This is the 4th article in the Time Based Strategy series.
Part 1 – Think Outside The Square with Time-based Trading Strategies
Part 2 – Stop Your Losses
Part 3 – The Anatomy of a Profitable Trading Strategy
NYTime – Entry and Stop for Time-Based Strategy
Mark Thomas– Trade On Track
This article follows on from past articles, describing our time-based forex trading strategy based on the NY session. From this point on, we’ll call this strategy “NYTime” for simplicity. In this article I will describe precisely how to enter the trade and where the stop loss should be placed. Please don’t try to take trades using this method yet, as the trade management, exit point and money management factors (all to be explained in future) are critical components to this overall strategy.
Firstly, with any strategy there’s always a trade-off between risk and possible returns. I’ve tailored this particular strategy so that it is reasonably conservative while still giving a decent return over time. I would also describe this strategy as “mechanical” because there is no discretion on the part of the trader required. If you follow the rules, you will have the exact entry price, the exact time to move your stop and lock in some profits, and the exact time to exit the trade. You’ll also know exactly how much to place on each trade (position size). Some readers to date have been skeptical about strategies, particularly mechanical strategies that can be profitable for an extended period of time. Skepticism is good, it keeps us on our toes and if something looks too good to be true, it usually is. So, I’ll lay it all out on the table now and you can decide whether this is fact or fiction. I have checked, double-checked and triple-checked the figures to the best of my ability, so it is as close to “fact” as I can get.
On to some results. I ended up downloading and testing an extra 12 months of data, so this strategy has now been tested on a full 25 months of historical data. With my conservative money-management regime, the system averages just over 12% return per month. Not bad for a mechanical, relatively simple, time-based strategy that takes just one trade per day on one currency pair. It makes roughly 3 times your investment each year. Start trading $10,000 and you should have around $30,000 at the end of 12 months if traded accurately, without error. (The Usual Disclaimer: Past performance does NOT guarantee future results.)
Remember though, just because the system is profitable overall, it doesn’t mean it makes money every month, there is going to be some losing months. In the 25 months I’ve tested, the best month was a return of 57%, the worst month was a loss of 15.5% which was also the maximum drawdown. In all, there were 20 winning months and 5 losing months. The maximum return in one trade was 32%, the maximum loss in one trade was 4.9%.
Lastly in our summarized results, a figure that might surprise you: there were 225 winning trades and 315 losing trades! “How can we have more losers than winners” you ask? Because we’re using great money management and the old cliche: cutting losses short and letting profits run. Basically, we’re trying to ensure that our good winning trades return MUCH more than our losing trades. Also, through money management we minimize our losses during a losing streak and maximize our profits during a winning streak.
“Expectancy” is a term often used to describe the overall profitability of a system. Expectancy is calculated as: (percentage of wins x average win size) – (percentage of losses x average loss size). A positive expectancy means the system should be profitable, a negative expectancy means the system will most likely lose money over time. In my tests, I get the following figures (based on a $1,000 balance): (41.7% x $37.49) – (58.3% x $16.65) = $5.91. So, if we’re trading a $1,000 account, we could expect to make $5.91 profit per trade. Similarly, trading a $10,000 account, we could expect to make $59.13 per trade.
So, how do we enter this trade? The quick answer is: The entry is made from 9:25am NY time onwards. Basically, you’re looking for a break of the high or low of the 9:20am candle. The initial stop is placed just below the low of the 9:20am candle if we’re going long, or just above the high of the 9:20am candle if we’re going short. How easy is that!
Ok, not so fast cowboy, the devil is in the detail, so I’ll get into the detail of the entry and stop loss now:
Use a 5 minute chart on the EUR/USD – candles or bars, it doesn’t matter.
At the close of the 9:20am candle (IE, at 9:25am), draw a horizontal line 2 pips above the high of the 9:20 candle and another horizontal line 2 pips below the low of the 9:20am candle.
Look for a break of one of these lines between 9:25am and 10:20am. You’ll usually get the break during the 9:25 or 9:30 candle, but it can be longer. If price doesn’t break by 10:20am, there’s no trade for that day.
If price first breaks the upper horizontal line, you want to go long 1 pip above that line. So, your entry price should be 3 pips above the high of the 9:20am candle. Alternately, if price first breaks the lower horizontal line, you want to enter a short trade 1 pip below that line. So, your entry price would be 3 pips below the low of the 9:20am candle. You should be able to place a pending order or two to get in automatically at these prices.
As soon as you’re in the trade, you must place the stop loss. If going long, the stop should be placed 3 pips below the low of the 9:20am candle. If going short, the stop should be placed 3 pips above the high of the 9:20am candle. So, your stop is at the same point that you WOULD have entered if price had gone the other way. This is a very logical place to put it and statistically, it works the best.
Do not deviate from these rules, not even by 1 pip.
I invite you to manually scroll back through your EUR/USD 5 minute charts and mentally go through the entry and stop rules. You don’t know where we’re exiting yet, I get to that in another article, but just imagine price riding nicely through the day in the direction of your trade. Yes, you might find you’re stopped out quite a few times, but at least we have a controlled stop point and therefore we know exactly how much we’re risking per trade.
In the video below I run through a few of the trade entry scenarios and how you can find similar strategies yourself in future.
Once again, do not start trading this strategy yet. Even after I describe the complete strategy, make sure you trade it in a demo account first until you are comfortable with it and confident it can make you money. That may mean you need to trade play money for 2, 3 or 4 months before trading it in a live account. Sounds boring I know, but don’t neglect this step, it is important. Also, if any of you are proficient at MT4 scripting, it should be possible to develop an EA for this strategy.
In the next article I’ll explain the money management rules for NYTime.
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