Yippie! The Week Ends With a Win

At our level of trading, most of us are technical traders. That is, we look at candles and indicators and make our trading decisions accordingly. As mechanical measures go, the 3am Grid is no different in that regard. Based upon hundreds of observations it makes a measured recommendation. This does not obviate the need to pay attention to announcements and other macroeconomic indicators.

The Prediction

Yesterday, the 3am Grid predicted that the GBP would travel another 48 pips with an 81% probability. This was a strong indicator.

Retail Sales Announcement

By 5:15am the SELL at 1.4575 was tripped taking me into the trade. I knew that at 5:30am the monthly UK Retail Sales numbers were going be announced. Since the GBP economy had been tanking for the last few months, I deduced that perhaps the predicted shitty -0.3% falloff in sales might be lower.

As you can see from the chart on the right, the GBP trips the SELL but is hovering over the SELL while the market waits for the announcement. I did two things to prepare for the announcement:

1. I tightened up my STOP to 30 pips, because no matter what you think, you have to consider your down-side.



2. I loosened my LIMIT from 1.4527 to 1.4501 figuring that the GBP would likely blow through the prior day's low and find support at the next even numbered price.

BOOM, the announcement's made. The predicted -0.3% was obliterated by a -1.9% actual! The GBP plunges, but immediately bounces back across my SELL. Bummer.

Now I have a dilemma. I know that in a couple of hours the US is going to announce the monthly Unemployment Claims. Living through one announcement is stressful enough, living through two could be deadly.

Knowing the Exit

I was agonizing over this trade. When faced with indecision, I ask myself, "Why am I in this trade?" I go around the horn to the different charts. The 240, 60 and 15 minute charts were all registering overbought conditions to a greater or lesser degree, but definitely all showing overbought.

I'd noticed that 30 minutes after the GBP announcement, the GBP was approaching the prior day's low and it quickly retreated back above it. Obviously no one wanted to keep the GBP below the prior day's low when the US Unemployment numbers might drive it up significantly. That logic stream only gave me one option. I tightened up my STOP to breakeven and resolved to get out when the GBP approached the support again, reasoning that the natural tide of being overbought would have it flirting with the low again before the US markets opened.

I rewarded for not panicking when the GBP dropped again briefly below 1.4540. At 1.4530, I was at 95% of my day's goal and I GOT OUT. A not too shabby 45 pips gain for the day.

Moments Later Karmic Satisfaction

At 8:30am, the US numbers get announced. They came out at about what was expected, 650 thousand unemployment claims. The market surges up, then starts a huge falloff. I was on the sidelines. I'd made my money for the day.

Bottom Line

Announcements can make or break your day. Your strategy, no matter how well thought out, can be run over by the news. Probabilities, indicators and chart reading all great, but knowing when to get out is still an art.

3am GBP Grid Stumbles Again

For the second time in three days, the Wednesday 3am Grid gave a bum recommendation. I guess it should've been expected given the uncanny run it had for most of the month. Still, any loss stings a little.






The 3am Grid predicted that the GBP would travel another 50 pips for the day with a 73% probability.







Within the hour of closing, the GBP trips the SELL at 1.4591. Almost immediately retracing 75 pips taking me out of the trade. Seconds later, THAT candle retraced again forming an inverted hammer. It was all academic at that point, I was already out.





Bottom Line

Not much to learn here. Sometimes the market gyrates wildly and kills your chances to make a profit. I'm not one of those touchy-feely types that recommends embracing your failures. By definition, I only enter high probability trades. When those probabilities fail me, it doesn't diminish my chances to succeed the following day.

Even Good Odds Go Against You

Nothing is infallible. Yesterday in spite of a high probability trade, the currency reversed.

The 3am LC Grid Prediction

With an 85 pip opening candle the 3am LC (Long Candle) Grid predicted an 85% probability of going another 115 pips in one direction. By any standard, a powerful sign.


















