Automatic Loss Recovery System (ALR) - read this first

[garyfritz]

I really like this idea but think it needs a little tweaking. I still think your first set of numbers would work very well, but this idea could prove to a home run.

You're missing my point. I believe, given the results I'm seeing here, this is by definition a zero-profit idea, before you include costs. Tweaking it will change the details but not the end result. If you include the losses that you're going to have, even with the occasional blowup settings, I don't think this can be a profitable strategy. Whether you trade it on its own, or only add it on after a losing trade, over the long run it just loses you the costs.

I would love to be proven wrong, but this fits with the image I've always had of martingale style approaches. They don't create profit -- they just delay losses. Everything looks great while you delay those losses, but eventually those losses come back to get you.

[madpipa]

If you include the losses that you're going to have, even with the occasional blowup settings, I don't think this can be a profitable strategy. Whether you trade it on its own, or only add it on after a losing trade, over the long run it just loses you the costs.

Well said Gary. That was the point I was making to make a few posts back. If we need as many as 30+ legs to get back to zero profit it is going to need a very large account size. Or, alternatively, a smaller account is going to blow-up fairly easily.

[wealthmaster]

If you include the losses that you're going to have, even with the occasional blowup settings, I don't think this can be a profitable strategy. Whether you trade it on its own, or only add it on after a losing trade, over the long run it just loses you the costs.

Well said Gary. That was the point I was making to make a few posts back. If we need as many as 30+ legs to get back to zero profit it is going to need a very large account size. Or, alternatively, a smaller account is going to blow-up fairly easily.

Who need 30+ leg??

The idea here use reasonable ALR zone and it will rarely go to 5-6th leg.. And cap it to 10th max and at 10th take a loss rather than blow up the whole account.

[Dewey McG]

Who need 30+ leg??

The idea here use reasonable ALR zone and it will rarely go to 5-6th leg.. And cap it to 10th max and at 10th take a loss rather than blow up the whole account.

Exactly. We can use this to control the overall risk which the user can determine ahead of time, the total number of turns, while reducing the chances of ever hitting a stop loss to a negligible amount.

[garyfritz]

Dewey, I admit I haven't worked through all the stuff you've posted. Can you point me to a particular example that you think contains the risk & losses? I'll look at it and see if it changes my view. But I don't see how a fixed mindless sequence of trades can produce a profit, or even break even by the time you count the costs. I think this is just a variant of Martingale logic, that pushes the losses off into the future. It looks good as long as you keep sweeping the losses under the rug. But if you keep trading, those losses will come back to eat your profits and you'll end up (at best) breaking even.

[Dewey McG]

Dewey, I admit I haven't worked through all the stuff you've posted. Can you point me to a particular example that you think contains the risk & losses? I'll look at it and see if it changes my view. But I don't see how a fixed mindless sequence of trades can produce a profit, or even break even by the time you count the costs. I think this is just a variant of Martingale logic, that pushes the losses off into the future. It looks good as long as you keep sweeping the losses under the rug. But if you keep trading, those losses will come back to eat your profits and you'll end up (at best) breaking even.

Ok—I will try to walk you through this using your original numbers at low risk:

For this example I will use a 20,000 account set to 3% risk and maximum 10 turns. This means the most we can lose if we hit a full stop loss is 20,000 times 3% = $600. We will use a TP of 60 pips which is probably more realistic given the volatility we are seeing right now. We start using ALR when price moves 20 pips against us.

For the initial trade, let’s say we hit our TP of 60 pips 60% of the time. You can play with this number but given my own trading I think this is realistic and probably on the low side. However, when we go into ALR mode we are now saying price didn’t go the way we expected and now we don’t know which way it will go. Since it has to go 60 pips now to make TP and only 20 pips to open another ALR trade, we will say there is a 75% chance it will open another ALR trade.

We are not opening any more ALR trades after 10 trades. This means the chances of it hitting a full SL are .4 (the odds we miss on the initial trade) * .75^9 (75% to the power of 9). This equals 3.0034% (we’ll say 3% to make the numbers simple)

This means over 1000 trades we would hit a full stop loss 30 times.

Our profits for the winning trades would be .11 (the initial lot size at 3%) times 60 pips = $66.67 per trade.
Our losses for the losing trades would be $600. You might be thinking yikes! That’s roughly 10:1 risk to reward against us, but that is the wrong way of looking at it. We only hit SL 3% of the time and hit a profit 60% of the time. What about the other trades? That is what ALR is for. They all show a small profit. I won’t even factor that in for now because we also need to allow for costs, so they should be about a wash.

