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 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.
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
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