Sadly, the GBPUSD tripped the SELL going south a couple of hours later then stalled. It reversed quickly to trip the BUY, but then stalled there as well. I got stopped out in a matter of minutes. When the details of Treasury Secretary Geithner's toxic-asset plan started to leak around 8:30am, the GBP zoomed south, retripping the SELL. This was a classic whipsaw.

Bottom Line
No system is perfect, mine included. This was the 3am Grid's first bad call all month. What made it surprising was the overwhelming probability it was going to be correct today. Oh well, I'm still up for the month.

Sometimes, It's Just Easy

I spend a lot of time analyzing my trades. It's my nature to dissect what I've done to see if I can improve for the next time. In the past, and hopefully in the future, I consulted with catalog and direct mail companies. I helped them improve their mailings, hone their message a little better or streamline their operations.

Frequently in the middle of the assignment, the CEO or other muckity-muck in the company would call me into their office and ask me about some other problem they were facing. A lot of the time, the right answer was "Do Nothing."

Friday, the right answer was to do nothing.

The 3am Grid Prediction

The Rolling 12 month 3am Grid (see last post) predicted that a GBP candle of 41 pips had a 75% probability of traveling another 59 pips.

I set the straddle as directed by the grid. A few minutes later it tripped the SELL. A few minutes after that it hit the target. Boom, 59 pips. Day's work completed before 7am.

Now many of you might say, jeeze, this went down another 100 pips. You left money on the table. It's taken me almost 2 years of doing this to realize that there will be another trade tomorrow or the next day. The opportunities to make money are there every day. I made my money. Done.

Bottom Line

The grid did it's job and I did mine.

Types of Grids

When I introduced this blog, I said I had created a grid of probabilities based upon the day of the week and the movement of the 3am GBP candle. What I didn't say is that I actually have 3 sets of grids. They are dynamic grids in the sense that they are updated and published every day. I monitor the probabilities to make sure they conform to my trading prerequisites. I'll go through them in turn.

The 3am Grid
This database has over a 1,000 observations of GBP behavior over a 4 year period. I used to physically print the grid and put in my trading binder, but I stopped printing it in mid-October when I noticed that the percentages do not change materially over time. The 1,000 or more observations give it a tremendous amount of statistical consistency. Not surprisingly, it is the bedrock of my trading approach.

The Rolling 12 Month 3am Grid
As I mentioned when I started the blog, if you traded the 3am GBP candle every day, you would make money over the long-haul. It was the variability in return that would be potentially devastating. Some months you make 500 pips, other months you lose 400 pips. That got me to thinking about "scoring opportunities". Every sport has them. In baseball, when there is a runner on 2nd base, the team at bat has a so-called scoring opportunity because any ball hit into the outfield has a better than even chance of allowing that runner to score. In football, a team is considered to have a scoring opportunity when they cross the 50 yard line as the odds of scoring either a touchdown or a field goal go up exponentially.

I wondered if the GBP candle presented scoring opportunities that existed for a short amount of time. I started tracking a rolling 12 month GBP candle performance. What I discovered is that for the most part it fits hand in glove with the regular 3am Grid. Thank goodness, I guess, because if it didn't, what would that say about the consistency of the regular grid percentages?

What it did identify were combinations of candles and days that over the prior 12 months had a high probability of hitting the number. What do I mean by high probability? Let me put it this way. For me to consider doing a regular 3am Grid trade, the probability of a winning trade has to be in excess of 50% AND the margin of pips won over lost has to be 20% or higher. With many observations over 4 years, that's a solid trade.

With a 12 month rolling average 3am Grid, by definition, the number of observations forming the grid is limited to the 261 days available in any given year to trade (365-52 weekends). Any statistician will tell you, the less observations the more variable the return. I only consider trades with 70% or better.

The 3am LC Grid
The original premise of the 3am candle was that whatever direction the GBPUSD took off in after the opening of the UK market, it would stay in that direction for at least 110 pips inclusive of the distance of the opening candle. On a 20 or 30 pip candle, a return of 70 or 80 pips is pretty decent. On a 70 pip opening candle though, it's hard to get worked up about a 20 pip or so gain.

