Think Like a Casino by Forcing Larger Statistical Samples
A higher number of relatively smaller lot sizes (versus a lower number of larger lot sizes), across a diversified number of instruments including Exotic Equity Commodity using 1:1 scaled commission structure provides far greater methods to compete and succeed long term. Mini and micro lot sizes allow this to be achieved when trading capital is only in the five figures.
We need the total trading cost per round trip to equal the exact percentage on a single trade of a 0.01 lot as it does a 100.00 lot trade. This would be a 1:1 scale since a 1.4 pip commission (spread based) equals the same percentage on both trades for both vastly different sizes.
Punished for Good Behavior
1:1 scaled commission eliminates being rewarded for trading huge lot blocks or huge share blocks.
►Or rather most importantly … eliminates being punished for trading smaller lot sizes in an effort to incorporate more appropriate risk management according to the relatively smaller account sizes.
1:1 scaled commission helps to level the risk threshold playing field
1:1 scaled commission helps to equalize our fear/greed pendulum more closely to our infinitely-capitalized competitor (the market as a whole, including central banks)
Yes in FX, the per trade commission is just rearranged and built into the spread. We all know this.
But, other markets such as Equities also enjoy the same spread margins in addition to the per trade commission. Sometimes they are less percentage-wise than FX. Sometimes they are more. Decimal pricing in stocks has reduced spreads considerably from fractional, down to almost null in high volume names like QQQQ.
Depending on the actual stock or ETF, many of these Deep Discount Brokers such as E-Trade, Ameritrade, Scottrade, and Schwab are actually padding those deep discount commissions by adding or increasing spread margin. Market orders allow them to profit even further by truly allowing them to increase spreads at-will.
This is not to say there is not plenty of opportunities with limits and stops also. Since just like with most FX brokers and bucketshops, the majority relatively small trades are not actually routed directly to exchanges. When we buy 437 shares of MSFT for example, it is most likely filled with the brokers’ own shares on hand. This is how Ameritrade can advertise ‘Instantaneous Fills! Can You Believe It? We Have Amazing Technology!’.
The point is, the spread is whatever they say it is. Better relationships and higher volumes with larger Market Makers allow them to receive lower wholesale spreads and thus an increased margin to what they charge retail. Just like in all of retail.
Give Historical Probabilities Room to Breathe and Playout
Even with lower spreads percentage-wise on average than FX, additional per trade commission with a flat minimum ($9.99 avg) completely changes everything for most active Retailers with account balances of less than $200,000. This cost can add up very quickly. Therefore, the ever presence of it and it always being a forethought forces or suggests non diversified strategies that are constantly trying to minimize this additional overhead cost … because it can be reduced.
When account sizes begin pushing into the six and seven figure amounts, this entire discussion becomes less and less relevant. But even when using 4:1 leverage (pattern day trader rules) with $250 000 at E-Trade’s $6.99, this cost is still dictating certain trade decisions when active.
Don’t Know What Ya Got …
Minimum trade sizes in Spot FX are also much lower. Brokers like OANDA and the new FXCM MT4 Micro allow trades as small as 0.01 standard lot. Even with the addition of E-minis and FX E-quivalents, CME and CBOT and NYMEX and others have always required large contract minimums relative.
No central exchange and an option to deal completely with derivatives depending on broker or account type is what allows all of this flexibility. All of this lack of regulation freedom and flexibility is what gave birth and ballooned this industry niche of Retail FX worldwide.
And likewise, the now lack of freedom and flexibility is exactly what destroyed this niche in the United States beginning October 2010.
Exploit No Regulations
Traders with as little as $10 000 balances are able to actually compete and succeed long term.
How? Primarily because huge trade block gambling tactics are not forced upon these smaller traders by default of the flat commission minimums. Just as important is the complete freedom to manage positions however the trader sees fit which increases total strategy options by a tremendous amount. Which therefore then allows for the exploitation of today’s technology in helping to manage thousands of smaller diversified units with ease.
And likewise, all of these additional strategy options and risk reduction techniques equaling that of large institutions is exactly why these same institutions drafted the 2010 CFTC regulations with and for the lawmakers. Such as for example, Citibank. Shortly after these new CFTC laws went into effect October 2010, the popularity of their new trading platform, CitiFX, exploded.
