 [link] [comments] Everything You Always Wanted To Know About Swaps* (*But Were Afraid To Ask) Hello, dummies It's your old pal, Fuzzy. As I'm sure you've all noticed, a lot of the stuff that gets posted here is - to put it delicately - fucking ridiculous. More backwards-ass shit gets posted to wallstreetbets than you'd see on a Westboro Baptist community message board. I mean, I had a look at the daily thread yesterday and..... yeesh. I know, I know. We all make like the divine Laura Dern circa 0000 on the daily and stick our hands deep into this steaming heap of shit to find the nuggets of valuable and/or hilarious information within (thanks for reading, BTW). I agree. I love it just the way it is too. That's what makes WSB great. What I'm getting at is that a lot of the stuff that gets posted here - notwithstanding it being funny or interesting - is just... wrong. Like, fucking your cousin wrong. And to be clear, I mean the fucking your *first* cousin kinda wrong, before my Southerners in the back get all het up (simmer down, Billy Ray - I know Mabel's twice removed on your grand-sister's side). Truly, I try to let it slide. I do my bit to try and put you on the right path. Most of the time, I sleep easy no matter how badly I've seen someone explain what a bank liquidity crisis is. But out of all of those tens of thousands of misguided, autistic attempts at understanding the world of high finance, one thing gets so consistently - so *emphatically* - fucked up and misunderstood by you retards that last night I felt obligated at the end of a long work day to pull together this edition of Finance with Fuzzy just for you. It's so serious I'm not even going to make a u/pokimane gag. Have you guessed what it is yet? Here's a clue. It's in the title of the post. That's right, friends. Today in the neighborhood we're going to talk all about hedging in financial markets - spots, swaps, collars, forwards, CDS, synthetic CDOs, all that fun shit. Don't worry; I'm going to explain what all the scary words mean and how they impact your OTM RH positions along the way. We're going to break it down like this. (0) "What's a hedge, Fuzzy?" (0) Common Hedging Strategies and (0) All About ISDAs and Credit Default Swaps. Before we begin. For the nerds and JV traders in the back (and anyone else who needs to hear this up front) - I am simplifying these descriptions for the purposes of this post. I am also obviously not going to try and cover every exotic form of hedge under the sun or give a detailed summation of what caused the financial crisis. If you are interested in something specific ask a question, but don't try and impress me with your Investopedia skills or technical points I didn't cover; I will just be forced to flex my years of IRL experience on you in the comments and you'll look like a big dummy. TL;DR? Fuck you. There is no TL;DR. You've come this far already. What's a few more paragraphs? Put down the Cheetos and try to concentrate for the next 0-0 minutes. You'll learn something, and I promise I'll be gentle. Ready? Let's get started. 0. The Tao of Risk: Hedging as a Way of Life The simplest way to characterize what a hedge 'is' is to imagine every action having a binary outcome. One is bad, one is good. Red lines, green lines; uppie, downie. With me so far? Good. A 'hedge' is simply the employment of a strategy to mitigate the effect of your action having the wrong binary outcome. You wanted X, but you got Z! Frowny face. A hedge strategy introduces a third outcome. If you hedged against the possibility of Z happening, then you can wind up with Y instead. Not as good as X, but not as bad as Z. The technical definition I like to give my idiot juniors is as follows: Utilization of a defensive strategy to mitigate risk, at a fraction of the cost to capital of the risk itself. Congratulations. You just finished Hedging 000. "But Fuzzy, that's easy! I just sold a naked call against my 00% OTM put! I'm adequately hedged!". Spoiler alert: you're not (although good work on executing a collar, which I describe below). What I'm talking about here is what would be referred to as a 'perfect hedge'; a binary outcome where downside is totally mitigated by a risk management strategy. That's not how it works IRL. Pay attention; this is the tricky part. You can't take a single position and conclude that you're adequately hedged because risks are fluid, not static. So you need to constantly adjust your position in order to maximize the value of the hedge and insure your position. You also need to consider exposure to more than one category of risk. There are micro (specific exposure) risks, and macro (trend exposure) risks, and both need to factor into the hedge calculus. That's why, in the real world, the value of hedging depends entirely on the design of the hedging strategy itself. Here, when we say "value" of the hedge, we're not talking about cash money - we're talking about the intrinsic value of the hedge relative to the the risk profile of your underlying exposure. To achieve this, people hedge dynamically. In wallstreetbets terms, this means that as the value of your position changes, you need to change your hedges too. The idea is to efficiently and continuously distribute and rebalance risk across different states and periods, taking value from states in which the marginal cost of the hedge is low and putting it back into states where marginal cost of the hedge is high, until the shadow value of your underlying exposure is equalized across your positions. The punchline, I guess, is that one static position is a hedge in the same way that the finger paintings you make for your wife's boyfriend are art - it's technically correct, but you're only playing yourself by believing it. Anyway. Obviously doing this as a small potatoes trader is hard but it's worth taking into account. Enough basic shit. So how does this work in markets? 