Capitalizing on Failed Trades - Idea

[TheForexGuy]

One kind of strategy that I've pondered with over the years is one that centers around failed trade setups. By this I mean stop loss trigger events on price action trades, then market just keeps going.

I've been trying to figure out a strategic way to capitalize on these counter trade breakouts.

Generally where I advise to place a stop loss in the price action protocol course is the 'threshold' for a price action signal - once it's breached, price has the potential to explode in the opposite direction, which we've seen it do many times.

Just like electricity, price likes to moves along the path of least resistance.

Once our stops are hit, price has generally overpowered a critical level in the market - once that area has been overcome, there is little resistance for price to blow up in the other direction.

Some other War Room traders have started to also raise the question: "Why don't we just place an order in the opposing direction".

I've thought deeply about this many times, but the idea of just blinding going in the other direction does not seem very strategic, and is more of an impulsive action - "feeling of missing out" "chasing price" kind of knee jerk reaction.

Here is something else I've thought about a lot - hedging.

The other day I sat back and thought to myself, maybe hedging could be the work around solution to working around failed trade setups. So I will pitch my idea to you guys and see what you think.

First an example of a failed trade setup...



This GBPJPY rejection candle trade is a very good example of how failed trades can be a trade opportunity within themselves.


The Hedging Idea

For those who don't know, hedging means to open up other positions that mitigate the risk of others. In the stock market hedging is a little more complicated, where hedge funds will buy stocks that will help reduce the risk of others.

In Forex, generally hedging just means to open an opposing trade to your current position. You can hedge a AUDUSD sell position by opening a AUDUSD buy position.

I know there are some wild, and overly complicated hedging strategies in Forex but as usual I like to keep things as simple and logical as I can.

Even though I am aiming to keep things simple here, it's still going to have the next level of complexity than our normal trading with a little bit of math involved.

I mentioned before, I don't feel great about ...

blindly opening a position in the opposite after a trade has been stopped out

The reason is, you run the risk of just being stopped out by a few pips then the trade continues as planned. A problem which a lot of traders run into on the USDCAD.

So if you opened a trade in opposite direction, you would have taken two quick full losses.

My proposed hedging strategy is to utilize the split money management system with hedging.

I will use this gbpjpy example to share my idea to you...

So we're looking at a rejection candle sell trade with hedge risk mitigation.

The sell trade is setup using the 50% retracement entry including split money management like normal, but we don't set the stop loss for the sell trade at the normal price.

Instead, where we would normally place a stop loss for the sell trade - we set up a bullish breakout order, also setup with split money management setup.

Is your mind blown?

Before this gets any more confusing, I will draw out the structure of the trade setup.



Take a moment to study the trade above and see if you can get you can work out how it all works.

Situation 1: Trade Plays out as Planned

Your trade plan plays out as anticipated. Your 1:1 R 'risk free' split target is hit. No hedging needed, all hedge trades are canceled and the stop loss level is adjusted on your trade to it's classic position.

In the case above.

• The retracement entry is hit, the market sells off and hits your 1:1 target.
• The buy hedge trade order is removed
• Your sell order stop loss is adjusted back to its classic position - above the signal candle high.

This ends up just being business as usual, with a split money management trade playing out in it's mimimal ideal scenario - a risk free trade.


Situation 2: Trade Idea Fails - Hedge Trade Triggered

Your trade didn't work out as planned, and normally your stop loss would have been triggered.

But in this case, a trade is opened in the opposite direction, with the split money management system also applied.

Now you have a buy and a sell trade open at the same time.

• Your buy trade's stop loss is set at your sell trade's 1:1 'risk free' target
• Your sell trade's stop loss is set at your buy trade's 1:1 'risk free' target

Situation 2A - Sell trade knock out



Here we have the situation for when our trade setup fails and the hedge trade kicks in.

• The hedge trade hits it's 'risk free' 1:1 target
• The original trade idea is completely stopped out and taken out of the equation.

This leaves you with an open trade with 0.5 R left to potentially make a return for you.


Situation 2B - Buy trade knock out



In this situation, the hedge trade is triggered, but the hedge trade never hits its 1:1 'risk free' target.

The original trade idea is back in the money again, and comes back to hit it's 1:1 risk free target. At this point in time, the hedge trade is taken out of the equation and the sell trade's stop loss is moved back to the classical position.

Once the hedge trade is triggered, either Scenario 2A or 2B MUST become true.

So instead of taking a full loss (-1R) on your original trade idea, you're left with a floating 0.5R trade in either the buy or sell direction which has the potential to make you money.

To break even you will need your final floating trade to reach 1:2, and beyond that you will make money on what otherwise would have been a loss.


Situation 3: The Worse Case Scenario



This is the worst case scenario - which all good traders plan for.

The worse case scenario is when both the original trade idea & the hedge trade fail. This will generally be caused by choppy markets.

Even in this 'doomsday' stop out scenario here - you're only going to walk away with a total loss of -1R... which you would have walked away with if your trade failed without the hedge trade setup.