October 2010 CFTC FIFO rules effectively eliminated all of these strategy option benefits while it was presented as consumer protection.
October 2010 CFTC rules effectively eliminated just about every advantage over traditional that was providing these smaller traders with an actual real opportunity to compete.
October 2010 CFTC rules effectively killed the large bulk of this Retail FX niche in the United States, of course under the guise of ‘Protecting the People’
So luckily for my brother and I here in the United States we have military relatives overseas. So like the rest of the world, we are able to exploit these advantages made possible with spread based commissions and no minimum lot sizes. We are able create exponentially-increasing take profit grids wherein the very last entry of the total position is cleared first. This means the very first, and usually best, entry is cleared last. This allows a favorable average entry level to be maintained through the life of the position.
This hugely in-the-money average entry level allows tremendous risk threshold. This allows for the patience to wait for hard retracements as opportunities to re-establish units that were previously cleared for profit. This allows risk threshold more in sync with the funds and institutions which allows our megatrends room to breathe as they continue and continue in our favor.
There are examples below under the section 37 Screenshot Examples – Open Live Positions and at the following ForexFactory.com posts:
We diversify extremely across many instruments thus reducing percentage capital used per pair. Thus equalizing our effective per position leverage more in line with the institutions. By far the most important and beneficial effect this all has – is reducing the percentage capital used on any given single decision.
Extreme diversification + variance across many small transactions with take profits ranging 2-2000 pips … puts historical probabilities and statistics in our favor.
It is the same reason casinos have table limits. Many small bets keeps the greater than 50% house edge in their favor. It eliminates the risk that one player can come in with a huge bankroll and bankrupt Casino A (MGM Grand Casino – Las Vegas, Nevada) 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 Casino – Las Vegas, Nevada) 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.
Statistical Edges Hold More True 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 alternatively, across a large sample.
Extreme diversification + variance using reduced percentage capital per across many small transactions with take profits ranging 2-2000 pips allows the favorable odds to eventually play out in our favor. It gives the favorable probabilities of applied strategies room to breathe. It puts 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 unreasonable 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 8.3+ 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 Hedge Fund. 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 method is a flawed ultimate conclusion. This is not the only option. 20 pips per day is not the only attainable possibility. In fact, reduced daily goals like these are seldom ever attainable … consistently, long term.
Extended gains of 200 pips to 2000 pips are all around us. 200 pip to 2000 pip gains are everywhere. They are happening all the time across multiple pairs and all sorts of CFDs and Commodities.
Embrace Margin Variability
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.
So then since we are proposing extended gains of 200 pips to 2000 pips can be the norm, why should we care that the spread in GBPZAR is 8.3 pips and our net margins are squeezed a bit in that one particular product?
Including GBPZAR in the mix, along with 50-90 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.
Insurance Allows Extended Gains
Insurance is seldom entirely 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 without constantly worrying about hard moves going against when we drift off to sleep, or log off for the weekend.
For GEICO, 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.
When adding additional pairs initially only for risk-reduction purposes, eventually we will discover that a predictable percentage of these FX Exotics with 10+ pip spreads will often catch extended megatrends in our favor.
So while initially in the short term we may have only justified anomalous risk reduction benefits, in the longer term with enough data points we can begin to seek actual trading profits.
Over time with enough of these positive events capturing extended gains, we begin to question why there was ever hesitation in the first place.
In other words after riding a 3 month long megatrend in both EURUSD and GBPZAR, the roughly 500 pip and 800 pip gains respectively in these pairs essentially expose the irrelevancy of the increased spread costs. The increased spread cost of GBPZAR is now an insignificant percentage 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.
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%?
There is definitely measurable benefit that then theoretically could be used to lower the effective entry cost. That is, to help in determining whether or not to add a certain lower volume instruments into the mix or not.
Spread Cost Dwarfed
So while 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.
Exploit ’Built-in Commission’ 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 a single 300,000 unit, as an example, with only (1) Take Profit level when instead we could buy (30) MINI lots with (30) variable entry levels and (30) variable Take Profit levels for the exact same cost?
Because your ‘Scalping’ or other M1 or M5 style of trading does not allow the ability for you to manage (30) open MINI lots with (30) Take Profits?
Then why are you trying to Scalp?
Why not hold positions overnight and through the weekends? EURUSD has just moved 700+ pips in 18 days.