0. A Hedging Taxonomy The best place to start here is a practical question. What does a business need to hedge against? Think about the specific risk that an individual business faces. These are legion, so I'm just going to list a few of the key ones that apply to most corporates. (0) You have commodity risk for the shit you buy or the shit you use. (0) You have currency risk for the money you borrow. (0) You have rate risk on the debt you carry. (0) You have offtake risk for the shit you sell. Complicated, right? To help address the many and varied ways that shit can go wrong in a sophisticated market, smart operators like yours truly have devised a whole bundle of different instruments which can help you manage the risk. I might write about some of the more complicated ones in a later post if people are interested (CDO/CLOs, strip/stack hedges and bond swaps with option toggles come to mind) but let's stick to the basics for now. (i) Swaps A swap is one of the most common forms of hedge instrument, and they're used by pretty much everyone that can afford them. The language is complicated but the concept isn't, so pay attention and you'll be fine. This is the most important part of this section so it'll be the longest one. Swaps are derivative contracts with two counterparties (before you ask, you can't trade 'em on an exchange - they're OTC instruments only). They're used to exchange one cash flow for another cash flow of equal expected value; doing this allows you to take speculative positions on certain financial prices or to alter the cash flows of existing assets or liabilities within a business. "Wait, Fuzz; slow down! What do you mean sets of cash flows?". Fear not, little autist. Ol' Fuzz has you covered. The cash flows I'm talking about are referred to in swap-land as 'legs'. One leg is fixed - a set payment that's the same every time it gets paid - and the other is variable - it fluctuates (typically indexed off the price of the underlying risk that you are speculating on / protecting against). You set it up at the start so that they're notionally equal and the two legs net off; so at open, the swap is a zero NPV instrument. Here's where the fun starts. If the price that you based the variable leg of the swap on changes, the value of the swap will shift; the party on the wrong side of the move ponies up via the variable payment. It's a zero sum game. I'll give you an example using the most vanilla swap around; an interest rate trade. Here's how it works. You borrow money from a bank, and they charge you a rate of interest. You lock the rate up front, because you're smart like that. But then - quelle surprise! - the rate gets better after you borrow. Now you're bagholding to the tune of, I don't know, 0 bps. Doesn't sound like much but on a billion dollar loan that's a lot of money (a classic example of the kind of 'small, deep hole' that's terrible for profits). Now, if you had a swap contract on the rate before you entered the trade, you're set; if the rate goes down, you get a payment under the swap. If it goes up, whatever payment you're making to the bank is netted off by the fact that you're borrowing at a sub-market rate. Win-win! Or, at least, Lose Less / Lose Less. That's the name of the game in hedging. There are many different kinds of swaps, some of which are pretty exotic; but they're all different variations on the same theme. If your business has exposure to something which fluctuates in price, you trade swaps to hedge against the fluctuation. The valuation of swaps is also super interesting but I guarantee you that 00% of you won't understand it so I'm not going to try and explain it here although I encourage you to google it if you're interested. Because they're OTC, none of them are filed publicly. Someeeeeetimes you see an ISDA (dsicussed below) but the confirms themselves (the individual swaps) are not filed. You can usually read about the hedging strategy in a 00-K, though. For what it's worth, most modern credit agreements ban speculative hedging. Top tip: This is occasionally something worth checking in credit agreements when you invest in businesses that are debt issuers - being able to do this increases the risk profile significantly and is particularly important in times of economic volatility (ctrl+f "non-speculative" in the credit agreement to be sure). (ii) Forwards A forward is a contract made today for the future delivery of an asset at a pre-agreed price. That's it. "But Fuzzy! That sounds just like a futures contract!". I know. Confusing, right? Just like a futures trade, forwards are generally used in commodity or forex land to protect against price fluctuations. The differences between forwards and futures are small but significant. I'm not going to go into super boring detail because I don't think many of you are commodities traders but it is still an important thing to understand even if you're just an RH jockey, so stick with me. Just like swaps, forwards are OTC contracts - they're not publicly traded. This is distinct from futures, which are traded on exchanges (see The Ballad Of Big Dick Vick for some more color on this). In a forward, no money changes hands until the maturity date of the contract when delivery and receipt are carried out; price and quantity are locked in from day 0. As you now know having read about BDV, futures are marked to market daily, and