One of the most common challenges for traders is finding the time to trade the markets. However, behavioural analysis suggests there is not a direct relationship between time in front of the screen and profitability. When the principles of successful trading are applied, time trading the market can be significantly reduced – to as little as five minutes a day.
On Monday, February 3 we’ll commence our fifth 5MADT campaign, targeting early European trading in the UK 100 Index (tracking the FTSE).
So far, four from four 5MADT campaigns have delivered a monthly profit:
This track record does not guarantee a profit this month – four of the five studies showed losing months. Nonetheless, this small sample shows that identifying market patterns, and then applying good trading strategy, can deliver profits.
You can see the trading from previous 5MADT campaigns 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 – the opening moves in UK 100 trading indicates the market direction for the day often enough for traders to profit.
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 UK 100 Index 10 minutes after the “cash” opening. The following table shows this time in various cities during February:
It’s important to note that these are the current times, and are suitable for the February campaign. These times will change as daylight savings ends in the southern hemisphere and commences in the north.
The analysis shows that the combination of a 2.3 to 1 profit / loss ratio gave the best expected profit level when stop entry orders were placed to buy 8 points above the index price ten minutes after opening, and to sell at 14 points under the reference price. Both orders have an attached stop loss 7 points away, and a take profit order 16 points away.
This means that traders employing the 5MADT strategy will observe the closing price of the 1 minute candle on the mid chart at 10 minutes past the hour, and use this candle closing as the reference price to set the levels for the buy and sell stop entry orders.
(A stop entry order is an order to buy above current market price, or sell below. The order is triggered when the market reaches the specified price.)
As these are stop entry orders, some consideration should be given to the “boundary price” on the order ticket. Setting the boundary at the same price as the trigger (ie 0 points) may result in the order not being filled in a moving market. The size of the boundary is up to individual traders, but the analysis suggests that a 1 point boundary will cover most of the days in the study period.
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 total gain of 383 points.
In a month of 20 trading days, just 7 profitable trades will deliver a profit for the month. In months such as October, where 13 of 23 trades are profitable, the gain is significant. Similarly, months like September, where only 4 trades of 21 made a profit, the result is a loss.
Please note: This analysis was run on January 30 – meaning the results for January do NOT include the last two days of the month.
At the close of the 7.10 pm one minute candle on January 22, 2014, the UK 100 Index stood at 6859.49.
A trader using this method would place two orders:
Order 1: BUY UK 100 INDEX at 6867.49 (6859.49 plus 8 points)
Stop loss at 6860.49 (buy price minus 7 points), take profit at 6883.49 (buy price plus 16 points).
Order 2: SELL UK 100 INDEX at 6845.49 (6859.49 minus 14 points)
Stop loss at 6852.49 (sell price plus 7 points), take profit at 6829.49 (sell price minus 16 points).
The trader also creates price alerts at the two entry levels (6867.49 and 6845.49) as an additional reminder when a trade occurs to cancel the other order.
At 8.30 pm, the SELL is triggered (order 2). The trader receives an alert, and cancels the BUY order (order 1). As there are attached stop loss and take profit levels attached to order 2, there is no further action required.
At 9.42 pm, the take profit level is hit (while the trader is relaxing with family), and the position closed for a 16 point 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 16 points won on successful trades exceeds the 7 points lost on unsuccessful trades.
Risks and Rewards
The average loss in unprofitable months in the study: 55 points
The average win in profitable months in the study: 87.6 points
While an extreme result is far less likely, it’s worth considering the theoretically possible.
Maximum possible loss (0 profitable trades out of 23): 161 points
Maximum possible profits (23 profitable trades out of 23): 368 points
Slippage is another risk. Slippage commonly occurs in fast, illiquid markets. The UK 100 Index is a deep market, with higher liquidity levels, especially in the first hour of trading. 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.
We’ll follow this trade over the month of February, placing the trades each night at 7.10 pm. Each morning, we’ll blog the previous night’s trade and result, keeping a running score for the month. Look out for regular updates on Twitter, following @MMcCarthy_CMC, and here, at the CMC Markets blog.