News Item #1: Stop loss discovery in Yen based forex strategies.

In going over the Cannon 450 strategies in play for the month of May, it was discovered that three EURJPY countertrend (oversold) strategies (“Cannon1 series”) had entered into the market in the 141.60 area on May 10, and two USDJPY strategies of the same series had entered into the market at 110.45 area on May 16. Now, prior to the entry of these signals, both markets were severely oversold, having fallen from 118.56 to 110.45 for USDJPY (approx 800 pips!) and from 144.70 to 141.60 for EURJPY (approx 300 pips!). Thus, the timing of the strategies was perfect for catching a significant market correction, as they strategies were designed to do. Unfortunately, prior to making their corrective move, the markets continued their downward thrust for an extra 150 pips from the strategy entry points (EURJPY hit a low of 140.74, and USDJPY hit a low of 108.96). Because the average stop loss for Cannon1 series was 120 pips, all five strategies were stopped out before they had a chance to take advantage of the corrective move that occurred not long after the stop out.

The question I asked myself was after this event was: is it chance or coincidence that all five strategies were picked off close to their stop, or could it be statistically shown that a 120 pip stop loss on Yen based strategies was cutting it too close? My hunch was the later scenario, and when I again retested many Yen based strategies going back to 1997 on intraday and 1987 on daily bars, I noticed that a 30 pip widening out of the 120 pip stop (making it a 160 pip stop) would have turned many losing trades into winning trades. This was a significant discovery. It meant that I had not widened out the stop loss enough to ride out the legendary volatility of the Yen.

The upshot of having 5 trades stop out at 120 pips each was 1100 pips damage (5X120) or $11,000 (1100 pips X $10) per 500K, which translates to -2%. If these strategies had been outfitted with 160 pip stop losses each, they would have gained an average 300 pips for each of the 5 trades (see before and after JPEG pics of all five strategies). This would have amounted to +1500 pips (5X300), or $15000 per 500K, which translates to +3% for the account. So if the stop loss was 150 instead of 120, the Cannon 450 would have been +3% for May, instead -2%. We cannot undo the past, but we can be better prepared for the future. We have discovered that Yen based strategies need at least 160 pips in order to withstand the Yen’s historic volatility (as seen from 25 years of back testing). These strategies have been outfitted accordingly. Going forward they will be better able to ride out the volatility of the market in order to capture the statistically greater degree of probable direction in favor of the entry signals.
 

News Item #2: Overlooked Daily Bar ripe for exploitation.

The blood of any good system is the data, how good is it, and how much of it is available to the system for back testing purposes. What I recently discovered was that while it is possible to acquire intraday 1 minute data going back 1997, which is a good deal of data, and the amount of time all the Cannon systems have been tested upon, the longer data available data for purchase is the DAILY data, which goes back to 1987 (even as far back to 1977 on some currencies).  This is an extra 10-20 years of data. I conducted further research on the matter and discovered what I had already suspected: institional traders trade on the daily bars of most markets, including FX. The daily bar shows the bigger picture of what is happening with the markets over the longer course of their history; it is the forest while the intraday is the trees. Since I had been accustomed to trade the emini S&P back in 1995 on a 15 minute chart, I had been biased in favor of intraday. When I started trading the FX in 2001, I graduated over to trading on the 60 minute, then the 120, then the 240, all the way up (almost every 6 months)…..with my last intraday horizon being 960 minute bar (16 hour bar).  I had realized that each graduation of a larger horizon bar brought with it greater advantages, such as less market noise and whipsaw, more technically advantageous conditions. But up till last month I had still kept my focus within the intraday and had not made the graduation “up” to the final level of the Daily Bar, the level of the institutional traders.

Now, the Daily bar is very difficult bar to work with. Not all traders can trade it successfully. But since I had worked out a number of interesting adaptive exits on the longer intraday bars (such as the 960 min), I thought that it should not be a problem now to work them out on the daily bar. And just for fun, I will try to see if the strategy can be profitable on the bars going back to 1987. So in the last month I have been applying each of my 18 core strategies to the Daily bar going back to 1987, and the results have been impressive. I had thought I had been catching the major swing moves of the markets with the 480, 780, and 960 minute bars before, and to a large extent I was, but with the daily bar, I could see that I could catch every swing every time. When I say swing, I mean market movements greater than 200 pips, all the way up to 1000 pips, and lasting for a week or more. Those are gigantic pip profits.

To let you in on a preview of what I am working on, I have attached a Rina portfolio report of 15 strategies on 5 markets, along with screen shots of some of these strategies. Each strategy produces close to 100K profit from 1987 till now, and combined together on a 500K sample account, they add 14% additional yearly profit. And that is just a small sample based on 2 core strategies applied to 5 markets, long and short. I plan on extending my other 16 core strategies to the 5 Daily markets, long and short, which entails creating at least 100 additional strategies. Because of the already low leverage of the each individual strategy, adding 100 additional elite strategies will only serve to enhance the profitability of the account. When more strategies aim at capturing the large profitable movements of the currencies, from the angle of the big picture (the DAILY bar) the account will blossom accordingly.