I broke out every 3am GBP candle that was in excess of 50 pips since 2005. I reasoned that if the opening candle were to travel 50 or more pips, it was likely that the GBPUSD was going to travel at least 200 pips. I tracked the results and developed a 3am Long Candle ("LC") Grid.

The firmness of a probability of success is dependent upon observations. The more observations, the more solid the probability. There are only about 400 or so observations, so the percents are not as steady as the regular 3am Grid. But 400 observations isn't shabby, so by and large they work just fine.

Implementation
At first, every week I would dutifully print each grid and 3 hole punch the spreadsheet and put it into my trading binder. At 4:01 am I would post the high and low into a spreadsheet and the computer would come back with the size of the candle. I would run my finger along a piece of paper to find the corresponding trade for the day.

This was not a good system. For one thing, I'm not that smart or awake at 4:01am. I would frequently miss a trade because my fingers are fat and the numbers are small. Sometimes I would forget to check the LC Grid or the Rolling 3am Grid.

Now, the grids are built into my 3am Tracking Spreadsheet. As soon as I enter the high and the low, the machine comes back with whether it's a trading opportunity or not. I keep the hard copy at my side, but that's mostly for show. I haven't missed a trade in 4 months.

Bottom Line
This was a lot of work. I embarked on this adventure with no guarantee that after weeks of cataloging and analyzing that I would come up with any system, much less one that worked. I am very proud of myself that took the chance. Lucky most of all that it worked.

It's a Game of Inches

Baseball is called the game of inches. A hard hit liner can scream into the outstretched glove of an infielder for an out. A softly struck shot can skim that same glove, landing in the outfield for a hit. Today I was stopped out twice; both times by a mere pip or two.


The 3am Grid Prediction

Yesterday's 3am GBP candle was 68 pips. The 3am Grid predicted that whatever direction the GBPUSD would take, ultimately it would REVERSE with a 75% probability.





Around 5am the GBP breached the BUY at 1.4176. I was a little slow jumping on it, but I finally got in a SELL at a little after 6am. By 6:30am I was stopped out, as the GBP surged to 1.4229, a whopping 4 pips past my STOP. Bummer.





Anatomy of a Mistake





I have a secondary account with FXSolutions. I like to use this account when I have things to do during the day, because this package allows you monitor and control your trade from your cell phone. I don't have a lot of money in this account. For a while I was using it to do mini-lot trades to test different strategies.









Seventy-five percent is a high probability. Once it seemed that the GBP was going to stay north of 1.4200 it seemed prudent to put a STOP-ENTRY SELL at 1.4176 to catch it should it reverse.




At 7:37am it did just that, breaching the BUY by 20 pips. An hour later though it started to push into the 1.4200 area. And that's when it happened. At 8:12am I margined out when the GBP reversed by 42 pips. My STOP was set at 50 pips, but as it turned out, my margin would only support 40 pips in the red. But an out is an out, a STOP is a STOP. I was out.



Once More Into the Breach
As I watched the GBPUSD approach a secondary peak for the day, the RSI's and MACD's on the 60/15/240 were all registering OVERBOUGHT. Experience told me that this was still likely to turn. I put in the SELL at 1.4176. Less than an hour later the GBPUSD hit the predicted LIMIT of 1.4083 for gain of 93 pips.



Bottom Line
Probabilities, small margins of error and experience combined to give me a breakeven day. I lost 50 pips on the original trade that retraced 54 pips. I lost an additional 40 pips on the margin call when the currency retraced 42 pips. Ultimately, I took a trade and gained 93 pips. A lot of work for 3 pips. But I'll take a breakeven day over a loss every day of the week. Oh, and more thing. The 3am Grid predicted the reversal and it was correct again.

Knowing When to Say No

I feel great today. I made money when I should've lost money, but my fundamental concept is still valid, so I had the best of both worlds yesterday.