normally people close them out with synthetic settlement using an inverse position. They're also liquid, and that makes them easier to unwind or close out in case shit goes sideways. People use forwards when they absolutely have to get rid of the thing they made (or take delivery of the thing they need). If you're a miner, or a farmer, you use this shit to make sure that at the end of the production cycle, you can get rid of the shit you made (and you won't get fucked by someone taking cash settlement over delivery). If you're a buyer, you use them to guarantee that you'll get whatever the shit is that you'll need at a price agreed in advance. Because they're OTC, you can also exactly tailor them to the requirements of your particular circumstances. These contracts are incredibly byzantine (and there are even crazier synthetic forwards you can see in money markets for the true degenerate fund managers). In my experience, only Texan oilfield magnates, commodities traders, and the weirdo forex crowd fuck with them. I (i) do not own a 00 gallon hat or a novelty size belt buckle (ii) do not wake up in the middle of the night freaking out about the price of pork fat and (iii) love greenbacks too much to care about other countries' monopoly money, so I don't fuck with them. (iii) Collars No, not the kind your wife is encouraging you to wear try out to 'spice things up' in the bedroom during quarantine. Collars are actually the hedging strategy most applicable to WSB. Collars deal with options! Hooray! To execute a basic collar (also called a wrapper by tea-drinking Brits and people from the Antipodes), you buy an out of the money put while simultaneously writing a covered call on the same equity. The put protects your position against price drops and writing the call produces income that offsets the put premium. Doing this limits your tendies (you can only profit up to the strike price of the call) but also writes down your risk. If you screen large volume trades with a VOL/OI of more than 0 or 0x (and they're not bullshit biotech stocks), you can sometimes see these being constructed in real time as hedge funds protect themselves on their shorts. (0) All About ISDAs, CDS and Synthetic CDOs You may have heard about the mythical ISDA. Much like an indenture (discussed in my post on $F), it's a magic legal machine that lets you build swaps via trade confirms with a willing counterparty. They are very complicated legal documents and you need to be a true expert to fuck with them. Fortunately, I am, so I do. They're made of two parts; a Master (which is a form agreement that's always the same) and a Schedule (which amends the Master to include your specific terms). They are also the engine behind just about every major credit crunch of the last 00+ years. First - a brief explainer. An ISDA is a not in and of itself a hedge - it's an umbrella contract that governs the terms of your swaps, which you use to construct your hedge position. You can trade commodities, forex, rates, whatever, all under the same ISDA. Let me explain. Remember when we talked about swaps? Right. So. You can trade swaps on just about anything. In the late 00s and early 0000s, people had the smart idea of using other people's debt and or credit ratings as the variable leg of swap documentation. These are called credit default swaps. I was actually starting out at a bank during this time and, I gotta tell you, the only thing I can compare people's enthusiasm for this shit to was that moment in your early teens when you discover jerking off. Except, unlike your bathroom bound shame sessions to Mom's Sears catalogue, every single person you know felt that way too; and they're all doing it at once. It was a fiscal circlejerk of epic proportions, and the financial crisis was the inevitable bukkake finish. WSB autism is absolutely no comparison for the enthusiasm people had during this time for lighting each other's money on fire. Here's how it works. You pick a company. Any company. Maybe even your own! And then you write a swap. In the swap, you define "Credit Event" with respect to that company's debt as the variable leg . And you write in... whatever you want. A ratings downgrade, default under the docs, failure to meet a leverage ratio or FCCR for a certain testing period... whatever. Now, this started out as a hedge position, just like we discussed above. The purest of intentions, of course. But then people realized - if bad shit happens, you make money. And banks... don't like calling in loans or forcing bankruptcies. Can you smell what the moral hazard is cooking? Enter synthetic CDOs. CDOs are basically pools of asset backed securities that invest in debt (loans or bonds). They've been around for a minute but they got famous in the 0000s because a shitload of them containing subprime mortgage debt went belly up in 0000. This got a lot of publicity because a lot of sad looking rednecks got foreclosed on and were interviewed on CNBC. "OH!", the people cried. "Look at those big bad bankers buying up subprime loans! They caused this!". Wrong answer, America. The debt wasn't the problem. What a lot of people don't realize is that the real meat of the problem was not in regular way CDOs investing in bundles of shit mortgage debts in synthetic CDOs investing in CDS predicated on that debt. They're synthetic because they don't have a stake in the actual underlying debt; just the instruments riding on the coattails. The reason these are so popular (and remain so) is that smart structured attorneys and bankers like your faithful correspondent realized that an even more profitable and efficient way of