Trading and markets can be all consuming – they take as much time as an individual is willing to give. Many experienced traders work to reduce the amount of time spent in front of a screen. However, very few are able to reduce the time spent on trading to five minutes a day – but it is possible.
Customer feedback regularly suggests many market participants are looking for a straightforward trading system that doesn’t require a large investment of time. Five Minutes a Day Trading (5MADT) is an example of a strategy that fits this bill.
On Monday, June 3 we’ll commence our third 5MADT campaign, targeting early European trading in the EUR/USD.
Both of our previous campaigns made a profit. The profits in each case were modest as each time the month delivered the minimum number of successful trades for profit. You can see the trading from August 2012 (EUR/USD)and February 2013 (Germany 30 DAX Index)as it unfolded, as well as results, comments and summaries on CMC’s Blog – simply search the term “five minutes”.
The campaign is based on a straightforward idea - European currency traders regularly get it wrong at the open. Looking at data over the six months from November last year to April this year, and our experience last August, there is evidence to suggest traders can profit when the European opening move in EUR/USD is against the major move of the trading session.
Strike Rate and Profit / Loss Ratios
Experienced traders know that long term profitability is a function of two key ratios – the percentage of trades that are successful, and the realised profit to loss ratio. It often surprises newer traders that a success rate of less than 50% of trades can still deliver profits if combined with a higher profit to loss ratio.
We analysed data to discover a winning combination, based on the price of the EUR/USD at the European open. For traders in Australia this is 5pm ADST, or 3 pm AEST. In June this will be 3 pm in Brisbane, Melbourne and Sydney and 1 pm in Perth.
The analysis shows that the combination of a 3.25 to 1 profit / loss ratio gave the best expected profit level when orders where placed to buy 11 pips under the opening price, and to sell at 25 pips over. Both orders have an attached stop loss 12 pips away, and a take profit order 39 pips away.
Market Analysis Results
Care should be taken in examining the results above and the table below – past performance is not necessarily a guide to future returns.
As the table shows, this strategy was profitable in five of the last six months – but the wins and losses are not symmetrical. The wins are generally larger than the losses, and the net result is a gain of 579 pips.
In a month of 20 trading days, just five profitable trades will deliver a profit for the month. In months such as November, where 9 of 22 trades are profitable, the gain is significant. Similarly, months like March, where only four trades of 21 made a profit, the result is a loss.
Note – over the course of the study, on two occasions the trade was not closed within the study period (up to 6 am the following day). These days were stripped for analysis purposes.
At 3pm on April 10, 2013, the EUR/USD stood at 1.3088
A trader using this method would place two orders:
Order 1: BUY EUR/USD at 1.3077 (1.3088 minus 11 pips)
Stop loss at 1.3065 (buy price minus 12 pips), take profit at 1.3116 (buy price plus 39 pips).
Order 2: SELL EUR/USD at 1.3113 (1.3088 plus 25 pips)
Stop loss at 1.3125 (sell price plus 12 pips), take profit at 1.3074 (sell price minus 39 pips).
The trader also creates price alerts at the two entry levels (1.3077 and 1.3113) as an additional reminder when a trade occurs to cancel the other order.
At 3.25 pm, the BUY is triggered (order 1). The trader receives an alert, and cancels the SELL order (order 2). As there are attached stop loss and take profit levels attached to order 1, there is no further action required.
At 5.36 pm, the take profit level is hit (while the trader is out walking the dog), and the position closed for a 39 pip profit.
This is a single day example, and the stop loss target will (most likely) be hit on more trading days than the take profit. The reason the trader expects to make profit from the strategy is the 39 pips won on successful trades exceeds the 12 pips lost on unsuccessful trades.
Risks and Rewards
The average loss in unprofitable months in the study: 48 pips
The average win in profitable months in the study: 125 pips
While an extreme result is far less likely, it’s worth considering the theoretically possible.
Maximum possible loss (0 profitable trades out of 20): 240 pips
Maximum possible profits (20 profitable trades out of 20): 780 pips
Slippage is another risk. Slippage commonly occurs in fast, illiquid markets. The EUR/USD is the single largest market in the world, and therefore the most liquid, with the tightest spreads. This should limit slippage impacts. While slippage is still possible, it is unlikely to materially alter the results.
Perhaps a greater risk to the strategy is failing to place the trade. Missing just one profitable trade can have a significant impact on the result. Traders successfully using this method must make every effort to trade all of the days in the month.
Similarly, the study assumes that each trade is the same size – varying the size of trades could also materially alter the results.
What’s a Pip Worth?
On the CMC Tracker platform, all profits and losses are shown in Australian dollars. This means that the value of a pip in this trade will vary with the AUD/USD cross rate, as well as the trade size. At current levels (EUR/USD at 1.2860, AUD/USD at 0.9560) pip values are:
Trading EUR 10,000, pip value is AUD $1.05
Trading EUR 100,000, pip value is AUD $10.46
Trading EUR 1,000,000, pip value is AUD $104.60
Trading EUR 10,000,000, pip value is AUD $1046.03
We’ll follow this trade over the month of June, placing the trades each day at 3 pm, and recording previous results. Look out for daily updates on this blog.