by Joe T » Wed Jul 21, 2010 4:05 pm
Good thoughts. In fact, this discussion inspired me to set up a little spreadsheet to assess risk.
For a given account balance, you can select the range you want to buy in (bottom 50%, bottom 75%, whatever) and the range you want to sell in (same thing - I allow for different criteria if desired). You can set the range as desired, and then I spread the distance between entry points not by even Pip spread, but by a factor. For example, If a buy-in point is 1.5000, I define the next one as being calculated by applying a factor of 98% or whatever is selected.
Why? Because a Pip above 1.000 is different from a Pip below 1.000. Suppose you trade in a currency whhere the exchange rate is 0.8000. The corresponding exchange is 1.2500. (1/0.8 ) A move from 0.8000 to 0.8500 corresponds to a move to 1.1765. What is a 500 pip move below 1.000 was a 735 pip move above 1.000.
That's why things tend to get more volatile with higher exchange rates. It's why GBPUSD is more volatile than EURUSD. It's why spreads are generally higher on these pairs.
So, to equalize what that spread means, my gap is not a constant but a multiplier.
Anyway, that's kind of a digression. The spreadsheet basically allows me to select the range to trade both buys and sells, it allows me to define the range, it allows me to define the gaps between entries, and then it calculates what that means from a dollars risked so I can select an approach that allows good money management.
Fun exercise. For example, on the USDJPY I could implement a strategy right now of defining a range of 79.75 to 160.33, trading 0.01 lots with gaps on entry points with a ratio of 97.11% of the previous one, and buying the lower 70% of the range and selling the top 67% of the range, based on my current account balance.
This spreadsheet should work with any currency, just need to adjust for whether or not a pip is a hundreth or a thousandth, and adjust the value per pip as required.
I'll be sticking with gold for the moment, because I have a comfort level with it and, well, I'm satisfied with an 84% return in 8.5 months... but I may demo test this on some currencies if I fell up to it.