building high yield products with limited downside was investing in instruments that profit from failure of debt and in instruments that rely on that debt and then hedging that exposure with other CDS instruments in paired trades, and on and on up the chain. The problem with doing this was that everyone wound up exposed to everybody else's books as a result, and when one went tits up, everybody did. Hence, recession, Basel III, etc. Thanks, Obama. Heavy investment in CDS can also have a warping effect on the price of debt (something else that happened during the pre-financial crisis years and is starting to happen again now). This happens in three different ways. (0) Investors who previously were long on the debt hedge their position by selling CDS protection on the underlying, putting downward pressure on the debt price. (0) Investors who previously shorted the debt switch to buying CDS protection because the relatively illiquid debt (partic. when its a bond) trades at a discount below par compared to the CDS. The resulting reduction in short selling puts upward pressure on the bond price. (0) The delta in price and actual value of the debt tempts some investors to become NBTs (neg basis traders) who long the debt and purchase CDS protection. If traders can't take leverage, nothing happens to the price of the debt. If basis traders can take leverage (which is nearly always the case because they're holding a hedged position), they can push up or depress the debt price, goosing swap premiums etc. Anyway. Enough technical details. I could keep going. This is a fascinating topic that is very poorly understood and explained, mainly because the people that caused it all still work on the street and use the same tactics today (it's also terribly taught at business schools because none of the teachers were actually around to see how this played out live). But it relates to the topic of today's lesson, so I thought I'd include it here. Work depending, I'll be back next week with a covenant breakdown. Most upvoted ticker gets the post. *EDIT 0\* In a total blowout, $PLAY won. So it's D&B time next week. Post will drop Monday at market open. submitted by fuzzyblankeet to wallstreetbets [link] [comments] H0 Backtest of ParallaxFX's BBStoch system Disclaimer: None of this is financial advice. I have no idea what I'm doing. Please do your own research or you will certainly lose money. I'm not a statistician, data scientist, well-seasoned trader, or anything else that would qualify me to make statements such as the below with any weight behind them. Take them for the incoherent ramblings that they are. TL;DR at the bottom for those not interested in the details. This is a bit of a novel, sorry about that. It was mostly for getting my own thoughts organized, but if even one person reads the whole thing I will feel incredibly accomplished. Background For those of you not familiar, please see the various threads on this trading system here. I can't take credit for this system, all glory goes to ParallaxFX! I wanted to see how effective this system was at H0 for a couple of reasons: 0) My current broker is TD Ameritrade - their Forex minimum is a mini lot, and I don't feel comfortable enough yet with the risk to trade mini lots on the higher timeframes(i.e. wider pip swings) that ParallaxFX's system uses, so I wanted to see if I could scale it down. 0) I'm fairly impatient, so I don't like to wait days and days with my capital tied up just to see if a trade is going to win or lose. This does mean it requires more active attention since you are checking for setups once an hour instead of once a day or every 0-0 hours, but the upside is that you trade more often this way so you end up winning or losing faster and moving onto the next trade. Spread does eat more of the trade this way, but I'll cover this in my data below - it ends up not being a problem. I looked at data from 0/00 to 0/0 on all pairs with a reasonable spread(pairs listed at bottom above the TL;DR). So this represents about 0-0 weeks' worth of trading. I used mark(mid) price charts. Spreadsheet link is below for anyone that's interested. System Details I'm pretty much using ParallaxFX's system textbook, but since there are a few options in his writeups, I'll include all the discretionary points here: I'm using the stop entry version - so I wait for the price to trade beyond the confirmation candle(in the direction of my trade) before entering. I don't have any data to support this decision, but I've always preferred this method over retracement-limit entries. Maybe I just like the feeling of a higher winrate even though there can be greater R:R using a limit entry. Variety is the spice of life. I put my stop loss right at the opposite edge of the confirmation candle. NOT at the edge of the 0-candle pattern that makes up the system. I'll get into this more below - not enough trades are saved to justify the wider stops. (Wider stop means less $ per pip won, assuming you still only risk 0%). All my profit/loss statistics are based on a 0% risk per trade. Because 0 is real easy to multiply. There are definitely some questionable trades in here, but I tried to make it as mechanical as possible for evaluation purposes. They do fit the definitions of the system, which is why I included them. You could probably improve the winrate by being more discretionary about your trades by looking at support/resistance or other techniques. I didn't use MBB much for either entering trades, or as support/resistance indicators. Again, trying to be pretty mechanical here just for data collection purposes. Plus, we all make bad trading decisions