Is it the system or is it you?


I have recently had a rather persistent gentleman with no experience in actual trading, who has never read any of my books, contact me with two long emails, after reading another authors book on trading.  He has armed himself  with some questions with which he is going around and testing system authors.

Here are the questions…

1. How many years did you backtest 10XROI ?
2. Was final test done on an out out sample of fresh data ?
3. Did you test over different market conditions ?
4. What was longest drawdown ?
5. What was largest win ?
6. What was largest loss ?
7. What was average trade profit ?
8. Was system curve-fitted ?
Now when I was first involved in the forex market these would have seemed very reasonable questions to ask a system creator, but they display a lack of trading experience.
 Firstly I wouldn’t read a book on high probability and then use that authors set of criteria to question someone whose books are based on getting a High ROI, they are obviously using a different set of trading criteria. Whatever answer I gave this gentleman would it be meaningful to him unless he had read the book and done his own back testing.  These questions can and should be answered with the purchase of one of my very inexpensive books, starting with the 10XROI system and doing their own back testing over a couple of years to see if there is profit in the system.  Every trader who is using my systems are putting their own spin on the system and so the experience of one trader using the system is going to be different from another trader.  This is why I don’t put back testing results in the books, but instead I ask my readers to do their due diligence and their own back testing.
In my book Control Your Inner Trader I talk about the work of a professional trader which is keeping strict records and  about the process of Kaizen which is constantly looking for ways to improve  each aspect of your  trading results which I suppose means that you are constantly curve fitting your system!
After I had done my own back testing, using the system creators criteria. here are a set of questions I would ask knowing what I know now.
1.If you were just starting out in the forex market and you were using the  10XROI system, what steps would you take to short cut the learning curve and get to profitability?
2.What do you think is the most important thing to know about this system?
3.What are the weaknesses of the trading, money management system?
4.What do you think is going to be my biggest hurdle in trading?
5.How would I overcome this?
Here would be my answers.
1.Work out if the 10XROI is a system that fits around your lifestyle so you can take every trade that comes up, if that is the case and you feel comfortable with this system then don’t look at any other system. ( You can add another of my  systems as they are very similar and will not conflict  with the 10XROI  but wait until you have mastered one system.) Ignore everything else but your own work on the system,  You don’t need a complex system to trade the forex and by opening your mind to other systems you will be confusing yourself and go off on tangents which will make it a far longer journey.  Just focus on this system and kaizen.
2. The most important thing to know is that this is a deceptively simple system that took years to develop and all the other systems developed by the system creator are simply different versions of this system. Therefore the 10XROI is the system to start with even if you end up trading another system by the author because of time constraints.
3 Here are the weaknesses of the system
a) You have to enter on an hourly time frame which can leave you vulnerable to getting spiked out by news announcements.
b) Sometimes you have to leave your trade to run over a couple of weeks which means leaving your trade open over the weekend and risking weekend gapping. ( I put the solution to this in another post Click Here…)
c) There can be long waits between trades (sometimes weeks , which is why I created the TAYJ system to find more entries into the daily momentum)
e) The money management system is subject to the limitations of your trading account, that is  the precision of the position sizes you are allowed to place, you may have to round it to the nearest whole number. The leverage allowed by your broker, particularly in the USA,  (Learn to Trade Forex Without Losing Your Shirt gives a list of brokers US Citizens can use).  There can be slippage in a trade and so you are best to err on the side of caution when placing your stop and allow for this.
f) Different platforms can show the daily candles differently so it would be wise to use a few demo platforms with different end of day finishes to see if the levels are different, sometimes you can miss trades due to this,
4 and 5 You biggest hurdle is going to be sticking to the system and taking the trades as they are meant to be taken without talking yourself into doing something else.  Your psychology is going to be your biggest hurdle. (Control Your Inner Trader and Overcome Your Fear in Trading need to be implemented alongside the trading system).
I will end by saying  that a great trader can take this system and make a great deal of money, a  rubbish trader can take this system and lose a great deal of money, therefore the goal should be to be a great trader.  Control Your Inner Trader and Overcome Your Fear in Trading are designed to help you become a great trader!
p.s
I have one last comment to make, in that I forgot to mention that I sent the persistent gentlemen to the forex factory thread to look at the back tested results of shellsnail  who is putting his own spin on the system.  For those who are interested here is his back testing result.

[quote=shellsnail;7253320]Backtesting Results from 01 Jan 2013 to 20 Dec 2013 EUR/USD As this was a visual backtest, with discretionary elements (basically I analysed the weekly, monthly and daily charts and found my bias using historical data and then started looking for trades according to how I will interpret the market movements), there may be some human error, so don’t take the results too seriously. There were a total of 25 trades, 11 Longs and 14 Shorts.

The average duration of a winning trade is 4.1 days. The average duration of a losing trade is < 1 day: the implication is that once a trade survives for more than 2 days it is LIKELY to be a winner. The entry types are quite evenly split between Morning/evening stars, pinbar, engulfing. There were a few triple tops. There were 14 winners and 11 losers in total. February was the best month with 2 winners and no losses.

There were no trades in April. Initially the SL used was 23 pips, TP 230 pips because the 60 day ADR shrank as the year proceeded, until now it is 20:200. Most winners had negligible drawdown. Assuming 1% risk per trade, here are the returns. Jan: 18% Feb: 21% Mar: 10% Apr: 0% May: 8.9% June: 10% July: 8.9% Aug: 5.6% Sept: 10% Oct: 17.4% Nov: 10% Dec: 10% Total return for 2013: 338% Largest peak to trough drawdown: 4% Largest drawdown from initial balance: 2% Longest winning streak: 5 Longest losing streak: 4

The winners and losers tend to come in streaks, so it might make a lot of sense to risk more (i.e. take 50% of previous trade winnings to put on the next trade) when you make a winning trade and cut down when you make a losing trade. Using this money management method, the total returns increase to 90,800% and peak-to-trough drawdown increases to 17%, while largest drawdown from initial balance remains at 2%. Most of the trades are taken either between 8-9:30AM or after 12pm, clustering around 3pm. Let’s say we make some mistakes and I suppose we could cut the returns in half and double the drawdown. So a reasonable expectation will be 150% return, 10% drawdown.

An interesting observation about this system is that, once you make a winning trade, the market usually enters a phase of consolidation or reversal and then spits out the next push-pull entry. So in some sense, it comes one after another. As long as you get the first one right, it will be like a river flowing. I think the reason for that is the market has a certain flow to it and once you tap into the flow it will usually last for a few trades before breaking/changing. Oh, and one trade each pair at a time. But one thing is for sure, if you trade this way, you wouldn’t lose your shirt even if you keep getting it wrong. It just takes one LUCKY break to make back the money from losing 10 trades. Your analysis is likely to get better over time too and your profitability will increase BUT sticking to the MM is the first step.

If you want to trade more pairs then you might want to consider cutting the risk back from 1% to maybe 0.5% per trade. For example, with 8 pairs, you can get a 32% drawdown if you are unlucky. Like what Mark Douglas said, profitability is not primarily a function of market analysis, but rather how you manage your money once you have a simple edge. In this case the edges we have are: 1) Context clues/filter based on Daily, weekly, monthly chart. 2) Push-pull candle formation. 3) 15min candlestick patterns + formation as entry edges OR if you use the original method it’ll be 1H trendline breaks/S-R levels. Even if you suck at no. 1, 2 and 3 should provide enough edge for you to get at least around 20% winning trades, which with 1:10 RR and proper MM will make you very profitable.[/quote]

 

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