.

[Dewey McG]

Thinking out loud:

1. Can recovery zone size be a function of the volatility ?
2. Must the tp be so huge ? What is preventing us from setting a smaller tp like 50 or 80 pips ? (Guess this somewhat ties in with Question 1).
If the tp is huge, then the risk of stop out is bigger when there is no life in the market.

Cheers

1. Can you explain what you mean?

2. I don't see why not, but if you reduce the tp then you must either reduce the lot size of your trades or increase your risk. If you sue a tp of 50, then multiply all the lot sizes by 1/3. If you use a tp of 90, then multiply by .6 etc

[SpiderX]

1. Can you explain what you mean?

2. I don't see why not, but if you reduce the tp then you must either reduce the lot size of your trades or increase your risk. If you sue a tp of 50, then multiply all the lot sizes by 1/3. If you use a tp of 90, then multiply by .6 etc

Hi

Assuming that volatility of a pair is 50 pips, we set the recovery zone to 50 pips.
But if volatility reduces to maybe 30 pips, we could reduce it correspondingly.

Cheers

[Dewey McG]

How did you come up with lots like 0.12 ,0.21, 0.38? I can not see any calculation for this in relation to 50 pips zone and 150 tp.

I estimated the value then adjusted up or down to get just above break even.

You can play around a little and adjust the numbers to tweak it a little.

Someone smarter than me might actually figure out a formula to take the spread and automatically calculate each number so it is covered but I wanted to keep it simple for now.

Ok, so who is brave enough to ask Steve to add this to MPTM?

[Dewey McG]

Hi

Assuming that volatility of a pair is 50 pips, we set the recovery zone to 50 pips.
But if volatility reduces to maybe 30 pips, we could reduce it correspondingly.

Cheers

Or only trade pairs with volatility greater than a certain number.

[SpiderX]

Ok, so who is brave enough to ask Steve to add this to MPTM?

I could code a play EA to make sure the rules really work.
But the rules/logic/ calculations need to be clear first.
Maybe we could do a simple EA: Price above previous weekly close and above previous monthly close: Buy and vice-versa on Sell.
Tp: 150 ? SL: 50 ?

Cheers