Think Like a Casino by Creating Larger Statistical Samples
The large quantity of lots, whether Standard or Mini or Micro, across a large quantity of instruments is what allows us as Retail Spot Traders using the current Forex Broker commission structure an advantage to compete on a daily basis. Spread-based commission is a primary reason we actually do have a chance in competing against an Infinitely Capitalized Competitor (the market as a whole)
Trading Retail Spot Forex allows us to completely eliminate any and all additional costs involved in the placement of 1000 trades in addition to the initial first trade. Other market mediums, such as Equities, charge a per trade commission in addition to the Market Maker Spread that is already built in.
Yes, the per trade commission is just rearranged and built in to our Forex spread. But, placing the amount of entries and take profits that we do flips the cost structure on its head. In addition, Market Maker Bid/Ask spreads still exist and are an additional cost with other trading mediums on top of the per trade commission. Cost comparisons are not even in the same ballpark, even with using a Deep Discount Broker such as E-Trade Pro @$6.99 per trade.
Spot Forex also does not institute minimums. Brokers like OANDA and the New FXCM MT4 allow trades as small as 0.01 Standard Lot. Even with the addition of e-minis, CME and equivalent type Futures Exchanges require large contract minimums.
We exploit these advantages offered by the current Retail Forex Commission and No-minimums [with select brokers] by diversifying extremely and thus equalizing our effective per position leverage in line with the Bank and Hedge Fund Traders.
Extreme diversification + variance across many small transactions puts historical probability and statistics in our favor.It is the same reason Casinos have table limits. Many small bets keeps the greater than 50% House Edge statistical advantage in their favor. It eliminates the risk that one player can come in with a huge bankroll and bankrupt Casino A (MGM Grand) while getting lucky during only a small sample of hands played with large bets placed for each.
Sure, that same “Lucky Player” will turn into an “Unlucky Player” the very next day at competing Casino B across the street (New York-New York) using the same high risk betting tactic.
But that does not reconcile Casino A.
Casino B is not going to help save Casino A from bankruptcy.
We Are The House
When we engage in trading with the direction of the trend like 5NITRO+ and ClearChart 2 are telling us and use many units across many pairs to do so while creating variance with our entries and exits… we are actually the Casino. The odds are in our favor over 50.01%.
Be The House, Not The Lucky Gambler
When a Trader is to rely and bet the majority of their trading capital on one pair in a small, reduced time trend event, they are gambling. This is how almost all newer Forex Traders trade. A Trader who only trades like this is highly susceptible to unforeseen news events, unexplained price action, and price action that is occurring outside of our internal perceived – normal historical volatility*.
[*see movie Margin Call]
The difference between success and failure tends to be reduced to whether or not we are able to survive these situations of price action outside of the norm that we did not foresee. We increase our chance of long term survival when we decrease the impact these outside of the norm situations have on our account health.
Likewise, a Casino imposes table limits to achieve this same long term survival by lowering the impact a few lucky (outside of the norm) players can have.
Statistics holding true increases as the sample size increases
We all know that overall, ‘The Trend is Your Friend’. This can only hold true over 50% of the time across a long period of time, or rather – across a large sample. How can we make this reliable rule hold true on such a small sample size, like when trading a 15M chart Intraday for example? We forcefully increase the sample size through diversification + variance.
Diversification + Variance through the means listed further below is the #1 way to increase sample size and put the odds in our favor that “The Trend Really is Our Friend”.
Use GEICO and Walmart as Enterprise Models
Strategically Vary Profit Margins and Diversify the Product Line to Reduce Risk
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?
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 legitimately 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 and 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. The susceptibility to anomalous price action devastating an account is far too great when trading only from a small pool of pairs. In reality, the susceptibility to just plain ol’ normal market behaviors is far too great with this style of trading.