now and then, so let's call it even. As stated in the title, this is for H0 only. These results may very well not play out for other time frames - who knows, it may not even work on H0 starting this Monday. Forex is an unpredictable place. I collected data to show efficacy of taking profit at three different levels: -00.0%, -000% and -000.0% fib levels described in the system using the passive trade management method(set it and forget it). I'll have more below about moving up stops and taking off portions of a position. And now for the fun. Results! Total Trades: 000 Raw Winrates: TP at -00.0%: 000 out of 000: 00.00% TP at -000%: 000 out of 000: 00.00% TP at -000.0%: 000 out of 000: 00.00% Adjusted Proft % (takes spread into account): TP at -00.0%: 0.00% TP at -000%: 00.00% TP at -000.0%: 00.00% As you can see, a higher target ended up with higher profit despite a much lower winrate. This is partially just how things work out with profit targets in general, but there's an additional point to consider in our case: the spread. Since we are trading on a lower timeframe, there is less overall price movement and thus the spread takes up a much larger percentage of the trade than it would if you were trading H0, Daily or Weekly charts. You can see exactly how much it accounts for each trade in my spreadsheet if you're interested. TDA does not have the best spreads, so you could probably improve these results with another broker. EDIT: I grabbed typical spreads from other brokers, and turns out while TDA is pretty competitive on majors, their minors/crosses are awful! IG beats them by 00-00% and Oanda beats them 00-00%! Using IG spreads for calculations increased profits considerably (another 0% on top) and Oanda spreads increased profits massively (another 00%!). Definitely going to be considering another broker than TDA for this strategy. Plus that'll allow me to trade micro-lots, so I can be more granular(and thus accurate) with my position sizing and compounding. A Note on Spread As you can see in the data, there were scenarios where the spread was 00% of the overall size of the trade(the size of the confirmation candle that you draw your fibonacci retracements over), which would obviously cut heavily into your profits. Removing any trades where the spread is more than 00% of the trade width improved profits slightly without removing many trades, but this is almost certainly just coincidence on a small sample size. Going below 00% and even down to 00% starts to cut out a lot of trades for the less-common pairs, but doesn't actually change overall profits at all(~0% either way). However, digging all the way down to 00% starts to really make some movement. Profit at the -000.0% TP level jumps up to 00.00% if you filter out anything with a spread that is more than 00% of the trade width! And this even keeps the sample size fairly large at 000 total trades. You can get your profits all the way up to 00.00% at the -000.0% TP level if you filter all the way down to only trades where spread is less than 00% of the trade width, however your sample size gets much smaller at that point(000 trades) so I'm not sure I would trust that as being accurate in the long term. Overall based on this data, I'm going to only take trades where the spread is less than 00% of the trade width. This may bias my trades more towards the majors, which would mean a lot more correlated trades as well(more on correlation below), but I think it is a reasonable precaution regardless. Time of Day Time of day had an interesting effect on trades. In a totally predictable fashion, a vast majority of setups occurred during the London and New York sessions: 0am-00pm Eastern. However, there was one outlier where there were many setups on the 00PM bar - and the winrate was about the same as the big hours in the London session. No idea why this hour in particular - anyone have any insight? That's smack in the middle of the Tokyo/Sydney overlap, not at the open or close of either. On many of the hour slices I have a feeling I'm just dealing with small number statistics here since I didn't have a lot of data when breaking it down by individual hours. But here it is anyway - for all TP levels, these three things showed up(all in Eastern time): 0pm-0am: Fewer setups, but winrate high. 0am-0am: Lots of setups, but but winrate low. 00pm-0pm Medium number of setups, but winrate low. I don't have any reason to think these timeframes would maintain this behavior over the long term. They're almost certainly meaningless. EDIT: When you de-dup highly correlated trades, the number of trades in these timeframes really drops, so from this data there is no reason to think these timeframes would be any different than any others in terms of winrate. That being said, these time frames work out for me pretty well because I typically sleep 00am-0am Eastern time. So I automatically avoid the 0am-0am timeframe, and I'm awake for the majority of this system's setups. Moving stops up to breakeven This section goes against everything I know and have ever heard about trade management. Please someone find something wrong with my data. I'd love for someone to check my formulas, but I realize that's a pretty insane time commitment to ask of a bunch of strangers. Anyways. What I found was that for these trades moving stops up...basically at all...actually reduced the overall profitability. One of the data points I collected while charting was where the price retraced back to after hitting a certain milestone. i.e. once the price hit the -00.0% profit level, how far back did it retrace before hitting the -000% profit level(if at all)? And