Pro Forex Trader Interview With Psychologist Walter Peters

This is a great interview with Walter Peters, conducted by TradingHeroes.

Going Live

I'm currently opening a new account with Pepperstone. I hope to be trading live again next week with the low volatility breakout system that I described in the last few entries.

My overall aim is to become a mechanical trader by simultaneously trading multiple, low-correlated systems. My vision is :

- a smooth equity curve from using low risk money management (<1% per trade) in combination with multiple systems (the systems in drawdown should be more than compensated by systems in profit at any particular time due to low correlation).

- a rapidly rising equity curve from high frequency of trades (multiple systems will provide many trading opportunities every day. High frequency + the effect of compounding = steep equity curve).

Composite Equity Curve for daily range < 50% ATR(14)

Here it is! Time to enjoy my weekend.

By deleting duplicated trades, we are left with around 600 trades that took place from 2001 to mid-2012.

That gives us approximately one trade per week (600 / 11.5 years = 52).

50% ATR backtest on GBPJPY

Good results from the GBPJPY backtest. Expectancy was 28.5% after spread. Sample size was 171 trades.

The next step is to collate the results from all five currency pairs I've tested, eliminate duplicated trades and create a composite equity curve.

Personal links

I know I don't have many followers, but just in case, I've now classified most of my personal links as "outdated" / "obsolete". My mental framework as a trader is continually evolving and some of this information is no longer relevant. However, I'm not in a position to type up concrete alternative plans / forecasts / etc at this time.

50% ATR backtest on USDCAD

Below is the equity curve for the USDCAD from 2001 to mid-2012, using a 1.67:1 R:R ratio, 2% risk and a $10,000 initial balance.

This is from using my daily range < 50% ATR(14) breakout system. Expectancy was 24.1% after 123 sample trades, which is acceptable.

50% ATR backtest on AUDUSD

The result of the AUDUSD backtest is pretty bad. With a 2.5 reward-to-risk, expectancy was an unremarkable 1.43%.

However, if we reduce our reward to 1.67R, expectancy climbs to 10.88%. With a 1.67R reward, the expectancy for the USDJPY is 26.68%, and the EURUSD 31.15%.

The equity curves for 1.67R are below:

50% ATR backtest on USDJPY

I spent most of my Sunday backtesting the USDJPY with the system I described in the previous entry. Gathered around 250 sample trades from 2001 to mid-2012.

An equity curve is presented below, using 2.5 reward-to-risk and 2% risk per trade. This yielded a win% of 37.35% per trade, with an after-spread expectancy of 27.65%.

50% ATR trading system

This is a system I designed over the last few days. It still needs further backtesting, but so far I've gathered around 150 trades on the EURUSD from 2001 to mid-2012. It's somewhat price-action related, but we are using Average True Range to provide entry signals, rather than a candlestick pattern.

Setup the Average True Range indicator to 14 periods on the Daily Timeframe, High + low /2.

On the daily timeframe, you are looking for candles with a range of less than 50% of ATR(14). The rationale is similar to inside bars and dojis in that a daily candle of less than 50% ATR(14) represents a period of consolidation and indecision.

Here is a visual example.

Entry = break of the high or low + 1 pip

SL = opposite high or low + 1 pip

If you're stopped out in the same day as you enter, re-enter in the opposite direction. For example, yesterday's high is broken in a bullish run and you go long, but then price reverses and stops you out. Re-enter with a short order at yesterday's low + 1 pip (the same place as your stop loss). 

There were 152 trading opportunities for the EURUSD from 2001 to mid-2012. A risk-reward of 2.5 yielded a 40.79% win rate with an expectancy of 39.91% after spread, which is quite good. I ignored swap rates. Equity curve is below with 2% risk per trade.

Don't worry, if results continue to hold with further backtesting, I'll make a future post with more details.

Pro traders versus retail traders (and formulation of meta-strategy)

Today I was musing over the differences between professional and retail (stay-at-home) traders, and what obstacles pose in the way for retail traders.

It's pretty safe to assume that professional traders have a strong advantage over retail traders. From what I've gathered:

1. Professionals have a support team behind them, from market analysts to more-experienced mentors.

2. Regarding fundamental analysis, professionals have access to a myriad of contacts and information sources that provide them with a distinct edge over retailers.

3. Professionals pay less spread (if any at all).

4. Professionals have quicker and deeper access to forex markets.

5. Professionals have access to proprietary tools and indicators that retailers will never access.

And so on and so on...

For many months now I've been trying to design trading systems that can stand toe-to-toe with the professionals but I just don't think I can do it, at least in the medium-term.

Should I give up?

While thinking about strategy, my mind drifted over the different doctrines that the various militaries used in World War 2. Germany had blitzkrieg, using highly-trained stormtroopers and quality armour to quickly overwhelm the enemy, while the Soviets depended on endless human waves of inferior conscripted infantry to defend itself.

In the end, the Soviets won.

As a retail trader, I am the Soviet Union. My troops suck. I will never be able to fight Germany (the professionals) toe-to-toe. But what I can do is design plenty of mediocre (but still profitable) systems and trade all of them on the market. In effect, I can unleash human waves on the enemy.

This relates to the concept of "expectunity". Low expectancy can be compensated with high opportunity, which will occur if I use a multitude of low-expectancy trading systems simultaneously.

I have to accept my reality as a retail trader and fight with my strengths, not my weaknesses.