JoeT's Gold Trading System

Post your new strategies, discoveries or just ideas for development

JoeT's Gold Trading System

Postby Joe T » Wed May 26, 2010 9:28 am

I have kept a journal here for some time now, documenting various successes and failures. You can find it here: joe-journal-t12.html

Since last October I have traded a system with XAUUSD (gold against the US Dollar) with some fairly consistent success (as of today I'm up over 70% in my account). I first start documenting that in my journal here: joe-journal-t12-70.html#p1223. I invite you to take a look at the results and thoughts I posted starting at that point, to get an idea of my periodic thoughts, tweaks, and most importantly, the results.

I decided to fully document the entire system, and rather than just post a brief concept, I wrote up an entire 16 page document. I uploaded it to the journal, but I don't know how many people go there, so I thought I'd point it out here. You can find the document here: joe-journal-t12-90.html#p2696 and an accompanying spreadsheet in the post after that, or here: joe-journal-t12-90.html#p2697


I wil continue to post my results in the journal. I link to the blog in those posts where I put up all the specific detail, but summarize the results twice a month and discuss any tweaks in strategy in the journal.
Joe T
 
Posts: 186
Joined: Thu Jul 02, 2009 10:26 am

Re: JoeT's Gold Trading System

Postby Joe T » Tue Jun 01, 2010 1:12 am

Update is here:
joe-journal-t12-90.html#p2717

Now up 74.4% in 7 months.
Joe T
 
Posts: 186
Joined: Thu Jul 02, 2009 10:26 am

Re: JoeT's Gold Trading System

Postby Joe T » Tue Jun 15, 2010 10:47 pm

Update here: joe-journal-t12-100.html#p2783

A quiet couple weeks, a slight decline in account equity, and patiently waiting for a retrace.

I see a number of downloads of my document. I'd love feedback on your thoughts, including any ways to present it more clearly, if needed.
Joe T
 
Posts: 186
Joined: Thu Jul 02, 2009 10:26 am

Re: JoeT's Gold Trading System

Postby Joe T » Wed Jul 07, 2010 1:00 pm

Update as of June month-end here: joe-journal-t12-110.html#p2928 (July so far has gone very well, but this is only updated through end of June).


For those of you who do not wish to download the documents in that thread, I'll start posting the strategy here. I'll do it piecemeal to allow things to digest along the way. The entire original document is available for download in the otehr thread. There have been some edits to the document for clarification purposes.



Joe T’s small-lot, no-stop-loss profit-taking strategy:
I’ve tried to figure out the best way to present my strategy in a concise way. However, I’ve decided that it will be better to be thorough and provide as many answers as possible on this approach rather than overly concise for the simple sake of brevity.
The strategy I have used can be used with any currency pair, but will need some accommodation as you move between pairs. The intent of this presentation is not to provide all the details on how you would adapt from one currency to another, though I will share my own thoughts on that.


Gold versus other currency pairs
I have successfully used the strategy I’m about to outline on Gold traded against the USD. The reasons why I’ve done this aren’t particularly important. If you have a favorite currency pair, you can develop a similar strategy, but since I do not trade this strategy in those currencies, any suggestions I have are untested and speculative.
My basic strategy using gold, though, probably is pretty reliable with other commodity-type instruments: Silver and other metals; possibly other commodities as well.

Commodities have an intrinsic nature to them, so their price is determined by external influences. So when trading XAUUSD, you are at the mercy of supply/demand market forces, and also the perceived value of the US Dollar. This is different from currency pairs, where the exchange rate depends on all the economic and speculative factors of not just one currency, but two separate currencies.


