Think Like Walmart
Strategically Vary Profit Margins + Diversify the Product Line
If you feel the spread your broker is charging for low volume pairs such as CADJPY, GBPCHF, or USDMXN is too great, you may want to do calculations using Realized Volatility OR switch Brokers OR increase your Take Profit amounts – to reduce that perceived or unperceived increase in overhead. Keeping track of actual volatility as a means to evaluate Brokers’s overhead spread costs in general is useful. Keeping track of actual volatility as a means to evaluate trading any particular pair is a necessity. How can it be decided that a spread in a particular pair is too great unless we have this data?
The CME link to FX Realized Volatility data maxes out at 2011. CME began to issue a new product called ‘FX VolContracts’. The data can now be obtained through these historical charts of VolX products. Most FX Brokers also provide volatility data through their websites when logged in to your account.
While the increased spread costs associated with lower volume pairs does prove that diversification is not entirely a free lunch, why should we care if a spread is 5.3+ pips on a portion of our pairs traded? Trading from a possible selection of 30-80 pairs/products allows us to reduce overall risk and thus think like a large Bank Trader. This allows us to trade relaxed and make all decisions based on Logic+Probabilities. It allows us to capture extended gains across all products traded. Extended gains that are just not possible via leveraging up in only a few pairs because of susceptibility to anomalous price action.
So what then if the spread in GBPZAR was 7.3 pips and our net revenue was squeezed a bit in that one particular product?
Including GBPZAR in the mix, along with 50 other Exotics+CFDs, allows us to capture extended gains across the entire product line as a whole… because anomaly risk was reduced. Inclusion of GBPZAR and other exotics provides us with Diversity. Then, the act of creating entries and exits in these additional products manually – inherently provides us with Variance.
In other words, insurance is not free.
But, the protection from disaster allows us to relax and enjoy life without the constant fear of “the other shoe dropping”. The elimination of fear in our daily trading allows us to make logical decisions based solely on probability at all times.
As a company providing insurance, sure certain demographics such as 16-24 year old males may not afford the company with as much Net Margin per these insured. But their inclusion into the group… reduces overall risk for the entire group. This is why we see commercials for GEICO, StateFarm, AllState, eSurance, The General, Farmer’s, SafeAuto 3000 times per day while watching CNBC. It is a fight for quantity of insured across the widest geographic area as possible. It is a fight for as many additional insured as possible. Each additional insured reduces the risk cost of the existing insured. In turn, this then increases Net Margins ACROSS THE ENTIRE GROUP OF INSURED. Although new acquisition costs may be extremely high due to running thousands of commercials per day, this cost is minimal compared to the benefits of overall risk reduction.
So thus while adding lower volume pairs with true increased transaction costs due to higher spreads (not as the result of increased daily volatility) may appear to only simply reduce our Net Margins per, this is not the full picture. In reality, these added 3-4pip spread costs are dwarfed by the additional Net Margins gained ACROSS ALL EXISTING PAIRS TRADED/OPEN POSITIONS due to the now added ability to hold onto all other existing positions much longer + capture many more pips than without the added higher-cost pairs/symbols.
WalMart not only embraces profit margin variability, they also capitalize on it. Net Revenue as a whole is non-variable and consistently stable at fiscal end because all categories are producing profit, albeit with varying degrees of profit margin percentage.
WalMart and Amazon triumph over the local store who may only sell HDTVs because they have a greater diversification of products allowing them to reduce the risk that a certain category or product may falter momentarily in regards to abiding by the historical laws of statistics + probability within that category. Thus hurting their cash flow and ability to rapidly expand because of the additional risk.
Current, ongoing HDTV and other electronics price wars exemplify this. WalMart and Amazon can easily sell HDTVs at reduced 0.5% margin for extended periods while still surviving through higher margin of their 100,000 other products. Maintaining volume in this category through accepting these lower 0.5% margins also adds to the margins of all other products in all other categories because of per unit fixed overhead reduction. While at the same time, this same price war is destroying what non-diversified HDTV competitors are left. BestBuy falls into this non-diversified category.
Another added benefit of maintaining rolling open positions from a wide variety of Risk On / Risk Off products? Minimizing ongoing Flash Crash fears.
Exploit No Commission Per Trade Cost Structure
Unless physical time to complete the trade operation is constrained or other unique circumstances that may expressly demand it – why would we only buy an ultimate total of 2 standard lots, as an example, with only 2 take profit levels when we can buy 20 MINI lots with 20 variable entry levels and 20 variable take profit levels for the exact same cost?
Position Trading GBPJPY H4 or D1 Example
Unless we are fortune tellers and can predict how long the current favorable trend will last, an argument could be made after applying statistics and probability analysis to build a Wall of Take Profit Levels exponentially increasing ranging from 2 pips to 400 pips – instead of just a few TPs maybe at 40 pips and then 120 pips.
These TP placements are shown directly below in the ‘Money Lots’ illustration and in many of the Sept 23, 2011 outstanding positions screen shots farther below with the dashed blue lines representing entry levels and the dashed green lines< representing take profit levels.
Of course this then means it would require utilizing many smaller units as opposed to the more popular method of only a few, large units. The latter is by far the more popular and chosen method by new FX Traders.
As illustrated in those screen shots below, while overall TPs are strategically placed at exponentially-increasing levels, the ‘exponential’ part often will not begin until after the first major support or resistance level.
Within this area, from after the last entry unit until the first major support or resistance level, these TPs are mostly equidistant from each other. This of course is mainly because the bulk of TPs are usually placed in this area. On average probably around 55% to 85% of TPs are placed here. Having to set equidistant is mostly a physical space restraint and inability to maneuver and arrange multiple TPs in an exponential grid without having to switch periodicities or zoom the chart. I do not necessarily feel there is a substantial statistical advantage lost by not placing this subset of TPs in an exponential manner. Again, the certain situations that are not allowing exponential placement are in fact providing ‘Exit Variance’ as an unrealized benefit.