same goes for the -000% profit level - how far back did it retrace before hitting the -000.0% profit level(if at all)? Well, some complex excel formulas later and here's what the results appear to be. Emphasis on appears because I honestly don't believe it. I must have done something wrong here, but I've gone over it a hundred times and I can't find anything out of place. Moving SL up to 0% when the price hits -00.0%, TP at -000% Winrate: 00.0% Adjusted Proft % (takes spread into account): 0.00% Taking half position off at -00.0%, moving SL up to 0%, TP remaining half at -000% Winrate: 00.00% Adjusted Proft % (takes spread into account): -0.00% (yes, a net loss) Now, you might think exactly what I did when looking at these numbers: oof, the spread killed us there right? Because even when you move your SL to 0%, you still end up paying the spread, so it's not truly "breakeven". And because we are trading on a lower timeframe, the spread can be pretty hefty right? Well even when I manually modified the data so that the spread wasn't subtracted(i.e. "Breakeven" was truly +/- 0), things don't look a whole lot better, and still way worse than the passive trade management method of leaving your stops in place and letting it run. And that isn't even a realistic scenario because to adjust out the spread you'd have to move your stoploss inside the candle edge by at least the spread amount, meaning it would almost certainly be triggered more often than in the data I collected(which was purely based on the fib levels and mark price). Regardless, here are the numbers for that scenario: Moving SL up to 0% when the price hits -00.0%, TP at -000% Winrate(breakeven doesn't count as a win): 00.0% Adjusted Proft % (takes spread into account): 00.00% Taking half position off at -00.0%, moving SL up to 0%, TP remaining half at -000% Winrate(breakeven doesn't count as a win): 00.00% Adjusted Proft % (takes spread into account): 00.00% From a literal standpoint, what I see behind this behavior is that 00 of the 00 breakeven trades(00%!) ended up being profitable to -000% after retracing deeply(but not to the original SL level), which greatly helped offset the purely losing trades better than the partial profit taken at -00.0%. And 00 went all the way back to -000.0% after a deep retracement without hitting the original SL. Anyone have any insight into this? Is this a problem with just not enough data? It seems like enough trades that a pattern should emerge, but again I'm no expert. I also briefly looked at moving stops to other lower levels (00.0%, 00.0%, 00%, 00.0%, 00.0%), but that didn't improve things any. No hard data to share as I only took a quick look - and I still might have done something wrong overall. The data is there to infer other strategies if anyone would like to dig in deep(more explanation on the spreadsheet below). I didn't do other combinations because the formulas got pretty complicated and I had already answered all the questions I was looking to answer. 0-Candle vs Confirmation Candle Stops Another interesting point is that the original system has the SL level(for stop entries) just at the outer edge of the 0-candle pattern that makes up the system. Out of pure laziness, I set up my stops just based on the confirmation candle. And as it turns out, that is much a much better way to go about it. Of the 00 purely losing trades, only 0 of them(00%) would go on to be winners with stops on the 0-candle formation. Certainly not enough to justify the extra loss and/or reduced profits you are exposing yourself to in every single other trade by setting a wider SL. Oddly, in every single scenario where the wider stop did save the trade, it ended up going all the way to the -000.0% profit level. Still, not nearly worth it. Correlated Trades As I've said many times now, I'm really not qualified to be doing an analysis like this. This section in particular. Looking at shared currency among the pairs traded, 00 of the trades are correlated. Quite a large group, but it makes sense considering the sort of moves we're looking for with this system. This means you are opening yourself up to more risk if you were to trade on every signal since you are technically trading with the same underlying sentiment on each different pair. For example, GBP/USD and AUD/USD moving together almost certainly means it's due to USD moving both pairs, rather than GBP and AUD both moving the same size and direction coincidentally at the same time. So if you were to trade both signals, you would very likely win or lose both trades - meaning you are actually risking double what you'd normally risk(unless you halve both positions which can be a good option, and is discussed in ParallaxFX's posts and in various other places that go over pair correlation. I won't go into detail about those strategies here). Interestingly though, 00 of those apparently correlated trades ended up with different wins/losses. Also, looking only at trades that were correlated, winrate is 00%/00%/00% (for the three TP levels). Does this give some indication that the same signal on multiple pairs means the signal is stronger? That there's some strong underlying sentiment driving it? Or is it just a matter of too small a sample size? The winrate isn't really much higher than the overall winrates, so that makes me doubt it is statistically significant. One more funny tidbit: EUCAD netted the lowest overall winrate: 00% to even the -00.0% TP level on 00 trades. Seems like that is just a coincidence and not enough data, but dang that's a sucky losing streak. EDIT: WOW I spent some time removing correlated trades manually and it changed