Five Minutes a Day Trading – June 2013 – White Paper

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.

Customer feedback regularly suggests many market participants are looking for a straightforward trading system that doesn’t require a large investment of time. Five Minutes a Day Trading (5MADT) is an example of a strategy that fits this bill.

On Monday, June 3 we’ll commence our third 5MADT campaign, targeting early European trading in the EUR/USD.

Both of our previous campaigns made a profit. The profits in each case were modest as each time the month delivered the minimum number of successful trades for profit. You can see the trading from August 2012 (EUR/USD)and February 2013 (Germany 30 DAX Index)as it unfolded, as well as results, comments and summaries on CMC’s Blog – simply search the term “five minutes”.

The campaign is based on a straightforward idea – European currency traders regularly get it wrong at the open. Looking at data over the six months from November last year to April this year, and our experience last August, there is evidence to suggest traders can profit when the European opening move in EUR/USD is against the major move of the trading session.

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 data to discover a winning combination, based on the price of the EUR/USD at the European open. For traders in Australia this is 5pm ADST, or 3 pm AEST. In June this will be 3 pm in Brisbane, Melbourne and Sydney and 1 pm in Perth.

The Method

The analysis shows that the combination of a 3.25 to 1 profit / loss ratio gave the best expected profit level when orders where placed to buy 11 pips under the opening price, and to sell at 25 pips over. Both orders have an attached stop loss 12 pips away, and a take profit order 39 pips away.

Market Analysis Results

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

20130529 analysis

As the table shows, this strategy was profitable in five of the last six months – but the wins and losses are not symmetrical. The wins are generally larger than the losses, and the net result is a gain of 579 pips.

In a month of 20 trading days, just five profitable trades will deliver a profit for the month. In months such as November, where 9 of 22 trades are profitable, the gain is significant. Similarly, months like March, where only four trades of 21 made a profit, the result is a loss.

Note – over the course of the study, 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 10, 2013, the EUR/USD stood at 1.3088

A trader using this method would place two orders:

Order 1: BUY EUR/USD at 1.3077 (1.3088 minus 11 pips)

Stop loss at 1.3065 (buy price minus 12 pips), take profit at 1.3116 (buy price plus 39 pips).

Order 2: SELL EUR/USD at 1.3113 (1.3088 plus 25 pips)

Stop loss at 1.3125 (sell price plus 12 pips), take profit at 1.3074 (sell price minus 39 pips).

The trader also creates price alerts at the two entry levels (1.3077 and 1.3113) as an additional reminder when a trade occurs to cancel the other order.

At 3.25 pm, the BUY is triggered (order 1). The trader receives an alert, and cancels the SELL order (order 2).  As there are attached stop loss and take profit levels attached to order 1, there is no further action required.

At 5.36 pm, the take profit level is hit (while the trader is out walking the dog), and the position closed for a 39 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 39 pips won on successful trades exceeds the 12 pips lost on unsuccessful trades.

Risks and Rewards

The average loss in unprofitable months in the study:     48 pips

The average win in profitable months in the study:     125 pips

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

Maximum possible loss (0 profitable trades out of 20): 240 pips

Maximum possible profits (20 profitable trades out of 20): 780 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 1.2860, AUD/USD at 0.9560) pip values are:

Trading EUR 10,000, pip value is AUD $1.05

Trading EUR 100,000, pip value is AUD $10.46

Trading EUR 1,000,000, pip value is AUD $104.60

Trading EUR 10,000,000, pip value is AUD $1046.03

The Plan

We’ll follow this trade over the month of June, placing the trades each day at 3 pm, and recording previous results. Look out for daily updates on this blog.

About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
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13 Responses to Five Minutes a Day Trading – June 2013 – White Paper

  1. Pingback: Five Minutes a Day Trading – June 2013 – Day 1 | CMC Markets Blog

  2. interesting stuff lets see how the month goes

  3. Steve says:

    The previous method posted in July 31, 2012

    ” 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. ”

    As I don’t know how to back test this method, can you please post an update for the results between August last year and now, if we still used this method ? Thanks .

    • Hi Steve – naturally, these parameters were the starting point of the analysis this time around. However, for the study period (Nov to Apr) the expectancy was only 60 points, due mainly to poor results in November (3 successes out of 21 trades) and March (1 success out of 21 trades).

      • steve says:

        Thank you Michael. So I guess, for this 5-minutes-a-day trading method, it needs to be adjusted every 2 – 3 month through back testing . Am I right ?

      • Hi Steve – yes, market behaviour evolves as participants discover patterns and adjust their strategies – this is why we focus on the most recent experience

      • steve says:

        Thank you very much. I am very interested in this method, and will use your method in trading everyday. But as you said, it need adjustment for setup every month, is it possible to show us how to get & adjust this setup in future ? Thanks again.

      • Steve – what would I then do for a living?

      • steve says:

        🙂

  4. Mark says:

    Hi Michael. Are you going to be posting up a day by day result of this strategy for successes and failures? or are you just going to be posting up the results at end of month ?
    Regards
    Mark

  5. Mark says:

    Hi Michael. Another thing I was wondering about is why is the target buy trade price to be only 11 pips away from the opening mid price whilst the target sell trade price is to be 25 pips away from the opening mid price? Why are entry parameters different yet the stop loss and take profit parameters the same?

    Regards
    Mark

    • Hey Mark – The stop loss and take profit levels are consistent on both sides by design – the reason I expect to profit from the strategy is the higher risk to reward ratio. Working with our quant I then sought the best combination of profit/loss and entry point – the final levels are a result of analysing what has worked over the recent trading history.

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