Scalping huge lot sizes all at once going ‘All In’ and ‘All Out’ might make sense if we were Day Trading Stocks and paying a flat commission for each trade regardless of number of units within that trade.
But this is not the Stock Market and the vast majority of us are not paying per trade commissions. So then why don’t we take advantage of the endless advantages this type of ‘No Per Trade Commission’ allows us in this Retail FX Spot Market?
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 the point of final 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.
In other words with correlated pairs such as EURUSD + USDCHF, I may worry about more preciseness with one, and worry less with the other. Since trading nearly ever pair offered means that all my positions are correlated, this equates to worrying about precise exponential placement in about half of my positions. Then, worrying less in the other half. This is what is meant by ‘Exit Variance’.
Why Are 51% to 85% of Take Profits Placed in this Area?
From experience over the years, there tends to be a 51% to 85% 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 + trailing stops 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.
Money Lots Help Prevent Chasin’ Pips
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 great 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 that hard, formerly-anticipated, within-reason retracement now goes against you. You are out-of-the-money and completely out of sync.
To prevent this nightmare situation that can devastate account health if frequent, it helps to have extra Money Lot Take Profit Levels that seldom get hit unless you finally decide the trend has switched and you close out manually. These lots are a 5%-15% portion of your Take Profits set far away as shown below
These Money Lot Take Profits 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.top
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, this innocent analogy is given based on hypotheticals only and is not intended to offend any religious beliefs. Sorry.
Diversified Entry and Exit Examples using 37 Screenshots + Videos
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.
10 Pips or 20 Pips?
We are often asked some form of:
“Should I set my Take Profit at 6 pips or 10 pips or 20 pips?”
“And then what about my Stop Loss, 2 pips or 6 pips or 10 pips?
This question throws me for a loop.
I am unsure why nearby support & resistance levels and anchor regions and popular moving averages would not always dictate exiting levels including stop losses. So, these screenshots have been provided as a way to answer that common question.
Is using support & resistance and anchor regions and popular moving averages the correct exiting 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?
37 Screenshot Examples – Open Live Positions
Diversify Entry and Take Profit Levels ... LONG *cleared take profits not shown on charts
ENTRY = Support & Resistance (breakout points) + 200SMMA + ClearChart + NITRO+
TAKE PROFITTING = Support & Resistance + Anchors + ClearChart + NITRO+
CLEARED TAKE PROFITS = Not Shown
SAFETY STOP LOSS = Around 200SMMA Initial Entry Area
HD VIDEOS – 14 Hours of Live Trading and 71 Completed Trades
More Examples of Multiple, Varied Take Profits *cleared take profits shown as-_-red dashes_–
Direct MP4 Stream: *right-click to download full .mp4 file
Can Apply Towards Multiple Time Frames: Although I do not personally agree with this type of short term trading (albeit over 14 hours as shown) unless only around 15% or less of total yearly trade volume measured in dollar amount, this is similar to the chosen time realm for nearly all users and potential buyers. So again, it was created for them ‘As an Example’ to reduce email overhead costs.
Though, the same general methods and tactics can be applied to all time frames. Such as for example, diversification of entries and exits through splitting these (7) Standard Lots into (70) MINI Lots as shown. In addition, the placement of Take Profits in relation to varying degrees of support and resistance levels along with using correlated as additional guidance. More examples of this Take Profit placement and management are shown in the 30+ screenshots in the section directly above.
Meaning: Forget what time frame is being traded in the video. Forget the pip amounts. What is important are the decisions around the N+ meter output in combination with everything else shown. The trade management is what is important as it relates to the meter output along with all other technical data available to us on that chart. The tactics and methods can be just as easily applied to an M1 chart or D1 chart … as it is this M30 chart.
This is not to say blind success is ‘possible’. Or that this video can serve as a blueprint or be easily duplicated. This price action is inherently unique by default and not likely to occur the same ever again. This is not a video game. When price action does diverge a little bit from what is show in this video, how will you react? What will you do?
In Other Words: ‘Perceived Success’ in video far more the result of my own personal methods and position management techniques based on my own personal experience and years of daily screen time … rather than NITRO+ specifically or solely.
‘Perceived Success’ Clarification: As the screenshot of GBPUSD below clearly shows, success is in the eyes of the beholder. Many may view both the video and the screenshot to conclude the trading was actually an epic fail.
*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.