So what do we have after 1000 trades?
Gross Profit = 66.67 times 600 = $40,000
Gross Loss = 600 times 30 = -18,000

Net Profit = $22,000

The profit factor would be 2.22

Now let’s use some common sense and look how the markets work to make the odds even better. Pick a volatile pair by checking here: http://www.myfxbook.com/forex-market/volatility. You can sort pairs by time frame and how volatile they are. After a while you will know which pairs are always among the leaders. Stick with pairs that are consistently above 60 on the daily. Now how likely is it they will go 10 turns without going at least 60 pips either way (or really 60 one way or 80 the other). I use Volume Spread Analysis as part of my trading. Let’s add a filter making volume be above average as part of your entry criteria so the chances of it staying volatile when you open a trade increase.

I hope this helps. Feel free to check my numbers but unless I made an error in the math I think this is looking pretty good.

[kotsh]

Who need 30+ leg??

The idea here use reasonable ALR zone and it will rarely go to 5-6th leg.. And cap it to 10th max and at 10th take a loss rather than blow up the whole account.

Exactly. We can use this to control the overall risk which the user can determine ahead of time, the total number of turns, while reducing the chances of ever hitting a stop loss to a negligible amount.

Also if we set the TP of the ALR trades at logical Support And resistance levels that are within the daily ranges, I don't expect more than 2-3 turns MAX.


For example if you are trading a breakout an a significant S/R level which turned into a pin-bar (fake out), the pinbar momentum is likely to pull the price to the nearest S/R level, which is the TP of the hedge trade.

On the other hand if you are trying to catch a reversal which turns against you as a breakout, the breakout will also likely take the price to the nearest S/R level.

[wealthmaster]

Dewey, I admit I haven't worked through all the stuff you've posted. Can you point me to a particular example that you think contains the risk & losses? I'll look at it and see if it changes my view. But I don't see how a fixed mindless sequence of trades can produce a profit, or even break even by the time you count the costs. I think this is just a variant of Martingale logic, that pushes the losses off into the future. It looks good as long as you keep sweeping the losses under the rug. But if you keep trading, those losses will come back to eat your profits and you'll end up (at best) breaking even.

Ok—I will try to walk you through this using your original numbers at low risk:

For this example I will use a 20,000 account set to 3% risk and maximum 10 turns. This means the most we can lose if we hit a full stop loss is 20,000 times 3% = $600. We will use a TP of 60 pips which is probably more realistic given the volatility we are seeing right now. We start using ALR when price moves 20 pips against us.

For the initial trade, let’s say we hit our TP of 60 pips 60% of the time. You can play with this number but given my own trading I think this is realistic and probably on the low side. However, when we go into ALR mode we are now saying price didn’t go the way we expected and now we don’t know which way it will go. Since it has to go 60 pips now to make TP and only 20 pips to open another ALR trade, we will say there is a 75% chance it will open another ALR trade.

We are not opening any more ALR trades after 10 trades. This means the chances of it hitting a full SL are .4 (the odds we miss on the initial trade) * .75^9 (75% to the power of 9). This equals 3.0034% (we’ll say 3% to make the numbers simple)

This means over 1000 trades we would hit a full stop loss 30 times.

Our profits for the winning trades would be .11 (the initial lot size at 3%) times 60 pips = $66.67 per trade.
Our losses for the losing trades would be $600. You might be thinking yikes! That’s roughly 10:1 risk to reward against us, but that is the wrong way of looking at it. We only hit SL 3% of the time and hit a profit 60% of the time. What about the other trades? That is what ALR is for. They all show a small profit. I won’t even factor that in for now because we also need to allow for costs, so they should be about a wash.

So what do we have after 1000 trades?
Gross Profit = 66.67 times 600 = $40,000
Gross Loss = 600 times 30 = -18,000

Net Profit = $22,000

The profit factor would be 2.22

Now let’s use some common sense and look how the markets work to make the odds even better. Pick a volatile pair by checking here: http://www.myfxbook.com/forex-market/volatility. You can sort pairs by time frame and how volatile they are. After a while you will know which pairs are always among the leaders. Stick with pairs that are consistently above 60 on the daily. Now how likely is it they will go 10 turns without going at least 60 pips either way (or really 60 one way or 80 the other). I use Volume Spread Analysis as part of my trading. Let’s add a filter making volume be above average as part of your entry criteria so the chances of it staying volatile when you open a trade increase.

I hope this helps. Feel free to check my numbers but unless I made an error in the math I think this is looking pretty good.

3% loss is still generous .. Dustin's backtesting shows once in a year goes above 10 turns( I think he was using 50 and 150 on EURUSD. If you use your ALR zone wisely then you do not worry about 10 turns because you know market will ultimately pick a direction sometimes with-in those 10 turns. In worst case you are still protected.

And in the meantime you are banking profits on other trades. And the good thing is overall exposure is low means if your broker gives zero margin requirement on hedged positions then you can open a lot of trades on other pairs meanwhile and banking profits.

YOU JUST NEED TO PICK ALR ZONE WISELY....

[summicron]

I read this thread yesterday. Today I'm dusting off an old indicator from forexfactory - stairsteps breakout by forexhard - to find so called "consolidation zones".

[kotsh]

So is anyone interested in writing some initial version for this EA? Dewey?