Trading the NZD/JPY

This three-month period can be broken up into five stages, as shown in the figure below. In stage 1, the market rallied against the underlying theme I identified. In stage 2, the theme played out in my favour. In stage 3, a strong countertrend rally saw it move against me and then stage 4 went my way. In stage 5, the trade was again moving against the underlying theme. The realised profits also occur in five identifiable stages.

In stage 1, I was losing money. Entries were stopped out for a loss and this occurred for almost two weeks. Then the pyramiding came into effect. Now that the trade was going my way, profits were added rapidly, continuing for almost two weeks. It is about this time that dreams of what I could spend all the money on start to take over. It was now tempting to add larger and larger positions but I kept in mind the concept of reversion to the mean. A winning streak occurs because of a trend, and the most likely thing to happen next is a consolidation. This came in right on schedule and my position size was cut back to minimise the impact on my portfolio.

Entries were then stopped out for a loss regularly but the underlying theme remained in place. Ideally, I needed to reduce the impact of the periods when the strategy was not working because the impact on the account was significant. Scaling back position size more quickly after a winning streak would help because I was still trading larger positions as the account grew. Calculating risk purely on the basis of your account size, which I was doing, means that the account has to drop in value a lot before you start to trade less. This can result in unnecessarily giving back profit that has been made. Because of the concept of reversion to the mean, I developed the strategy of removing money from my account once I double the account size. This forces me to trade less. Quit while you are ahead. A profit of almost $14 000 dropped back to $4000 during stage 3, while I continued to trade through this countertrend move.

After a month of losing money, many traders can become frustrated or despondent, but if your underlying strategy remains valid, you are just around the corner from profitability. Minimising the impact of losses by reducing position size is the answer here. Stage 4 came along with a rapid return to profitability, as the pyramiding once again allowed me to increase my position size rapidly as the trade moved in my favour.

The sharp drop in the New Zealand dollar caused the realised profit to increase rapidly up by 400 per cent in a matter of days, before entering stage 5, where once again the trade moved counter trend. The statistics are shown in table 11.3 for the series of trades taken. The hit rate at 19 per cent is very low. This means for every 100 trades taken, only 19 trades are profitable. Psychologically, this is not an easy system to trade because you are wrong so often. However, the strategy is profitable because of a very strong edge ratio of more than 5. This means that when the strategy wins, it makes five times what it loses. Risk is well contained at less than $500 per trade.

Wins and losses trading the yen against the New Zealand dollar can be seen in the table below.

Wins 21
Losses 92
Hit rate 19%
Average win $2,300.60
Average loss -$452.81
Edge ratio 5.08

The statistics are shown in the table for the series of trades taken. The hit rate at 19 per cent is very low. This means for every 100 trades taken, only 19 trades are profitable. Psychologically, this is not an easy system to trade because you are wrong so often. However, the strategy is profitable because of a very strong edge ratio of more than 5. This means that when the strategy wins, it makes five times what it loses. Risk is well contained at less than $500 per trade.

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