Why Are 55% to 85% of Take Profits Placed in this Area?
It is perceived there is about a 55% to 85% chance of that first major support or resistance level being tested. Obviously much depends on each individual situation including:
Some may choose instead to use Trailing Stops. Some may choose to use a hybrid of both at the same time. A ‘Wall of Trailing Stops’, or rather creating multiple distances of Trailing Stops is also possible and advised to help diversify the exit.
We want to put the odds that our take profits will be cleared before our stop losses in our favor. All the while still allowing ourselves huge upside potential for our 5%-15% Money Lots to run if we just so happen to be in a Parabolic move that we are yet to be aware of or realize.
There is no worse scenario than having all your Take Profits cleared out too early … only to re-enter again at these same levels because the retracement never came. The retracement usually now comes after you finally decided to re-enter. But now your former good average entry level is gone. You therefore no longer have the same loss threshold as before. You are now forced to cut your losses when the formerly anticipated within reason retracement now goes against you and you are out-of-the-money.
Money Lots Help Prevent Chasin’ Pips
To prevent this nightmare situation described immediately above that can cost an account balance greatly if done frequently, it helps to have extra Money Lot Take Profit Levels that may never get taken out unless you finally decide the trend has switched and you close out manually. These lots are a 5%-15% portion of your Take Profits that are set far away and do not usually get hit often.
These Money Lot TPs should coincide with your BEST entry level lots. I never worry too much about where the majority of my TPs that are associated with various entry levels are accordingly placed. However I do worry about the Money Lots, and make sure my best 5% to 15% entry levels coincide in order with my furthest away TPs. Yes, this can be an issue for US Traders using ‘First In, First Out’ Brokers. (move your trading account offshore now)
These Money Lots allow you to at least feel that you are participating in a Parabolic move even if those remaining lots are only 5% of what your total position once was. It is amazing what positive side effects this then can have on overall trading, and an overall mind-set.
These extra lots can also act as Defenders of your hugely in-the-money Average Position and a Mental Defender of the overall trend that you decided to be in in the first place. Having these assets will allow you more confidence and the patience to wait for that inevitable hard retracement to now re-enter and add-to that existing in-the-money position.
Diversity + Variance
Succeeding with 5NITRO+ is not about exactness or perfection. Succeeding in trading these markets is not about exactness or perfection. The byproduct of un-exactness is variance. We need controlled variance in every trade operation we perform, to be able to survive and succeed … Long Term.
Just like Long Term evolution and survival of all living things on planet Earth.
In fact, it is a lesson straight from Mother Nature’s Handbook. As billions of years worth of evolution in this Galaxy has shown, Mutations that ultimately help create variance are also an integral part of long term survival and adaptation. Sometimes, it is the mistakes we make while manually trading that will end up providing positive results. Imperfection can sometimes help to reduce negative impact from unexpected price action anomalies.
Diversified Entry + Exit Examples
These examples were created in 2011 of the original NITRO+. 5NITRO+ examples will be created when I find time. However, it does not necessarily matter which meter version is on the chart. What does matter are the entry + take profit levels in relation to support and resistance and the total quantity of each.
- - - -Blue Dashed Lines- - - - Indicate Entry Levels.
- - - -Green Dashed Lines- - - - Indicate Take Profit Levels.
There is no indication for Take Profits that have been already cleared. Large area of space between Entry Levels and Take Profit Levels generally indicates a large chunk of TPs were already hit and cleared… such as shown in the first screen shot of EURHUF.
The objective here is to provide an example of where I personally look to place take profits in relation to major and minor support and resistance levels. Also, in relation to major consolidation and anchor regions. These screenshots are also showing the 200SMMA / 500EMA where I personally look to begin thinking about establishing positions. This 200SMMA / 500EMA also then turns around and acts as my general stop loss and occasional stop and reverse.
We are often asked some form of “Should I set my TPs at 10 pips or 20 pips or 30 pips?”
This question throws me for a loop. I am unsure why nearby support and resistance levels would not always dictate exiting levels including stop losses. So, I have provided these screenshots as a way to answer that common question. Is this the correct method for everyone? I do not know. Maybe for some traders the correct method is the illogical and inexplicably-popular way of just setting each and every trade’s take profit to 20 pips – regardless of where support or resistance levels are.
VIDEOS – 14 Hours of Live Trading and 71 Completed Trades
More Examples of Multiple Take Profit Levels and Their Varied Placement
*NITRO+ and 5NITRO+ are not Forex Robots. They are not like FAP Turbo in any way. They are not EAs. NITRO+ is a Manual Trading Indicator Tool. The trades in the video are being entered manually and are being exited through Take Profit (TP) levels that were entered at the time of entry. The blue Take Profit lines/levels are actively managed directly on the chart with our own iDrag. iDrag is not included with your download. Large arrows on the chart clarifying the direction of the trend and when a market buy order is completed are for illustrative purposes only.
What Happened Next to GBPUSD After the Video Ended?
GBPUSD 30M resumed its climb upward by a large margin.
Trends strong enough to breach 90% will often eventually continue in that same direction even more. This statistic holds true by a greater margin as the time frame increases.
The price level that triggered the NITRO+ 50% Alert, turned around and acted as support along with the 200SMMA.
The Take Profits of 2 pips through 67 pips that were hit and cleared in the video, shown in the picture above as -_-red dashes_– along with the additional exits from trades placed after the video was produced, in hindsight appear to have been prematurely closed.