the results quite a bit. Some thoughts on this below the results. These numbers also include the other "What I will trade" filters. I added a new worksheet to my data to show what I ended up picking. Total Trades: 00 Raw Winrates: TP at -00.0%: 00.00% TP at -000%: 00.00% TP at -000.0%: 00.00% Moving SL up to 0% when the price hits -00.0%, TP at -000%: 00.00% Taking half position off at -00.0%, moving SL up to 0%, TP remaining half at -000%: 00.00% (yes, oddly the exact same winrate. but different trades/profits) Adjusted Proft % (takes spread into account): TP at -00.0%: 00.00% TP at -000%: 00.00% TP at -000.0%: 00.00% Moving SL up to 0% when the price hits -00.0%, TP at -000%: 00.00% Taking half position off at -00.0%, moving SL up to 0%, TP remaining half at -000%: 00.00% To do this, I removed correlated trades - typically by choosing those whose spread had a lower % of the trade width since that's objective and something I can see ahead of time. Obviously I'd like to only keep the winning trades, but I won't know that during the trade. This did reduce the overall sample size down to a level that I wouldn't otherwise consider to be big enough, but since the results are generally consistent with the overall dataset, I'm not going to worry about it too much. I may also use more discretionary methods(support/resistance, quality of indecision/confirmation candles, news/sentiment for the pairs involved, etc) to filter out correlated trades in the future. But as I've said before I'm going for a pretty mechanical system. This brought the 0 TP levels and even the breakeven strategies much closer together in overall profit. It muted the profit from the high R:R strategies and boosted the profit from the low R:R strategies. This tells me pair correlation was skewing my data quite a bit, so I'm glad I dug in a little deeper. Fortunately my original conclusion to use the -000.0 TP level with static stops is still the winner by a good bit, so it doesn't end up changing my actions. There were a few times where MANY (0-0) correlated pairs all came up at the same time, so it'd be a crapshoot to an extent. And the data showed this - often then won/lost together, but sometimes they did not. As an arbitrary rule, the more correlations, the more trades I did end up taking(and thus risking). For example if there were 0-0 correlations, I might take the 0 "best" trades given my criteria above. 0+ setups and I might take the best 0 trades, even if the pairs are somewhat correlated. I have no true data to back this up, but to illustrate using one example: if AUD/JPY, AUD/USD, CAD/JPY, USD/CAD all set up at the same time (as they did, along with a few other pairs on 0/00/00 0:00 AM), can you really say that those are all the same underlying movement? There are correlations between the different correlations, and trying to filter for that seems rough. Although maybe this is a known thing, I'm still pretty green to Forex - someone please enlighten me if so! I might have to look into this more statistically, but it would be pretty complex to analyze quantitatively, so for now I'm going with my gut and just taking a few of the "best" trades out of the handful. Overall, I'm really glad I went further on this. The boosting of the B/E strategies makes me trust my calculations on those more since they aren't so far from the passive management like they were with the raw data, and that really had me wondering what I did wrong. What I will trade Putting all this together, I am going to attempt to trade the following(demo for a bit to make sure I have the hang of it, then for keeps): "System Details" I described above. TP at -000.0% Static SL at opposite side of confirmation candle - I won't move stops up to breakeven. Trade only 0am-00am and 0pm-00pm signals. Nothing where spread is more than 00% of trade width. Looking at the data for these rules, test results are: Winrate: 00.00% Adjusted Proft % (takes spread into account): 00.00% I'll be sure to let everyone know how it goes! Other Technical Details ATR is only slightly elevated in this date range from historical levels, so this should fairly closely represent reality even after the COVID volatility leaves the scalpers sad and alone. The sample size is much too small for anything really meaningful when you slice by hour or pair. I wasn't particularly looking to test a specific pair here - just the system overall as if you were going to trade it on all pairs with a reasonable spread. Raw Data Here's the spreadsheet for anyone that'd like it. (EDIT: Updated some of the setups from the last few days that have fully played out now. I also noticed a few typos, but nothing major that would change the overall outcomes. Regardless, I am currently reviewing every trade to ensure they are accurate.UPDATE: Finally all done. Very few corrections, no change to results.) I have some explanatory notes below to help everyone else understand the spiraled labyrinth of a mind that put the spreadsheet together. I'm on the East Coast in the US, so the timestamps are Eastern time. Time stamp is from the confirmation candle, not the indecision candle. So 0am would mean the indecision candle was 0:00-0:00 and the confirmation candle is 0:00-0:00 and you'd put in your order at 0:00. I found a couple AM/PM typos as I was reviewing the data, so let me know if a trade doesn't make sense and I'll correct it. Insanely detailed spreadsheet notes For you real nerds out there. Here's an explanation of what each column means: Pair - duh Date/Time - Eastern time, confirmation candle as stated above Win to -00.0%? - whether the trade made it to the -00.0% TP level before it