No time to trade? Can you spare five minutes a day?
As traders grow in experience, becoming more time efficient becomes increasingly important. The good news is that 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, March 2 we’ll commence our sixth 5MADT campaign, targeting early European trading in EUR/JPY.
So far, four from five 5MADT campaigns have delivered a monthly profit:
This track record does not guarantee a profit this month – five of the six studies showed losing individual months. Nonetheless, this small sample shows that identifying market patterns, and then applying good trading strategy, can deliver profits.
Alert readers will notice there is a more than one year gap between this campaign and the previous. The reason was the very unusual period of low volatility in the middle of 2014, which dampened trading in most global markets.
At the bottom of the chart below is a measure of 20 day volatility for EUR/JPY. Note how it persisted below 6.5% between April and August.
The lower volatility, and daily ranges, made identifying profitable and practical patterns for trading difficult, despite the best efforts of CMC’s quantitative analysis team. However, now that volatility has risen again, the analysis shows a potentially tradeable market pattern in EUR/JPY.
You can see the trading from previous 5MADT campaigns as it unfolded, as well as results, comments and summaries on this blog – simply search the term “five minutes”.
This campaign is based on a straightforward idea – as European currency traders take over from their Asian counterparts, their early trading moves indicates the market direction for the day often enough for traders to profit.
Strike Rate and Profit to 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 actual 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.
When is the Reference Price for the Daily Trade Set?
CMC’s quantitative analysts examined the data to discover a winning combination, based on the price of EUR/JPY as Europe awakes (7am in Berlin and 6 am in London). The following table shows this time in various cities during March:
It’s important to note that these are the current times, and are in most cases suitable for the March campaign. These times will change as daylight savings ends in the southern hemisphere and commences in the north. Traders may wish to satisfy themselves as to the local time that corresponds to London 6 am / Berlin 7 am.
The analysis shows that the combination of a 2.7 to 1 profit to loss ratio gave a higher expected profit level when stop entry orders were placed to buy 16 pips above the EUR/JPY price at the European opening, and to sell at 9 pips under. Both orders have an attached stop loss 11 pips away, and a take profit order 30 pips away.
This means that traders employing the 5MADT strategy will observe the closing price of the 1 minute candle at 4:59 pm Sydney time, 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 pips difference) 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 pip boundary will cover most of the days in the study period, where the boundary trigger price is the “SELL price” for stop entry sell orders and the “BUY price” for buy stop entry orders.
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 four of the last five 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 515 pips.
In a month of 22 trading days, just 7 profitable trades will deliver a profit for the month. Six winning trades would result in a profit of 4 pips – just better than break even. In months such as October, where 11 of 23 trades are profitable, the gain is significant. Similarly, months like November, where only 4 trades of 20 made a profit, the result is a loss.
Please note: there were two days in the study period where the trade was not closed by the end of the US trading session – these days were excluded from the results.
At the close of the 4.59 pm one minute candle (MID price) on January 29, 2015, EUR/JPY stood at 132.61.
A trader using this method would place two orders:
Order 1: BUY EUR/JPY at 132.77 (132.61 plus 16 pips)
Stop loss at 132.66 (buy price minus 11 pips), take profit at 133.07 (buy price plus 30 pips).
Order 2: SELL EUR/JPY at 132.52 (132.61 minus 9 pips)
Stop loss at 132.63 (sell price plus 11 pips), take profit at 132.22 (sell price minus 30 pips).
The trader also creates price alerts at the two entry levels (132.77 and 132.52) as an additional reminder when a trade occurs to cancel the other order.
At 5:25 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 6.14 pm, the take profit level is hit (while the trader is at the gym), and the position closed for a 30 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 30 pips won on successful trades exceeds the 11 pips lost on unsuccessful trades.
Risks and Rewards
The average loss in unprofitable months in the study: 56 pips
The average win in profitable months in the study: 142.8 pips
While an extreme result is far less likely, it’s worth considering the theoretically possible.
Maximum possible loss (0 profitable trades out of 22): 242 pips
Maximum possible profits (22 profitable trades out of 22): 660 pips
Slippage is another risk. Slippage commonly occurs in fast, illiquid markets. The EUR/JPY is a deep market, with higher liquidity levels. 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 March, placing the trades each day at 5.00 pm. Each morning, we’ll blog the previous night’s trade and result, keeping a running score for the month. Look out for daily potential trades and updates on Twitter (@MMcCarthy_CMC) and on the CMC Markets blog (blog.cmcmarkets.com.au).