Thread: Volatility Exploitation Strategy

Hi

Ok I have another strategy for those that don't mind high risk.

This one relies on volatility so I guess the currencies that are the most volatile are the best. Perhaps GBP/USD and EUR/USD.

Preamble:
It would seem sensible to have stop loss limits closer/smaller than your profit lock limits. This way you only need to win less than half the time.

For example:
* If you stop loss was 3 and your profit lock was 9. One 'win' can fund up to 3 losses. To to break even you only need to be right one third of the time.
* If your stop loss was 2 and your profit lock was 4 then you only need to be right half the time to break even.
* If your stop loss was 40 and your profit lock was 120 then you only need to be right one third of the time to break even.

Ok that makes sense. So I traded like that and got hit every time. The reason I wasn't trading with large enough stop loss limits. I found that with anything less than 30 pips stop loss the market volatility ensured that the closest limit (stop OR profit lock) to my opening position, got hit first.

So I figured why not make that work for me.

Volatility Exploitation Strategy
1: Look at your graphs on 1 minute or 5 minute (these show the most volatility, longer charts cover that up). Decide on the latest trend, switch to a longer timeframe and use RSI(14) (if it is above 50 it may rise and below 50 it may fall) to help decide if it will continue, if you like.
2: Place trade in direction of trend with a low profit lock limit of around 5 to 10 pips (or more if you like, but the higher this limit the greater the risk it won't trigger).
3: Place a stop loss limit of between 50 and 100 pips. The lower the limit the higher the risk it'll trigger. If it is over the days high/low then even better.

The theory is that since volatility causes small swings 'all over the place' even with larger trends being evident, it will be volatility causing the closest limits to be hit first. If the closest limit is the profit lock then volatility should cause it 'on average' to be hit more times than the larger stop loss.

If you think the trend is going to reverse and is at a pivot point, then trade in the opposite direct. It shouldn't matter which direction you place the trade so long as you are not at the days high/low or in the middle of a much larger trend (i.e. a freefall or rocket rise) then you stand a good chance of being right.

Of course you can enhance this strategy with resistance levels, fib limits and everything else as you learn more. But for newbies with reasonable capital invested and no aversion to high risk, this can be a good starting strategy allowing you to learn as you go.

thank you for sharing.
How many transactions do you execute in a day with this strategy?

One, usually around 7.30am. Sometimes another around 6pm but usually one. I usually risk 100pips a trade and target around 10-20pips profit a trade (sometimes a tad more) in whatever direction seems sensible.

maybe I'm not getting your whole system, but with a profit of 20 and a stop loss of 100 you need to be right 5 times to cover being wrong once? I know you might use trailing stops, but the best that will do is 20/80

but you tell that the shorter trigger ususally gets hit first and you should already be in the direction of the (micro)trend

thanks