Think Like Walmart by Strategically Varying Your Profit Margins + Diversifying Your 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.
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 RiskOn / RiskOff products? Minimizing ongoing Flash Crash fears.
(read more about this possible notion at The N+ Beta Test Results page)
Exploit Your 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?
Really. Why? I am asking this.
If anyone knows, please email us using the Contact Form. I am perplexed constantly by Retail FX Traders using Standard, No Commission Per Trade Retail FX Brokers whose method of trading is to have one single unit of 500,000 and its one single Take Profit at 100 pips away.
While Position Trading GBPJPY 4H or D1, as a random 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 50 pips and then 300 pips.
[as 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?
Because it is perceived there is around a 55% to 85% chance of that first major support or resistance level being tested. Obviously much depends on each individual situation including:
- How much distance there actually is before this first major support or resistance
- How many units were opened
- Current Momentun / Slope / Parabola
- Where in the current trend were entry units established … very beginning upon 1st or 2nd HAS color changed candle?
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 + Mutations
Diversity + Variance is Essential Across All Aspects of The Trade From Inception to Completion.
Including, but not limited to:
- ultimate exit
- take profit levels (or trailing stops… or hybrid of both)
- stop loss levels (accomplished, for instance, via trading correlated pairs with different ultimate exits)
- hold time
- pairs and types of instruments traded (Forex, Commodities, Equity CFDs)
- brokers used (those with large capital not trading with NFA regulated firms)
Succeeding with NITRO+ 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 us as Humans.
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 the negative impact from unexpected price action anomalies.
Live Trading Screen Shots Below – Sept 23, 2011:
- - - -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.
Diversify Entry and Take Profit Levels (remaining open LONG positions on 09/23/2011):
(( VIDEO )) Fourteen Hours of Live Trading and 71 Completed Trades – Compressed into 9.3 minutes: INTRADAY TRADING
Video is compiled into 10 minutes and was sped up by 200%.
70+ trades entered on GBPUSD 30M.
68 Take Profits were hit and cleared in the money.
2 positions closed out manually at the end for profit.
1 position closed for loss.
Take Profits cleared, indicated by-_-red dashes_–, ranged from 2 pips – 67 pips.
Additional, correlated pairs EURUSD, GBPCHF + SILVER, GBPJPY used in Compact Mode to the bottom left for added correlation insight to what the market is doing.
Take Profit Levels _____blue lines_____ are actively managed and adjusted many times through the life of the trade.
*NITRO+ is not a Forex Robot. It is not like FAP Turbo in any way. It is not an EA. 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.
As is stated below in preface of the next EURUSD 15M video, trends strong enough to breach 90% will often eventually continue in that same direction even more. This statistic held even more true on this 30M chart time frame.
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 – 67 pips that were hit and cleared in the video, shown in the picture above as -_-red dashes_– (along with the additional from trades placed after the video was produced), in hindsight appear to have been prematurely closed:)
*** We are refining and perfecting the EA(type) Add-On shown in some of the screenshots and videos
… tentatively called ‘iDrag™’. It may be offered or included free in the future if the user interface can be programmed more friendly. All products need to be suitable for all trader levels as we are unable to ‘filter’ who purchases our products based on experience or ability to understand new tools. This add-on is what is used with Metatrader based accounts to manage and move take profit and stop loss levels directly on the chart. Without an application of this type, none of this type of trading done would be possible. In addition, all of the above instructional guidance and suggestions would be impossible.
If you do not have an application of this type that allows you to manage TPs and SLs quickly and conveniently individually or in bulk directly on your chart, we recommend trading live with a broker like OANDA [using FX Trade], FXCM – FXCM MICRO [Trading Station II], CMSFX [using VT Trader], or AVA FX
May 15, 2013 03:28:09 +7 with Metaquotes now giving us the functionality to move positions directly on the chart with a new build in the Spring of 2013 … I have since dragged my old “iDrag” in to the Recycling Bin.
The ability to drag positions on the chart is now integrated into the Metatrader 4 Platform. And it is a beautiful feature addition. Especially for someone like myself with nearly 1200 to 2000 open Mini lots during any given week. It may be necessary to enable the One Click Trading Panel for this functionality, I am not sure at this moment. Default setting requires we hold down the ‘Alt’ key to move the trade level lines. This safety feature can be disabled from the Toolbar > Tools > Options > Charts.top
(( VIDEO )) Showing Trade Ideas and Possible Use of Nitro+ and ClearChart Together on a 15M Chart During The New York Session. INTRADAY TRADING
2011-03-18 T15:37:47 (GMT) –
50 Pip opportunity for gain in just over 70 minutes on the 15M EURUSD once the 50% Alert Level is triggered after the daily 16:00GMT Euro Style Options Expire and before the 18:00GMT CME Futures Fix | 18:30 London + EuroZone Close. An additional +23 pip gain is also available on re-entry or adding to position upon completion of midday lunch period and lower equity and FX volume retracement using the same 50% level as support and HAS signal for confirmation of reentry or ‘adding to’ position.