This reality then is what forces most Retail Traders into Intraday-Only Trading. Having 30% to 80% of the account’s trading capital on the line in only one or two pairs when drifting off to sleep is never an option … Ever. So, it is then concluded that trading Intraday from a M5 M15 M30 chart is the one and only option if one is to make a career out of this FX Market.
This Intraday-Only is a flawed ultimate conclusion. This is not the only option. 20 pips per day is not the only attainable possibility. Extended gains of 200 pips to 2000 pips are all around us. They are happening all the time across multiple pairs and all sorts of CFDs. We may just need to open our eyes to what is actually being offered inside our MT4′s Market Watch Window.
Why Limit Basic Capabilities?
Here in 2015, Multi-Monitor Setups Are Dirt Cheap
In addition to exploring new Brokers with large offerings in the Market Watch window and using a Volatility Calculator to properly gauge whether a spread is absolutely ridiculous or absolutely fair, we may just need to stop thinking we can actually have a sustained trading career using a 15.6″ Laptop.
Just because the Brokers show Laptops, Tablets, and Phones in their banner advertisements and on television, does not mean these are ideal primary tools for a sustained trading career.
But don’t throw that shiny new MacBook Air in the garbage just yet …
Newer Laptops though, with the latest Displayport version, do allow daisy-chaining of multiple displays in series. Newer Laptops with USB 3.0 also allow inexpensive External GPUs to be used. These 3.0 versions function flawlessly for our relatively-static chart purposes. Much better than USB 2.0.
Return on equipment investment can be greater than most other professions by an extreme margin.
Lenovo has an Outlet and offers discounts in addition to Outlet pricing such as ‘Additional 30% to 40% Off Employee Pricing’. Dell also has an Outlet. HP also has an outlet. Asus also has an Outlet. NewEgg also has a separate Refurbished Desktop and Workstation site. It does not matter if our equipment is used or refurbished and has a few scratches. What matters is that we have the tools we need.
200 Pip to 2000 Pip Gains Can Be The Norm
Ok, so we are proposing extended gains of 200 pips to 2000 pips are not just a pie in the sky possibility, but they can be the norm. So what then if the spread in GBPZAR is 7.3 pips and our net revenue is squeezed a bit in that one particular product?
Including GBPZAR in the mix, along with 50 other Exotics, Crosses, and CFDs, allows us to capture extended gains across the entire product line as a whole because anomaly risk is 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
(or maybe it can be technically free?)
But, the protection from disaster while owning Car, Life, Home, Boat, and Health insurance allows us to relax and marvel at this 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 Average Net Revenue per this group of insured over a 5-10 year period of time because this group carries a certain inherent risk due to something called ‘Testosterone’. But, their inclusion into the larger group when originating from a wide sample reduces overall risk for the entire group of insured. And by entire group, this would mean across the entire offering of insurance products. Not only Vehicle Insurance, but every insurance product they sell. There is a certain percentage of those 16-24 year old male drivers who will also require such products a Earthquake Insurance, Flood Insurance, Mortgage Insurance. This is why we see commercials for Progressive, State Farm, AllState, eSurance, The General, Farmer’s, SafeAuto, and GEICO … 3000 times per day while watching CNBC.
It is a fight for quantity of insured across the widest geographic area as possible. While wider geography does not necessarily diversify their group of insured drivers and insured vehicles, it does benefit the bundling or add-ons like Flood and Tornado. A predictable certain percentage of all new Auto acquisitions will also bundle.
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 (paying 10+ pip spreads), this cost is minimal compared to the benefits of overall risk reduction which then allows for expansion into new products which then ultimately leads to expansion of TOTAL NET REVENUE.
Auto Insurance tends to be a Loss Leader for these large providers. So sure, those 16-24 year old males may introduce high risk and may actually result in a net loss for a given group on whole for a given ten year period.
But, those risky males will not be 16-24 forever.