Requirements
Patience and capital are required to trade this system. I consider it a long-term trading strategy, and not a get-rich-quick strategy. I trade micro-lots and do not use a stop loss, so you need a platform that allows an account trading micro-lots. Either that, or you need a lot more cash than I have! There are no indicators used, the strategy relies solely on patience, available capital to absorb swings, a very strict trading plan based on acceptable risk levels, and a spreadsheet to help you define the proper price points. For the most part, only casual monitoring is required. There are occasional days where price is moving enough that positions are closing fairly rapidly, and you will want to be able to enter back in limit orders to take advantage of all the market movements. However, if you miss out on any of these, it is not a big deal at all, and there is no real risk in missing it other than you may have missed a few opportunities along the way. The ability to monitor can help you recognize periods where price is stagnating and you may choose to take profits manually rather than risk waiting to see if your target is hit. However, again, the worst that happens here is you may miss a take-profit opportunity for now, but you can anticipate realizing that at some point in the future.
Joe T
 
Posts: 186
Joined: Thu Jul 02, 2009 10:26 am

Re: JoeT's Gold Trading System

Postby Joe T » Tue Jul 13, 2010 1:23 pm

Results

Before I get into the actual strategy, I have summarized the following results. I started trading this method on November 1, 2009. Nearly all the results of my account are from this strategy, but there are a few other trades I made along the way, as well. I did not segregate those trades out. All percentages stated in terms of the previous balance, so they are multiplicative:

Nov 1 - November 20 2009: -32.72%
Nov 21 2009 – Jan 21 2010: +39.54%; cumulative -6.12%
Jan 22 – Jan 31 2010: -5.41%; cumulative -11.20%
Feb 1 – Feb 16 2010: +40.31%; cumulative +24.60%
Feb 17 – Feb 28 2010: +3.88%; cumulative +29.43%
Mar 1 – Mar 15 2010: +2.51%; cumulative +32.68%
Mar 16 – Mar 31 2010: +8.69%; cumulative +44.21%
Apr 1 – Apr 16 2010: +7.66%; cumulative +55.26%
Apr 17 – Apr 30 2010: +6.15%; cumulative +64.81%
May 1 – May 14 2010: -4.02%; cumulative +58.18%
May 15 – May 31 2010: +10.26%; cumulative +74.41%
June 1 – June 15 2010: -1.82%; cumulative +71.23%
June 16 – June 30 2010: -1.01%; cumulative +69.49%

The initial drawdown in the first month had much more to do with some outstanding positions that I had prior to implementing this strategy. Almost all those were eventually reversed at some point and closed at a very small profit (though I still carry 4 such positions), so the above results are more volatile early on as some of those things worked out, but the overall net impact is close to zero. While it is true that you may be in multiple positions that are moving against you and reducing equity, I wouldn’t expect the swings you see above starting out, though it is likely you may experience negative draw-downs at first without corresponding profit. The profits will come. You need to enter positions in order to profit from them. Sometimes it takes a while to reap the benefit. It may even be months. I am actually still carrying a couple old positions from a previous strategy in my account from last August (2009) and September (2009). However, had I started using this strategy only from scratch, I wouldn’t be holding these positions at all. They are currently contributing negative equity. Right now, the oldest position I hold unique to this strategy is from May 5, 2010. In summary, you do NOT need to be closing positions and opening positions all the time to profit. Patience is much more important. There may be some cases where you’ll eventually want to close at a loss, but to date I have only done that once, and it was actually due to an error on my part (thanks to an EA that I inadvertently activated).

You'll notice consistent gains from Jan 22 to May 31 above, as gold increased in price, and then two consecutive periods of small losses even though gold soared to new highs. Well, at a certain trigger point, I went short, so the gold increases in price worked against my equity position. As I entered positions, the draw against equity was more than the occasional profits I took. However, if you've been watching gold prices, you know that in July they corrected enough that I profited from all those short positions. You'll see the impact of that come through with my 7/15 update.
Joe T
 
Posts: 186
Joined: Thu Jul 02, 2009 10:26 am

Re: JoeT's Gold Trading System

Postby Joe T » Thu Jul 15, 2010 11:13 pm

July 1 - July 15 2010: +8.78%; cumulative +84.38%
Joe T
 
Posts: 186
Joined: Thu Jul 02, 2009 10:26 am

Re: JoeT's Gold Trading System

Postby Joe T » Mon Jul 19, 2010 12:54 pm

Next installment of my trading approach:


Warnings, Caveats, and some fun projections mixed with a dose of reality

Money management is always important. Most traders determine their risk level by some formula that lays things out on a % risked per trade basis. There is also a prevalent idea that some theoretical profit potential/loss potential ratio needs to be targeted. I’ve taken a different approach. I trade very small lot sizes with no stop loss.