The stronger trends such as shown that trigger 90% on 5M, 15M, 30M, or 1H Charts during the NY a.m. session will sometimes virtually revisit or surpass those levels of both Global Probability Percentage and or Price after midday retracements into the NY equity close and sometimes will continue into the CME Forex Futures close.
Keep in mind with the video below, the 50% Alert being triggered does not necessarily mean it was the first time within that 24 hour time span.
EURUSD had obviously been strong previously. The 50% Alert was triggered within the previous London session. It was also triggered within the Asian session prior to that.
This video was captured to show what is sometimes a repeating pattern, on a daily basis throughout the New York session.
On 30M charts and less, and somewhat also on 1H charts depending on what type of Trader you are – it is advised to ‘Reset’ Nitro+ internally in your mind for each new session.
In fact, it is advised to treat each individual session as its own entity and therefore ‘Reset’ your trading (if you are an Intraday Trader using such charts as 30M and less). This does not mean you need to automatically close out all positions upon London Close, for example. It simply means you need to be prepared for an entirely different sentiment upon New York Open. You need to be ready to pull the trigger and take profit on your remaining open positions if an Economic Report is negative for your bias.
I will never act upon any Nitro+ Percentage on these lower time frame charts, for example within the NY session, until Major Events have occurred and a Trend Direction has been established for the NY session.
Trend Directions for the NY session are not ALWAYS established early within the New York session. They do not ALWAYS follow a similar pattern as shown in this EURUSD 15M Video.
However, Currencies + Equities virtually TEND TO FOLLOW THIS PATTERN virtually quite often. Trend Direction established within the NY Morning will a good amount of the time regain that same price level or resume that same direction into the NY Afternoon after taking a Volume break during the Mid-Day Doldrums.
These Major Events within the New York Morning include at least (1) of the following and sometimes more than (1) of these events depending how major of an impact, for example, the Economic Report release is predicted to have:
The Forex Factory Calendar
Equities + Commodities are a Leading Indicator for Currencies… not the other way around as is a common mistaken belief of new Forex Traders.
***On A Related Note: CNBC’s Jim Cramer’s recent [spring 2013] obsession with “Risk On / Risk Off” NEVER having ANY merit EVER is continually unbelievable every time we here it 10X per day as he argues with or corrects an Economist or Harvard Professor.
While yes, in late 2012 early 2013 there has been some unraveling of this statistical and phenomenal reality. Decoupling and some divergences are finally being seen after 5 years of almost binary money flows on a daily, weekly, and monthly basis. RO-RO price action behavior of the two distinct groups that a Global Market Instrument happens to be categorized in has been a blatant reality since the collapse of 2008. To be unaware of it and the influence it has had within FX over the past 5 years could only indicate that one must have been living under a rock.
Now, has this larger “Risk On / Risk Off” daily money flow been the #1 constituent and influence for ALL Stocks on an individual basis? Of course not. Individual Stock picking and trading is more Micro rather than Macro.
“Risk On / Risk Off” has never applied to Individual Stock Picking, unless that Stock happens to be an ETF or Aggregate of course. Individual Earnings, and Individual Company Outlooks rule. Obvious example of this being the 180 degree flip to reverse correlation of Apple and the U.S. Equity Markets as a Whole in late 2012 into 2013. Of course Individual Stock Pickers cannot assign a high weighting in their decision making process to RO-RO. This does not mean that it does not exist, however.
It applies to Global Markets, as a Whole… ALL Global Markets:
“Risk On / Risk Off” is pure Macro. When Economist are asked to provide their outlooks and 6 month to 2 year forecast, they are generally providing their Macro views of the Global Economy. Whether they feel the Global Economy as a Whole looks to strengthen or weaken is at the root of ALL. The Global Markets as a Whole are systematically in large part based on that simple, single, black&white, binary view. Macro is the #1 influence on ALL Markets, as a Whole, worldwide.
Hedge Funds and those of us who trade a vast assortment of Global Market Instruments need a Macro Mentality. It is absolutely necessary to be aware of current RO-RO money flows as a primary influence + one of our primary Leading Indicators. This was never more true than from late 2008 until early 2013.
If this was somehow a ludicrous view as some insist, then >90% of all charts of all markets across the world would NOT contain almost identical massive spikes around October-November 2008… whether Up or Down.
Click Pic Below to View a Quicker Version and Smaller File Size of the Video Above. Mark-ups and Explanations have been Eliminated while also Increasing Speed.
What Happened Next to EURUSD After the Animation Ended?
EURUSD 15M resumed its climb upward when the market reopened on Sunday and into Monday morning (PST).
As is stated farther above, trends strong enough to breach 90% will often eventually continue in that same direction even more.
It takes a sizable amount of money flow to surpass the 90% Nitro+ level. This statistic holds more true in linear fashion as the time frame increases. This statistic, and the trading confidence it provides, should be ignored on 1M and 5M charts. The price level that triggers the Nitro+ 50% Alert, and the 50% Alert Level itself – will often times then turn around and act as support.