spread questions

[gazelle]

Any advice in this area would be appreciated as I am trying to gain a beter understanding on spread strategies and how to approach things .
Hypothetical example - USDCHF - price action is ranging between 13400-13500 on the H1 chrt shrt term
Medium term trend is down and we are monitoring this range for a break to the downside inkeeping with the direction of the intermediate trend.

Our strategy is to shrt the USD -price breaches our target @ 13400 and we check the spread which is 13395-13390 as this is a significant technical point and will probably register on many trading systems I would imagine a mass of mkt participants running to the door and looking to execute all at once - will you have trouble being filled at this area if price moves down quickly - perhaps the spread might jump down to 13390-13385 if downward momentum accelerates

As we are an undercapitalised swing trader with 15000USD deposit how could we approach this trade and what position sizing strategies could be utilized

entry @ 13395 shrt USD
stop @ 13420 stop R1
$Risk = 25 points 250.00USD
%Risk = .016% on 15000USD deposit
MAE = 13440 worst case scenario stop = 45 points .03%
PT1 = 13345 2RGain
PT2 = 13330 2.6RGain

mkt moves in our projected direction and hits PT2 so we close the position , it seems that in an ideal world when we can shoot for 2.5-3.5 RMultiples this compensates for the spread , we loose 5 points on the purchase and 5 points on the sell is this right ?
so in our above example we make 65 points subtract (10points round trip) = 55 points after the spread?

Now if the trade moved too far beyond resist and the spread was 13385 and we went shrt USD at this point our risk would be further magnified

entry @ 13385
stop @ 13420
$Risk = 35 points 350.00USD
%Risk = .023%
a string of 5 consecutively loosing trades would shave approx 10% of our deposit

Also the notion of placing your stops at an easily recognisable technical lv - are there any dangers here , I have heard that some of the larger players will sabotage clean cut S/R areas in an endeavour to shake out weak hands , position traders may be able to ignore these tactics and remain unaffected by the small gyrations as they have a large position size and relative their size they can afford to employ 100 point stops

A trader with 15000.00USD - setting a stop @ 100 points would be risking .06% and even if his analytical skills were sharp he could only tolerate 7-8 trades and if they were all loosers his deposit size would dwindle 50% approx

Not really quite sure where to start when it comes to position sizing , have a pretty basic model but I need to do mare work in this area.

Thanks Gazelle

[gazelle]

15000.00USD
How far would you leverage this out beginning with a demo account no money involved at this stage.

6:1 = 90000USD position
5 consecutive losing trades @ 25 points 250.00USD
will leave you with 14000.00 1000.00USD loss
.066% loss and we havent yet considered in what timeframe these losses have occured , it is quite possible if we are trading small subphases within the overall trend we may loose this amount within 4-5 days.

6:1 = 90000USD position
10 consecutive loosing trades @ 25 points 250.00USD
will leave you with 12750.00 2250.00USD loss
.15% loss

------------------------------------------------------------------------
increase the margin 10:1 = 150000.00USD position
5 consecutive losing trades @ 25 points 250.00USD
etc etc , same as above - does your dollar risk remain the same even though you have increased your margin , you could still have 5 consecutive loosing trades and loose the same amount even though your leveraged has increased - is this right

increase the marging even further and how does risk come into it

Any advice welcome

[gregh285]

gazelle,
you only pay spread once, 5pips on chf, 3 on E and Y.

[gazelle]

Ah , I though there was a 5 point spread at the buy and the close - thus 10 points and I was beginning to think how this would quickly add up , at the moment I am just watching the price movements across the 4 majors - I think much of my trading will be done on M15-30 charts as my optimal risk threshold is 20-25 points if I begin with a 15USD account - If I was to attempt entry/exit on 1-4HR chart the price ranges wouldnt align with my risk tolerance , cant really risk 50 -75 points on a given trade so I have to look for multiple time frame alignment and set my stops accordingly

Should I backtest my trading system or test it in real time , my strategy is to build up a 100 trade sample size over varying time increments using various setups along the way
From here I will look at average loss/gain
average stop , premature exits/entries , system reliability etc
just have to build up a sample size so I can break it all down and hope to learn from it

[peteuk]

[quote]Originally posted by gazelle
6:1 = 90000USD position
5 consecutive losing trades @ 25 points 250.00USD
will leave you with 14000.00 1000.00USD loss
.066% loss

Maybe my calculator's broken, but 5 x 25 x $9 = $1125, which equates to 7.5% of your equity.

= 90000USD position
10 consecutive loosing trades @ 25 points 250.00USD
will leave you with 12750.00 2250.00USD loss
.15% loss

Twice as many losing trades as your above example = twice the loss = $2250, which equates to 15% of your equity.


increase the margin 10:1 = 150000.00USD position
5 consecutive losing trades @ 25 points 250.00USD
etc etc , same as above - does your dollar risk remain the same even though you have increased your margin , you could still have 5 consecutive loosing trades and loose the same amount even though your leveraged has increased - is this right

No, because the deal size has increased and so the value per pip has increased, it's now $15 a pip and not $9 a pip, therefore 5 x 25 x $15 = $1875, which equates to 12.5% of your equity.

Just seen your last post, trading strategies need to be backtested for a bit longer than 100 trades, more like a couple years! There's charting software that does the job for you on historic data, but what I know about it could be written on the back of a stamp! There was a backtesting thread somewhere on this forum, try the search box?

[gazelle]

Thanks , I miscalculated the firsr sum , so the pip value increases relative to the deal size
I think there are set margin lvs 1:1 1:5 1:10 etc can someone pleasae clarify this as I dont really have a clue. so therefore on a 15USD deposit

5:1 = 75000.00USD (20 point stop loss times 7.50 = 150USD
which is 1% risk on 15USD

6:1 = 90000USD (20 point stop loss times 9.00 = 180USD
which is 1.2% risk on 15USD

8:1 = 120000.00USD (20 point stop loss times 12.00USD = 240.00USD which is 1.6% risk on 15USD

Have I got these figures correct , Have to jet off to work will return tonight

Thanks for any advice

6:1

[peteuk]

Your figs are correct

I don't think there are set levels for leverage, only maximum leverage (or minimum margin requirement), and minimum trade size (50k for my broker) ie to have a position of $100,000 (which some people call 1 lot), at a minimum 1% margin requirement = $1000 deposit to have the position open, plus of course your margin for market movements against you. So say your account balance was $10,000, you open a position for $100,000, that leaves you with an available balance of $9000. Pip value is $10, so in theory the market can move 900 pips (900 x $10) against you before you automatically get stopped out by the brokers software. In practice you'd get a margin call asking for more funds to keep the position open, or in reality you will have set appropriate stops probably around 30 pips (max 3% of capital risked per trade is sensible) and the bad trade would have been closed much earlier, preserving your capital.

The value per pip is directly proportional to the size of the trade. On the EUR/USD for example, 50k = $5, 100k = $10, $150k = $15 etc etc etc.

Pete

[gazelle]

Thanks Pete , you have been very helpful and I am beginning to fit the pieces togethor , I will run through a few examles later on more so to familiarise myself with things and any advice is appreciated

Thanks Grant