Trading and markets can be all consuming – they take as much time as an individual is willing to give. Many experienced traders work to reduce the amount of time spent in front of a screen. However, very few are able to reduce the time spent on trading to five minutes a day – but it is possible.

One of the lessons I learnt as a young market maker on the ASX Options trading floor is to remain open to all sorts of information. Traders tend to be decisive people. The downside to this is sometimes rejecting ideas that don’t agree with our own. However, good trading ideas can come from unusual and unrelated sources.

Customer feedback at CMC Markets seminars regularly suggests many traders are looking for a straightforward trading system that doesn’t require a large investment of time. In a conversation with a CMC Markets department head (a very successful investor) he pointed out that in trialling the new CMC Tracker platform he noticed that European currency traders regularly got it wrong at the open. These two ideas sparked an investigation.

Working with a talented quant (thanks Leo), we tested this idea. Looking at data over the eight months from November last year to June this year, there is evidence to suggest that the European opening move in EUR/USD is against the major move of the trading session.

The data was cut and sliced to come up with a trading approach that is based on placing two orders, both with attached stop loss and take profit orders.

Strike Rate and Profit / Loss Ratios

Experienced traders know that long term profitability is a function of two key ratios – the percentage of trades that are successful, and the realised profit to loss ratio. It often surprises newer traders that a success rate of less than 50% of trades can still deliver profits if combined with a higher profit to loss ratio.

We analysed the data to discover a winning combination, based on the price of the EUR/USD at the European open (5pm AEDT, 3 pm AEST).

The Method

The analysis shows that the combination of a 3:1 profit / loss ratio gave the best expected profit level when orders where placed to buy 17 pips under the opening price, and to sell at 28 pips over. Both orders have an attached stop loss 15 pips away, and a take profit order 45 pips away.

Market Analysis Results

Care should be taken in examining the table below – past performance is not necessarily a guide to future returns.

As the table shows, this strategy was profitable in four of the last eight months – but the wins and losses are not symmetrical. Despite the 50% success rate over 8 months, because the wins are significantly larger than the losses, the net result is a gain of 570 pips.

In a month of 22 trading days, just six profitable trades will deliver a profit for the month. In months such as April, where 11 of 21 trades are profitable, the gain is significant. Similarly, months like November, where only four trades made profit, result in a loss for the month.

Note – over the course of the study, one day resulted in no trade, and on two occasions the trade was not closed within the study period (up to 6 am the following day). These days were stripped for analysis purposes.

The Example

At 3pm on April 2, 2012, the EUR/USD stood at 1.3341

A trader using this method would place two orders:

**Order 1: BUY EUR/USD** at 1.3324 (1.3341 minus 17 pips)

*Stop loss at 1.3309 (buy price minus 15 pips), take profit at 1.3369 (buy price plus 45 pips).*

**Order 2: SELL EUR/USD** at 1.3369 (1.3341 plus 28 pips)

*Stop loss at 1.3384 (sell price plus 15 pips), take profit at 1.3324 (sell price minus 45 pips).*

The trader also creates price alerts at the two entry levels (1.3324 and 1.3384) as an additional reminder when a trade occurs to cancel the other order.

At 5.39 pm, the SELL is triggered (order 2). The trader receives an alert, and cancels the BUY order (order 1). As there are attached stop loss and take profit levels attached to order 2, there is no further action required.

At 10.07 pm, the take profit level is hit (while the trader is at dinner with friends), and the position closed for a 45 pip profit.

This is a single day example, and the stop loss target will (most likely) be hit on more trading days than the take profit. The reason the trader expects to make profit from the strategy is the 45 pips won on successful trades exceeds the 15 pips lost on unsuccessful trades.

Risks and Rewards

The average loss in unprofitable months in the study: 17.25 pips

The average win in profitable months in the study: 180 pips

Study monthly value, win to loss ratio: 10.4 to 1

While an extreme result is far less likely, it’s worth considering the theoretically possible.

Maximum possible loss (0 profitable trades out of 22): 330 pips

Maximum possible profits (22 profitable trades out of 22): 990 pips

Slippage is another risk. Slippage commonly occurs in fast, illiquid markets. The EUR/USD is the single largest market in the world, and therefore the most liquid, with the tightest spreads. This should limit slippage impacts. While slippage is still possible, it is unlikely to materially alter the results.

Perhaps a greater risk to the strategy is failing to place the trade. Missing just one profitable trade can have a significant impact on the result. Traders successfully using this method must make every effort to trade all of the days in the month.

Similarly, the study assumes that each trade is the same size – varying the size of trades could also materially alter the results.

What’s a Pip Worth?

On the CMC Tracker platform, all profits and losses are shown in Australian dollars. This means that the value of a pip in this trade will vary with the AUD/USD cross rate, as well as the trade size. At current levels (EUR/USD at 1.2060, AUD/USD at 1.0210) pip values are:

Trading EUR 10,000, pip value is AUD $0.98

Trading EUR 100,000, pip value is AUD $9.79

Trading EUR 1,000,000, pip value is AUD $97.88

Trading EUR 10,000,000, pip value is AUD $978.76

The Plan

We’ll follow this trade over the month of August, placing the trades each day at 3 pm. Look out for regular updates on the CMC Markets blog at blog.cmcmarkets.com.au

Could we have the price trades are entered at each day

Hi Louis – that’s the intention – look out for a blog post just after 3pm each day

Hi Michael, Why do you choose 17 and 28 ? why not 22 and 23 ?

Hi Steve – I tried many different combinations, both on the entry points and the profit/loss ratio. I also looked at joining the day trend ie buying above market or selling below market. Although other combinations delivered profits, 17 and 28 combined with 45/15 win/loss was the best mix tested.