Before you begin this strategy, then, you need to psychologically get yourself into the mindset of expecting to hold some positions at a loss for a long period of time. You also need to psychologically get into the mindset of seeing nearly all your open (unrealized) positions at a loss. This happens because I take reasonable profits when available, while letting the losses ride.

The risk, of course, is that price moves in the wrong direction, quickly and without many retraces, to such an extent that your entire account capital is at risk. And make no mistake – this could happen, especially if you are not careful. I use a spreadsheet to help me develop a trading plan that will minimize the probability of this happening.

But first, let me put things in perspective. Forex trading is risky. Money management principles are a key element of any trading plan: don’t trade lot sizes that are too large; protect the downside; take good trades; etc. And yet, over and over again, I see people trying to do the right thing and not having any success doing it. For me, using a stop loss was very frustrating. I may have been protecting the downside, but it seemed much more likely that I was taking losses only to see an eventual reversal occur so that I would have made a profit eventually had I stuck with the position. In my opinion, the problem is that I was trading too large a lot size. In order to try and achieve remarkable returns, I felt I needed to trade a lot size that was “large” (relative to available capital, large can mean different things to different people), and thusly I couldn’t afford to let the swing against my position work its way out and reverse because I couldn’t risk a large draw on my equity. Finally, I decided that I should trade a smaller lot size at a further stop loss target. But what was to say that I wouldn’t get stopped even then? So, maybe I should decrease lot size even more and use a further stop loss target. Continuing this train of logic eventually led me to trading very small lots with no stop loss. Trade it. Wait it out. Eventually you will profit. And if not, the incidents will be so small and the losses so gradual that eventually you can close it out at a loss, but the amount of profit from other trades will far outweigh this occasional loss. Or, at least, that’s the plan.

I’ve seen the argument that holding a loser ties up capital that you could be using elsewhere. This is a bit silly, in my opinion. First of all, closing a losing position simply loses that capital altogether. I’d rather have my capital simply tied up with the hope and expectation of profit, than for that capital to be gone forever. I suppose there is a bit of truth in the statement, but it’s not as if the Forex market isn’t an easy exit/entry market with fairly low transaction costs. One could decide at any moment that a great opportunity has come up that is better than the position being held, manually close the open position at a loss, and then shift the risk as desired.

I am not trying to make light of the risk here. It is very real. A very extreme move in one direction can most certainly put your entire account at risk. But there is also the very real risk of consecutive losses using a stop-loss. There is the risk of not reaching a profit target at your magical 3-1 ratio, and settling for something less (at which point it’s no longer really a 3-1 ratio that you’re trading). There is a very real risk of seeing a slow drain on your account from transaction costs when your wins and losses are about the same. I fully believe that there are very successful traders who utilize all these traditional safety nets. They are very patient traders who do not overtrade, and thus the safety nets are there as an expected low-probability occurrence of price heading in an unexpected direction. That just didn’t work out for me. So, I was forced to either: (1) work to refine my systems, learn the market, learn the indicators, and analyze entry and exits, or (2) I had to step back and find another way of approaching the market.