The 3am Grid Prediction

Coming in at 73 pips, the 3am Grid predicted a 71% probability of going 200 pips yesterday.

Boom, it tripped the BUY indicator. It was a bit of a bummer, because the 60 minute and the 15 minute indicators were well in the OVERBOUGHT area.

Hmmm, what to do? The 3am Grid promises good results but the facts on the ground aren't as promising. The 15 minute candles start to show indecision.

I got out of the trade. Up 34 pips for the day is never a bad thing.

Son-of-a-gun, the GBPUSD retraces 71 pips! Yippee, I guess. I made some money today, but on an intellectual basis, it bothered me that such a high probability trade would go south.

As the Stomach Churns

I haven't worked all the permutations of the 3am Grid. So what to do when the BUY was tripped, reversed, but the 240 minute and the daily both show it's gonna go north? As it happened, for 2 hours yesterday the GBPUSD flirted with the BUY trigger. Hitting, retracing. Hitting, retracing.

I stayed out. I made money yesterday. My rule of thumb is when I do, I stand pat. Finally though, the GBP definitively burst through. Unbelievably hitting the predicted LIMIT at 9pm EDT!!!

Bottom Line

I could not have managed this trade any better. Reading the indicators, I was able to bank some good money. Yes, it reversed and ultimately hit its predicted number. I wasn't there because the retracement was well in excess of my equity management rules.

Grid Calls and Delivers a Reverse Trade

Thought About Credibility

I read a lot of blogs and trading journals. I've yet to find a trader that will admit to making a mistake in a trade. I have a different approach. My credibility as a nascent trader goes up as you see me stumble and slowly improve over time. Not-to-mention, the 3am Grid has to allow the user to make mistakes. Any system that requires perfection to succeed is too strict for the average person. I made a dopey error today. I woke up to trade the 3am GBP candle (4am in this brief period between the beginning of DST in the US and the UK). I didn't notice that my trading software wasn't open. As the opportunity approached to get into the trade, by the time the package had opened, the moment had passed. I won't make this mistake again, but it illustrates how as humans, we make mistakes that prevent us from being at our best.

Today's Reverse Trade

The 3am GBP candle (4am for the few days) was 65 pips. The 3am Grid predicted that the GBP would never get to 1.3678, and that instead, after crossing the SELL at 1.3603, with a 87% probability, would get to the BUY @ 1.3893.

The Breach of the SELL

With the release of the monthly Manufacturing Production figures from the UK at 5:30am, the US dollar surged in value relative to the pound. It briefly went past the SELL.

The 3am Grid Delivers

Shortly after 8am, the GBP hits the BUY neatly completing the reverse for a handsome 90 pips profit.

Bottom Line

The 3am Grid did it's job. I didn't do mine. I missed the boat with a dumb mistake. Lesson learned.

Mechanical "Systems" and Reading the News

Reverse Grid Trades
The 3am Grid just doesn't predict straight buy / sells. Sometimes the market breaks in one direction, and before it reaches the day's goal, it reverses.



How to Trade the Reverse
You can trade this reverse several ways. One way is to place a stop/limit on the SELL or the BUY, so when it breaches the order you've entered a SELL when it goes past the BUY, or you've got a BUY when it goes past the SELL. The advantage is that you are always assured of capturing the reverse. The downside is the depth of the breach. If it goes past 50 pips, you've got a lot of sweating before you actually see the reverse.

I play it more conservatively. I wait until it's 10 or more pips past the BUY or SELL, then enter a stop/entry order at either the BUY or SELL. The problem with this approach is that you miss reverses that just touch and fly backwards. Part of my long-term analytics is to determine probabilities on both approaches. More on that in a future post.


The Reverse Trade on March 5, 2009



Yesterday, the 3am Grid predicted that because the 3am GBP candle was 73 pips there was a 75% chance of it reversing after going in a particular direction. Around 5am it broke south, ostensibly tripping the SELL which would've been at 1.4159 with a LIMIT of 1.4032. The Grid would predict that before it got to 1.4032, it would reverse all the way past the high of the day of 1.4180.



