Tomorrow, the fourth Five Minutes a Day Trading strategy month (5MADT) begins. Focused on the Australia 200 index, we'll post trades and results every day for the month of October. Follow all the action here on the blog, and we'll see if trading just five minutes a day will again show a profit.

Here's the full whitepaper:

Five Minutes a Day Trading

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 at CMC Markets seminars regularly suggests many traders 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 Tuesday, October 1, we’ll commence our fourth 5MADT campaign. Following feedback from traders, Leo the quant set to work on the Australia 200 index. And the computer says “yes”.

All three of our previous campaigns made a profit:

20130924 results table

You can see the trading from the previous 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 direction for the Australia 200 trading day is set early in the session, regularly enough for traders to profit from this pattern of behaviour.

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 Australia 200 index 15 minutes after the official open. For traders in Melbourne and Sydney, this is 10.15 am. Traders in other states should be aware of time differences, and care is needed when Daylight Saving Time starts on the second weekend in October.

The Method

The analysis shows that the combination of a 2.4 to 1 profit / loss ratio gave the best expected profit level when “stop entry” orders where placed to buy 4 points over the 10.15 am price, and to sell at 6 points under. Both orders have an attached stop loss 5 points away, and a take profit order 12 points 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.

20130924 analysis

As the table shows, this strategy was profitable in all of the last six months. Although in every month there were more losing trades than wins, the wins are larger than the losses, and the net result is a gain of 283 pips over the six months.

In a month of 22 trading days, just seven profitable trades will deliver a profit for the month. In months such as July, where 11 of 23 trades are profitable, the gain is significant. Although none of the months in this study showed a loss, this does not rule out the possibility of a losing month. Six or fewer successful trades in October will result in a loss for the campaign.

Note – in October, the share market will open on Monday October 7 – the Labour Day holiday in many states. As trading on this day is unlikely to match normal conditions, it will be excluded from the campaign.

The Example

At 10.15 am on July, 2013, the Australia 200 index stood at 4,779.70 (the last traded price on the 10.15 one-minute bar.

A trader using this method would place two orders:

Order 1: Stop entry BUY Australia 200 at 4,783.70 (4,779.70 plus 4 points)

Stop loss at 4,778.7 (buy price minus 5 points), take profit at 4,795.7 (buy price plus 12 points).

Order 2: Stop entry SELL Australia 200 at 4,773.7 (4,779.7 minus 6 pts)

Stop loss at 4,778.7 (sell price plus 5 points), take profit at 4,761.7 (sell price minus 12 points).

The trader also creates price alerts at the two entry levels (4,783.7 and 4,773.7) as an additional reminder when a trade occurs to cancel the other order.

At 10.16 am, 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.

Note the time of trigger – one minute after the price is set. Any trader considering this strategy will need to remain alert, possibly executing or placing the stop entry orders as a matter of priority, and then amending the placed orders to include the stop loss and take profit levels.

Setting boundaries on stop entries are up to the individual traders. Some traders will set their stop entry trigger to mid or opposite price, and the boundary limit at 0. While this protects capital it may mean missing out on some trades. On the other hand, traders keen to ensure they get in to the trade might set their stop entry trigger to default (buy at the buy price, sell at the sell price) and set a boundary of 1.0 points. This may mean some slippage on the order (up to 1.0 point) but should ensure entry in all but faster moving markets.

At 10.45 pm, the take profit level is hit (while the trader is out walking the dog), and the position closed for a 12 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 12 pips won on successful trades exceeds the 5 pips lost on unsuccessful trades.

Risks and Rewards

The average loss in unprofitable months in the study:    no losses

The average win in profitable months in the study:     47 points

Please note, this does NOT exclude the possibility of a losing month.

While an extreme result is far less likely, it’s worth considering the theoretically possible.

Maximum theoretical loss (0 profitable trades out of 22): 110 points

Maximum theoretical profit (22 profitable trades out of 22): 264 points

This 5MADT campaign is different to the three preceding it. The entry levels are much closer to the reference price, and the stop loss and take profit levels also significantly closer. These factors mean anyone executing this type of strategy will need to stay alert as the orders are placed, as the market may trade to the order level while the order is being created.

Slippage is another risk. Traders must make their own decisions about the amount of acceptable slippage, balancing the additional trading cost against the risk of missing the trade. Traders can use the boundary function on the order ticket to set their maximum slippage on entry.

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 (excluding the holiday Monday 7 October).

Similarly, the study assumes that each trade is the same size – varying the size of trades could also materially alter the results.

The Plan

We’ll follow this trade over the month of October, placing the trades each day at 10.15 am. Look out for regular updates on the CMC Markets blog at blog.cmcmarkets.com.au