I chose the latter approach. It’s a much longer-term approach to trading, and the goal is not to turn $1000 into $1 million in the course of a year. It may not be for everyone. [Some reality aside and invoking “dreaming” mode, if I annualize my current yield after 7.5 months and extrapolate that as an expected future return, I could turn $2300 – which is where I started - into $1 million (in a tax-free environment) in 6.25 years. Assuming 40% on taxes, just to be conservative about it, I can turn that $2300 into $1 million after taxes in 8.15 years. Stupid taxes…] OK, throwing “reality” into the equation: (a) I’m not ready to declare after 7.5 months that I can expect continued returns at this level going forward indefinitely. On the other hand, I’m not ready to say it can’t be done, either. Let’s be honest, this could all blow up in a heartbeat and in another year I could be back to the drawing board. ( b) This assumes that I simply do not spend anything. In reality, at some point, I probably would pay off my house just so I don’t have to worry about it anymore. Not to mention unforeseen things that cost money where I can now dip into a source of funds. Plus, I’m married. Need I say more? (c) Even if I kept all the money in and even if the same approach yielded a return in that area, I will continue to increase my target “zero-balance” levels, which means I’m dialing down risk a bit as time goes on in order to preserve capital. While my profit dollar amounts will continue to increase , the yield is sure to come down as a percentage yield simply as a prudent measure to preserve capital.
Joe T
 
Posts: 186
Joined: Thu Jul 02, 2009 10:26 am

Re: JoeT's Gold Trading System

Postby Joe T » Tue Jul 20, 2010 12:24 am

Just posting a follow-up because of a dumb series of math errors in the dreaming part of my above post...

Starting with $2,360, I need to extrapolate my current return on the basis of 8.5 months, not 7.5 months. Plus, I was subtracting an incorrect column.

So, just for completeness and accuracy, the current estimated date of my millionaire status :) is:

December 2016 on a tax-free basis, and December 2019 on a 40% tax basis. Doing the math, it's absolutely amazing how huge of a wealth-killer taxes are.

Anyway, that's a silly exercise, but it was wrong, so I wanted to adjust it accordingly.
Joe T
 
Posts: 186
Joined: Thu Jul 02, 2009 10:26 am

Re: JoeT's Gold Trading System

Postby Joe T » Fri Jul 30, 2010 1:04 pm

The next installment of the write-up on my trading approach:

Background and Genesis of my Approach
I started in Forex using an Expert Advisor robot. It failed miserably, but I don’t regret it. I probably would have been too intimidated to jump into the market on my own. So, with delusions of grandeur, I figured I’d let the robot do my work for me. What the EA did for me was well worth the money I lost. I got into the market and started demo trading, and eventually traded with real money. I was intrigued by the whole thing and read about the market and looked around on the internet for information and strategies, etc. Eventually, I learned that the robot wasn’t really a robot at all. As I went to forums relating to the EA, it was obvious that it worked for certain currencies in certain market conditions at certain times. In order to properly use it, you had to study the markets and understand them and look at other indicators and then know when to turn it off or on. This was, to say the least, quite different from the advertising that led me to believe that any idiot can just run the thing and make millions. To make it worse, it was a scalper, and most of the time the broker platform spread was above the recommended level – and the robot programmers/sellers were the ones who recommended the broker!

But, all in all, it was a relatively inexpensive tuition fee to get me to learn about the Forex market. I finally shut the robot off and found the “Forex Strategies Revealed” website. It was filled with advice, strategies, and knowledge that really helped me take the next step in understanding the market. I read every strategy, and started to dig into all the indicators. Since I have a bit of programming background, along with a math background, I started writing and optimizing EAs myself. I figured I could crack some kind of code. Theoretically, I still think that’s possible via some probability-weighted system. I did some work on this, in fact, and really had some satisfying results. But by the time I developed what I thought was a good system, the complexity was beyond my programming abilities, and every time I presented it to even seasoned programmers they told me it would be a huge project, and I never got a reasonable price quote. I even purchased a laptop computer with the intent that this was going to be the computer that cranks away on back-testing EAs all day long. And I did that for a while.

In the meantime, I was trying some trend line strategies that had a lot of success – when the market went as expected. When it didn’t, the stops killed me and I lost money as quickly in down periods as I made it in up periods. That was simply too volatile for me. I was getting to the point where I was overwhelmed, spending too much time away from the family, and generally losing money.