They will get older. They will mature. They will get married. They will have children. They will drive safer. And as GEICO’s years upon years of data points suggest, a certain percentage of those risky males obtained via heavily discounted, reduced margin acquisition strategies … will eventually bundle higher margin new products such as Life, Home, Flood.
Meaning eventually we will discover with enough data points that a predictable percentage of the exotics with 10+ pip spreads will catch extended trends in our favor. They will not be newly opened positions showing a loss forever. Some actually will, but many will not. So in the very short term we see only anomalous risk reduction benefits for the entire group as a whole. But in the longer term as price continues to move further and further from the initial entry when net loss was the greatest at -10 pips due to spread, we begin to witness the reason for initial entry hesitation become more and more negligible and insignificant. To the point where we then begin to question why there was even a question in the first place.
In other words after riding a 3 month long megatrend in both EURUSD and GBPZAR, the roughly 500 pip gains in these pairs essentially equalize the spreads of each together due to the now insignificant amount teetering on a rounding error difference.
After more and more of these same similar outcomes over many years, this positively reinforcing data gathered will allow us to pencil in this certain percentage being able to deliver these extended gains for us as the result of predictable and eventual megatrends every so often. Similar to how GEICO is able to pencil in a certain percentage of those 16-24 year old males eventually bundling higher margin policies in with their Loss-Leading Auto.
True Spread Cost Discounted?
So does this mean we can slash the effective spread of these 10+ pip exotics by 20%? 30%? 50%? Based solely on predictable gains over the course of many trading years? I say yes. But the actual percentage of course depends on the data. And the more data points the better.
Ok so then how much percentage reduction is anomalous risk reduction for the entire group worth? 10%? 20%? I have no idea. I’ll need to contact my GEICO insurance agent to help me with this formula.
What I do know though is that there is some measurable benefit that then theoretically could be used to lower the effective entry or ‘aquisition’ cost. That is, to help in determining whether or not to add a certain exotic into the mix or not. That is, if I was actually still undecided about the unrealized true benefits far outweighing and possibly dwarfing the spread cost. Which I am not. Well at least not in this scenario provided above because the true benefits have already been realized and therefore have already become positively reinforcing data points some time prior.
There are still many strange CFDs tracking obscure (obscure to me) UK, Swiss, French, German, Spanish, Australian Equities in my AvaTrade Market Watch window. Many have seemingly extreme spreads. I have yet to get the calculator out for these. I have a large enough pool to trade from as it stands right now however pushing 120+ across all FX-type brokers.
So then finally in conclusion, adding lower volume and exotic pairs with true increased transaction costs due to higher spreads (not as the result of actual higher volatility) may appear to only simply reduce our Net Margins per, this is not the full picture. In reality, these added 5 pip to 10 pip spread costs are dwarfed by the additional Net Margins gained ACROSS ALL OPEN POSITIONS due to the now added ability to hold onto all other existing positions much longer and capture many more pips than without the added higher cost pairs. Anomalous risk threshold is increased while percentage capital used per pair is reduced accordingly.
Capitalize On It
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 and non-diversified Electronic stores who may only sell HDTVs and other Electronics 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 and Laptops 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 Electronics competitors are left.
BestBuy might fall into this non-diversified category. Although they have been doing better in recent years, saved primarily by strong demand in Mobile and their high volume contracts with the carriers. Doesn’t look like 4G Smart Phone and Tablet demand will be enough to save Radio Shack though as they are currently teetering on Bankruptcy here in 2014.
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 2000 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 51% 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 51% to 85% of Take Profits Placed in this Area?
It is speculated there is about a 51% to 80% chance of that first major support or resistance level being tested. This speculation has generally been proven true over many years across a large sample size. 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.
***That is, hypothetically, if evolution does exist. I am not stating as fact that our universe or planet Earth is billions of years old. I do not know this to be true, but was taught this in a Science class offered by the State. So, the innocent analogy is given based on hypotheticals only and is not intended to offend any religious beliefs. Sorry.
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.