My Strategy
All things being equal, I would've waited until it breached the sell, then I would've placed a buy. But today, things were not equal. The Bank of England was going to release their new discount rate, going from 1.00% to 0.50%. The market reacted with a quick move to the south as the currency devalued relative to the US dollar. I was not trading a possible reverse regardless of what the model said.


Systems and Mindless Adherence
The 3am Grid represents months of tracking every 3am trade for several years. The resultant probabilities are solid. Solid in the sense that they are stable over time. If a particular combination of day of the week and sized candle typically hits its LIMIT 75% of the time, that's a solid bet. But having situational awareness is as important in trading as it is in life. I chose not to get into this trade. As it turns out both me and the 3am Grid were right.



Trade Analysis
Boom, at 7am eastern time, the BOE makes its announcement and the currency flies south, breaching the SELL price definitively. The currency never gets to the Grid projected LIMIT of 1.4032, stopping just short at 1.4036.















Slowly, over the course of the day, the currency wobbled with indecision. I started to doubt my decision not to play the reverse. You'll notice that the GBPUSD hit the SELL price 3 times before reversing breaching it for good at 7pm EDT. Unfortunately, the prior three attempts would've stopped me out as the currency would briefly touch the SELL price and tumble backwards 80 and 50 pips.

Ultimately, just prior to the London Open, the GBPUSD completed the grid predicted reverse!
Holy cow, the 3am Grid was right.

Bottom Line
The reverse trade offers a tremendous advantage over the traditional way of trading the 3am GBP candle. It's tricky to trade and I'm working on a methodology that makes sense.

The 75% probability of reverse predicted by the 3am Grid came true. I'd of been stopped out though, because in this case, the GBP seriously wobbled while deciding to reverse course.

Grid Trade Hits Again

There were no 3am Grid trades yesterday.

Today's 3am GBP candle was 58 pips (H: 1.4088 / L: 1.4030). The 3am Grid predicted that today's straddle had a 73% probability of going the 110 pips for the day. Over the last 12 months this straddle trade had an 88% probability of success. I dutifully entered the straddle trades detailed on the chart on the left.

Trade Analysis

It tripped the BUY going north at 5:48am (1.4103). Minutes after 8am, it hit the LIMIT of 1.4140. I did not get out of the trade. My rationale was that at 8:15am the ADP Non-Farm Employment Change was scheduled to announce. There was good angle and separation on the hourly MACD and all of the RSIs were trending overbought. I figured I had a good chance of going well beyond 1.4140. I tightened up the stop to 1.4129 yielding me a minimum of 26 pips should it go against me, but yesterday's high of 1.4157 was within shouting distance so I hung on.

The numbers came out worse than expected, but instead of shooting north, the GBP just meandered. Ultimately the system stopped me out at the 26 pips. A good gain for the day to be sure. The currency would bounce between 1.4150 and 1.4100 for much of the day, finally breaking past yesterday's high a little after 4pm.

Bottom Line

The 3am Grid promised a good day of 37 pips, and it delivered. I took a reasonable risk to turn a good day into a great day, and today it played against me. I got a decent percentage of what the Grid promised, so it was still a decent trading day.

Blown Trade

The title says it all today. I blew a perfectly good trade. The 3am Grid predicted a great result. I turned it into a so-so result.

The 3am GBP candle was 85 pips today. The 3am Grid predicts that if straddled, this currency would travel 200 pips inclusive of the opening candle. This means that the recommended straddle is a BUY placed at 1.4275 with a LIMIT at 1.4375, and a SELL placed at 1.4165 with a LIMIT at 1.4060. The 3am Grid had a demonstrated 71% probability of success with a whopping 38% winning pips over losing pips.

The SELL was tripped at 5:57am and it was off to the races. I noticed that the 240 and the Daily charts all showed very decent RSIs trending nicely downwards toward oversold.