But I was learning, and that’s always got value. I should also note here that I only “played” with money that I could afford to lose, and didn’t affect my ongoing personal finances or future plans in any way. So I didn’t really get down about it all that much, but I was reaching a point where I needed to make some decisions and assess priorities. I have a large family (8 children) and other responsibilities. I could not in good conscience spend more time on the computer after working all day away from home, pursuing my Forex dream.

At this point I stepped back from Forex and just decided to re-think the whole thing. Something was jumping out at me as I ran across stories of the more successful traders. The genius of their approaches seemed to be in their simplicity. Very few, if any, indicators; simple trend-trading approaches; simple Fibonacci analysis; stuff like that. This is not to say that the intelligent and dedicated trader can’t learn about all the indicators and market conditions and maximize profits. I’m sure you can. The trade-off is time, and I didn’t have the luxury of the time required to do that.

Then, I remembered a story I heard about years ago, where Warren Buffet took out huge silver positions, but price fell. He just held them, knowing that someday price would rebound, and it did. I was dabbling in commodities at the time (unsuccessfully, I may add) and thought to myself how great it must be to have the capital to make such an investment and not have to worry about closing a position, with the near-certainty that you can end up making money on it eventually. The rich get richer, and all that.

This simple concept became my revelation that, with micro-lots, I could do this. I didn’t need millions of dollars, I just needed a few thousand dollars. Now, nobody thinks it’s worth trading micro-lots because a 100 pip swing on, say, EURUSD will yield you a whole 10 dollars. What fun is that? But I put pencil to paper and looked at some old charts, and started realizing that if you look past the single-trade yields, and if you compare it to anywhere else you put your money, you could still do OK.

This became a change in mindset. Doing this eliminated the possibility of becoming a millionaire overnight. This was a more measured mindset – small gains, take them as they come, wait out losses, target a reasonable return over the long-term rather than a quick-hit killing. But at this point, I wanted simple, and I wanted to just see positive returns.

I started experimenting with micro-lots without any particular plan, just to get a feel for them. In the meantime, I started looking at the various currency pairs and started to figure out how many micro-lots I can/should be trading, and how I could trade them without a stop loss to make sure I didn’t blow my account – or at least to minimize the possibility.

I settled on trading Gold against the dollar, as I stated earlier. The overall plan of trading has evolved to the point where I think there will be few, if any, changes made to it. My opinion could change if things turn bad. For now, it’s going well. This strategy could be very reasonably adapted to suit any currency pair, but that will be treated quite a bit differently than a commodity such as gold.
Joe T
 
Posts: 186
Joined: Thu Jul 02, 2009 10:26 am

Re: JoeT's Gold Trading System

Postby Joe T » Mon Aug 02, 2010 11:43 am

Strategy on Gold (Part One)
The basic strategy with gold is to go long. Of course, there’s a lot more to it than that, but that’s the main focus. However, the “go long” aspect is the long-term outlook. The short-term can include shorts, so I do short gold during certain periods and at certain prices, as well. At times, this can become the dominant strategy.

I thought about the best way of laying out this strategy, and just decided to explain it step by step in as much detail as possible. Then I’ll try to address some specific situations that might arise.

Step One: Find the ALL-TIME high for gold, and enter it into a spreadsheet.
Look at your platform and go to a large time frame and locate the highest point. As of this writing, my platform shows a high of $1,265.05. If you want to duplicate the spreadsheet I have at the moment, you’d enter the words: “All Time High” in F18, and then you’d enter the dollar amount above in H18. (Otherwise, in my Journal I have it attached for download, as well as this entire write-up).

Step Two: Calculate your list of potential “Buy” entry prices
Right now, in A1 I have a column title called “In Price.” In A5 I simply pull over the value in H18 as a cell reference. In A6, I have =0.99*A5. I then copy that formula down the column.

