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.