Wham, bam the LIMIT of 1.4060 was hit at 7:32am! 105 pips! Yippie!!

Except, seeing that all the RSIs were trending in the same direction, downward, I had moved MY LIMIT to 1.4025. The GBP stalled at 1.4032 and retraced all the way back to 1.4138, a retracement of over 100 pips.

I kept moving my STOPS forward and got taken out at 1.4118 or a relative paltry 47 pips. As all you know by now, this currency continued to fall precipitously and ultimately hit 1.3956 at today's low. BUMMER.

The good news is that the 3am Grid was right. The bad news is that I mismanaged the trade.

Premise of the 3am GBP Candle Trade

Trade Background
Let me start out by giving credit where credit is due. I learned this basic trade from the folks at Market Traders Institute (MTI) http://www.markettraders.com/. I'm not necessarily endorsing them, but I don't have the basic bad feelings expressed in this overall forex rating website either http://www.forexpeacearmy.com/public/review/www.markettraders.com. There's an underlying shittiness in their approach to selling you their Ultimate Traders Package (UTP). They don't post a price on their website. They offer a price when you contact them simply counting on whichever combination of customer negotiative skills and salesman's chutzpah yields them the highest price. I was one of the dumber people paying $5,000, but others paid far less. Overall I was satisfied with their package, but not $5,000 worth.

For this amount, you get the DVD collection of their UTP trading approach, a yearly subscription to their on-line seminars (multiple trading reviews per day and weekly mentorship seminars), their charting package (licensed from Fibonacci Traders), and an in-class 2 day trading seminar.


There are cheaper ways to understand forex trading. Peter Bain's Forex Mentoring program is great, http://forexmentor.com/. It's relatively inexpensive. My only criticism is that they are always trying to sell you a class or seminar. It gets a bit tiring after a while. Like I said, while there are several cheap or free charting packages, Fibonacci Traders offers a terrific package for not a lot of money, http://www.fibonaccitrader.com/


Success at this trade will still require you to understand support and resistance, candlestick reading, and MACD and RSI. I'm not good enough to explain these in great detail, but know enough when to get out of a trade.



Basic MTI 3am GBP Candle Trade
Statistically speaking, on average, after 3am (EST) the GBPUSD will move at least 110 pips on any given day. MTI teaches putting a straddle trade on the opening candle for the GBPUSD (3am to 4am EST); 15 pips on the top of the wick for the buy; 10 pips on the bottom of the wick for the sell. Once either is tripped, you must cancel the other. The stop loss on the buy is the price of the sell, and the stop loss on the sell is the price of the buy. The target limit on either side is 110 pips including the length of the 3am candle wicks and all. Simple and nearly fool proof.


Problems with this trade.

1. Over the long haul, this trade makes money, no doubt. My problem is the variability of return. Some months you will make an unbelievable number of pips. Other months you will lose a healthy number pips. My heart and nerve is not designed for that kind of variability.



2. Lately, there have been many many so-called long candles (50 pips or more), which puts your stop losses at an unhealthy 60 to 75 pips or more away. Clinging to the MTI method puts you at risk for losing a lot of money on any given day.



3. You can only make money in this trade if you trip the sell and it gets to its limit, or trip the buy and have it get to its limit. If you trip in either direction and it reverses, you are shit out of luck (SOL).

3am Grid Trades

I went back and looked at every 3am trade since 2005. I discovered that combinations of certain days and candle sizes have a high probability of hitting the limit. Moreover, the pips won over lost is at least 20%, most times more. Interestingly, I also discovered combinations of days and candle sizes that had a low probability of hitting their limit, which means if properly traded you can make money on the reverse.

In essence, I built a 3am Grid. Every combination of candle size and day of the week organized in a grid format. The Grid tells me whether there is a trade possibility and the probability of success. I have since put it in an Excel spreadsheet, which mechanizes the process and prevents false reads.

Over the next year or so I will post the current Grid trade, the probability of success, the pips won or lost, and an analysis of the success or failure of the given trade.

Stayed tuned!