What is this doing? I am setting potential entry prices based on the all time high. Every 1% decline from the previous price point is a potential buy-in point (or shorting entry level).

[I started this method by trading every $X, but realized as the price increased that the percentages were different enough that I preferred the idea of trading on a percentage gap. At $900, a $10 gap is significantly different than a $10 gap at $1200. I prefer to compare a $9 gap to a $12 gap between entry prices, and for setting take profit levels.]

Step Three: Build a column for the trading plan in Lot size
In B1 I have a title “Lots”. Starting in B5, for now, just put in a zero and copy down. We’ll get to the actual trading plan later on. Note that a micro-lot is 0.01 lots.

Step 4: Determine Take Profit targets for each entry point
The C column is entitled “Take Profit.” I’ll give you the formulas and then explain what I’m doing.
Leave cells C5-C9 blank. In C10, enter: =(A9-A10)*0.25+A10.

Then, in C11 enter: =(A10-A11)*0.25+(C10-A10)+A11. Copy C11 down the rest of the column.

These formulas are what I’ve come up with based on observation and my trading experience over the last few months. There well may be a more optimal schedule of take profit levels to employ. But let me explain the rationale.

The first 5 cells in the column are blank because I don’t want to go long so close to the all time high. So, I will be leaving the lot size at zero on these rows and there is no take profit. The take profit level is set to increase in size as price goes lower. Basically, my theory is that the lower price retraces from the high, the more we can expect it to rebound back toward the high. Starting in cell C10, I set take profit to be 25% of the distance between the previous calculated potential buy-in point in A9 and the current one in A10. It’s a small profit target, but I’m anticipating more price action up and down, and almost have a scalper mindset at this level.

Starting in cell C11, the take profit increases from a pip standpoint, but is at a lower price than in C10. What I’m doing here is calculating 25% between current and prior just like in C10, but also adding the pips from the C10 calculation to increase my take profit.

This may seem confusing, but let’s just show the example based on the current high of $1265.05:
(1) Potential Entry 1 = $1265.05
(2) Potential Entry 2 = (1) x 0.99 = 1265.05 x 0.99 = 1252.40
(3) Potential Entry 3 = (2) x 0.99 = 1252.40 x 0.99 = 1239.88
(4) Potential Entry 4 = (3) x 0.99 = 1239.88 x 0.99 = 1227.48
(5) Potential Entry 5 = (4) x 0.99 = 1227.48 x 0.99 = 1215.20
(6) Potential Entry 6 = (5) x 0.99 = 1215.20 x 0.99 = 1203.05
(7) Potential Entry 7 = (6) x 0.99 = 1203.05 x 0.99 = 1191.02
(8) Potential Entry 8 = (7) x 0.99 = 1191.02 x 0.99 = 1179.11

And so on…

Looking at the above entry points for long positions, I do not go long on the first 5. Thus, my first potential buy-in point occurs at (6), or 1203.05. I am then a buyer all the way down after that point. Lot sizes will be determined based on available capital.

The take-profit calculation described above would be calculated as follows, starting at the first buy-in point of 1203.05.
(1) 0.25 x (Entry Point 5 – Entry Point 6) + Entry Point 6 = 0.25 x (1215.20 – 1203.05) + 1203.05 = 1206.09.
(2) Take Profit Differential in (1) + 0.25 x (Entry Point 6 – Entry Point 7) + Entry Point 7 = (1206.09 – 1203.05) + 0.25 x (1203.05 – 1191.02) + 1191.02 = 3.04 + 3.01 + 1191.02 = 1197.07
(3) Take Profit Differential in (2) + 0.25 x (Entry Point 7 – Entry Point 8) + Entry Point 8 = (1197.07 – 1191.02) + 0.25 x (1191.02 – 1179.11) + 1179.11 = 6.05 + 2.98 + 1179.11 = 1188.14

And so on…
Joe T
 
Posts: 186
Joined: Thu Jul 02, 2009 10:26 am

Next

Return to Forex trading strategies and systems