Thank you for your reply. I will follow your blog everyday for the trial this month 🙂

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DOES THIS APPROACH WORK WITH ANY OTHER MARKETS/

Hi Drew – have now set up a template to test other markets. Would like to hear any suggestions for investigation – essentially I’m looking for repeated behavioural quirks in any market

I’m still working with marketmaker….on my screen that setup last night was a stopout , then a move to where you had hoped. Curious to see if it was the same on Tracker. drew.

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It seems to me that there are Trading Metrics missing from the table shown above, which make this approach to Trading higher risk than necessary.

IMHO, this type of Trading is HIGH Risk, for the following reasons:

1 – It relies on Market/Trader Behaviour remaining CONSTANT

2 – There are no Metrics for that Behaviour in the Table (Apart from the Results)

3 – There are no Metrics for how OPTIMISED the Trade Criterion has been made

4 – Highly Optimised Trade Criterion are likley to fail sooner (Once behaviour changes slightly)

If I was preparing a Trading Plan based on this approach, I would have included Metrics that helped me determine changes that might put the approach at risk, like:

– The number of consecutive days where a Buy Trade results in a Loss

– The number of consecutive days where a Sell Trade results in a Loss

(There are others, but these will do for a start)

If you recall the video, a ‘Quant’ was consulted for assistance to develop the above approach. Quants are very skilled mathemeticians, and the evidence of their involvement is shown in the fact that the Entry Points are Assymetric. Did you notice that you don’t Buy & Sell the same distance away from the Trigger point?

I will give you an example of Optimisation the Quant might have done. The Entry & Exit points are there for Mathematical reasons. I would expect the Quant to know how moving those prices (say) 5 Pips would affect the outcomes in the Table. Do you think that Metric would have been useful in the Table?

Another is Volatility. This trade relies on a certain amount of movement in one direction or the other. If markets become More Volatile, then Stops will get hit, and larger profits will get left on the table. If markets become Less Volatile, then Profit targets will get missed, and there will be more trades closed out without reaching the Profit Target.

Both of these events could be added to the Metrics in the Table. In addition, the Stop & Profit targets could be adjusted, due to the current Volatility (Say, over the last 24 hours, or the last 5 days). Even JUST having the Volatility of each day would be useful!

There is NO information about HOW the entry points were arrived at, which (IMHO) makes this a Black Box trade. Bbased on the above issues, I haven’t traded it. For those of you brave enough, the VERY best of luck to you!

Thanks your thoughtful and insightful comments Warren. I’ll stick with the current approach for this month, but as part of the review at end August I’ll look at incorporating your feedback in the next study.

The other issue is the Time of 15:00 for the Signal Price Point.

IMHO, trading in Australia isn’t necessarily going to move the world. But, by making the Time of the Signal Price Australia-Centric (Southern Hemisphere centric) ignores the consequences of Daylight Saving changes to Time Relativity with the rest of the world.

The table of past results is primarily during AESST, while there is a 2 hour difference between Australia and the rest of the world, when compared to AEST (When we are NOT on Daylight Saving Time).

The way this issue could be verified or discounted, is to know what Time (Expressed in AEST, or AESST, or UTC – which never goes int DST) the Market reversed from the Entry Price to towards the Take Profit Price, and the Distance from the Signal price at the Time of reversal.

If the Trading results table were done for 12 months, there would be full period of AEST & AESST trade results, to ascertain whether the move being traded is Northern or Southern Hemisphere centric (i.e. If the reversal point moves about 2 hours around DST Entry & Exit).

I believe this analysis could not be redily performed by CMC customers, as I’m not aware of ANY method customers can use for downloading the data behind a CMC chart (As say 15-Minute OHLC data).

Thanks agaion for your thoughts – although, as the original paper points out, the study was adjusted for the change in daylight savings on April 1.

michaelmccarthycmc Cancel said:

“…as the original paper points out, the study was adjusted for the change in daylight savings on April 1”

That’s great. However, the “original paper” you refer to isn’t quoted above, neither is the fact that Daylight Saving was accounted for As far as I can see, but I;m happy to be proved wrong).

What IS stated is: “European currency traders regularly got it wrong at the open.”

Since Europe DOES open at different times (Depending on DST in Australia & Europe), this WOULD seem to suggest that the Time of the Sginal Price MUST swap about every 6 months (i.e. from 15:00 AEST to 17:00 AESST). And, if Australia & Europe don’t swap on the same Sunday, then for a period of time, the Time of Signal Price could be 16:00.

I’m not trying to pick nits here, just fully understand what is being presented, and determine if all factors that could impact it have been considered. However, if there is a paper I could review, I would really appreciate a link to it.

Hi Warren – agree with your timing arguments. The paper was also published as a blog post – you can read it here:

http://blog.cmcmarkets.com.au/2012/07/31/five-minutes-a-day-trading/

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Hi Michael, Thanks for sharing this nice strategy. Will definitely try this out on demo. As I see, this strategy has defined rules, so it can be automated fairly easily. So would you mind if I try automating your strategy. Ofcourse credit will be yours and will share it will you as well. By a program, it will be easy to test out various TP/SL combinations.

Hi Dinesh – yes, feel free to automate this strategy. I’m very interested to hear how it works for you – please let me know.

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When you say 3 pm AEST, is it 5Am GMT??

Yes – 5 am GMT, 6 am London, 7 am Berlin/Bonn

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Hi Michael

Great article, the last Ping Back was dated Aug 31st, have you (missed profit by half a pip! Haha don’t you hate that!!) have you got more updates? Warren, nice feedback!

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