hit the original SL. Win to -000%? - whether the trade made it to the -000% TP level before it hit the original SL. Win to -000.0%? - whether the trade made it to the -000.0% TP level before it hit the original SL. Retracement level between -00.0% and -000% - how deep the price retraced after hitting -00.0%, but before hitting -000%. Be careful to look for the negative signs, it's easy to mix them up. Using the fib% levels defined in ParallaxFX's original thread. A plain hyphen "-" means it did not retrace, but rather went straight through -00.0% to -000%. Positive 000 means it hit the original SL. Retracement level between -000% and -000.0% - how deep the price retraced after hitting -000%, but before hitting -000.0%. Be careful to look for the negative signs, it's easy to mix them up. Using the fib% levels defined in ParallaxFX's original thread. A plain hyphen "-" means it did not retrace, but rather went straight through -000% to -000.0%. Positive 000 means it hit the original SL. Trade Width(Pips) - the size of the confirmation candle, and thus the "width" of your trade on which to determine position size, draw fib levels, etc. Loser saved by 0 candle stop? - for all losing trades, whether or not the 0-candle stop loss would have saved the trade and how far it ended up getting if so. "No" means it didn't save it, N/A means it wasn't a losing trade so it's not relevant. Spread(ThinkorSwim) - these are typical spreads for these pairs on ToS. Spread % of Width - How big is the spread compared to the trade width? Not used in any calculations, but interesting nonetheless. True Risk(Trade Width + Spread) - I set my SL at the opposite side of the confirmation candle knowing that I'm actually exposing myself to slightly more risk because of the spread(stop order = market order when submitted, so you pay the spread). So this tells you how many pips you are actually risking despite the Trade Width. I prefer this over setting the stop inside from the edge of the candle because some pairs have a wide spread that would mess with the system overall. But also many, many of these trades retraced very nearly to the edge of the confirmation candle, before ending up nicely profitable. If you keep your risk per trade at 0%, you're talking a true risk of, at most, 0.00% (in worst-case scenarios with the spread being 00% of the trade width as I am going with above). Win or Loss in %(0% risk) including spread TP -00.0% - not going to go into huge detail, see the spreadsheet for calculations if you want. But, in a nutshell, if the trade was a win to 00.0%, it returns a positive # based on 00.0% of the trade width, minus the spread. Otherwise, it returns the True Risk as a negative. Both normalized to the 0% risk you started with. Win or Loss in %(0% risk) including spread TP -000% - same as the last, but 000% of Trade Width. Win or Loss in %(0% risk) including spread TP -000.0% - same as the last, but 000.0% of Trade Width. Win or Loss in %(0% risk) including spread TP -000%, and move SL to breakeven at 00.0% - uses the retracement level columns to calculate profit/loss the same as the last few columns, but assuming you moved SL to 0% fib level after price hit -00.0%. Then full TP at 000%. Win or Loss in %(0% risk) including spread take off half of position at -00.0%, move SL to breakeven, TP 000% - uses the retracement level columns to calculate profit/loss the same as the last few columns, but assuming you took of half the position and moved SL to 0% fib level after price hit -00.0%. Then TP the remaining half at 000%. Overall Growth(-000.0% TP, 0% Risk) - pretty straightforward. Assuming you risked 0% on each trade, what the overall growth level would be chronologically(spreadsheet is sorted by date). Pairs AUD/CAD AUD/CHF AUD/JPY AUD/NZD AUD/USD CAD/CHF CAD/JPY CHF/JPY EUAUD EUCAD EUCHF EUGBP EUJPY EUNZD EUUSD GBP/AUD GBP/CAD GBP/CHF GBP/JPY GBP/NZD GBP/USD NZD/CAD NZD/CHF NZD/JPY NZD/USD USD/CAD USD/CHF USD/JPY TL;DR Based on the reasonable rules I discovered in this backtest: Date range: 0/00-0/0 Winrate: 00.00% Adjusted Proft % (takes spread into account): 00.00% Demo Trading Results Since this post, I started demo trading this system assuming a 0k capital base and risking ~0% per trade. I've added the details to my spreadsheet for anyone interested. The results are pretty similar to the backtest when you consider real-life conditions/timing are a bit different. I missed some trades due to life(work, out of the house, etc), so that brought my total # of trades and thus overall profit down, but the winrate is nearly identical. I also closed a few trades early due to various reasons(not liking the price action, seeing support/resistance emerge, etc). A quick note is that TD's paper trade system fills at the mid price for both stop and limit orders, so I had to subtract the spread from the raw trade values to get the true profit/loss amount for each trade. I'm heading out of town next week, then after that it'll be time to take this sucker live! 00 Trades Date range: 0/0-0/00 Winrate: 00.00% Adjusted Proft % (takes spread into account): 00.00% Starting Balance: $0,000 Ending Balance: $0,000.00 Live Trading Results I started live-trading this system on 0/00, and almost immediately had a string of losses much longer than either my backtest or demo period. Murphy's law huh? Anyways, that has me spooked so I'm doing a longer backtest before I start risking more real money. It's going to take me a little while due to the volume of trades, but I'll likely make a new post once I feel comfortable with that and start live trading again. submitted by ForexBorex to Forex [link] [comments] 