The advantage of this hedging strategy is to give you a chance to avoid a loss, and actually make some returns on a failed trade.

The disadvantage is the hedge trade needs to move more to turn the over all scenario into a profit, and will probably need to be a longer term trade.

Because the hedging strategy has a lot of moving parts, it would be idea to have a script, or an Expert Adviser to control the whole thing.

The War Room money management tool for MT4 could be upgraded to control this hedging strategy.

First I am looking forward to other war room trader's thoughts on this.

P.S US traders, I don't think you are allowed to open hedge trades under US broker regulations. Sorry to dangle the carrot in front of you.

 

[Wgbalf]

At my last firm we used to hedge and that was with the help of the smart quant guys who were creating all the algos.
A few things/rules to consider:
1. Is this actual price movement just a bank stop run? (a favourite past-time of the market movers)
2. Never hedge on commodity pairs
3. Invariably, hedging was successful only in a counter-trend move or in the basing process prior to trend change

Just my 2c worth from experience at a large IB

 

[TheForexGuy]

At my last firm we used to hedge and that was with the help of the smart quant guys who were creating all the algos.
A few things/rules to consider:
1. Is this actual price movement just a bank stop run? (a favourite past-time of the market movers)
2. Never hedge on commodity pairs
3. Invariably, hedging was successful only in a counter-trend move or in the basing process prior to trend change

Just my 2c worth from experience at a large IB

Thanks for your feedback, now here are my rebuttal points

1. Is this actual price movement just a bank stop run? (a favourite past-time of the market movers)

The whole reason for this hedging strategy is to attempt to capitalize on failed trade setups. So where a trade is normally stopped out, the hedge trade kicks in. Once the hedge trade is active, the worst case scenario is walking away with -1R - which is what you would have lost anyway on a failed trade.

This hedge strategy gives you a better chance of turning a losing trade back into a winner, or even just walking away from it at break even.

2. Never hedge on commodity pairs

Why do you say that? I could see this strategy working on gold, silver and oil. It technically should work on any market.

3. Invariably, hedging was successful only in a counter-trend move or in the basing process prior to trend change

There are a lot of hedging strategies out there, and this may have been the case for your the firm you used to work for. But this strategy should work anywhere, anytime.

It has very specific parameters that keep the outcome of the trade under control. Doesn't matter if it's a trend trade or a counter trend trade, this is trade failure hedge strategy.

 

[mno3195]

Generally speaking, I hate hedge and never hedge my positions no matter what. I would rather take whole 1R loss and seek other quality set-ups if present. To me, hedging is a behavior of afraid taking losses but taking losses is just part of the game. IMO, working on the mindset that can take losses comfortably is more important than try to hedge your positions. No risk, no gain 　

 

[TheForexGuy]

Generally speaking, I hate hedge and never hedge my positions no matter what. I would rather take whole 1R loss and seek other quality set-ups if present. To me, hedging is a behavior of afraid taking losses but taking losses is just part of the game. IMO, working on the mindset that can take losses comfortably is more important than try to hedge your positions. No risk, no gain 　

I appreciate your point of view, and normally retail Forex hedging is driven on bad psychological moves.

You say you're willing to take 1R loss and call it a day, well you won't ever lose more that 1R with this strat - it's the worst case scenario. At least you have a chance to regain the failed setup's 1R loss, or even make some return on it.

I think the beauty of this technique is that everything plays out normally UNTIL your trade idea fails, then the hedge system kicks in and gives you a chance to recover.

To make this set and forget, it needs to be programmed because stops need to be adjusted under certain conditions, and pending orders canceled on others.

 

[takingpip]

the idea is to breakeven and if there is a profit it would be great. i have tried it and it works however manually executing the hedge trade is a pain. my experience is to get out of the trade when it breakeven (move stop loss to breakeven point) as most of the time it will turn choppy.

You have a good idea and to make it work the maths has to be great...

Hope to see it it the War Room money management tool.

 

[gcgm]

There are key moments on the chart where price will either make a run in one direction or the other.
In the example you provided, I would not have sold the rejection bar myself.
The reason is that after three attempts at a bearish breakout in a bear trend, the bears are exhausted (notice the strong rejections of the support).
To me, the big bullish bar before the signal bar is a sign of bullish strength, which makes the rejection bar the first pullback.

Personally, I would've sold with a stop order below the bull bar (before your signal bar), and have taken the bullish rejection bar off the EMA (the second last bar).

Just my two cents

 

[michael]

While l appreciate your focus was on your new strategy if you actually keep things simple and look at the candles ( although l would need the bigger picture really to see more of the previous downtrend) you see you have a triple bottom AND a rare (in FX) almost classic Morning Star formation screaming BUY BUy BUY!
IMO.

 

[aleeyan]

Here's my humble opinion. No matter how you cut it, you are diverting from your current price action strategy. I really don't think you want to create a system that opens positions because "your main signal is wrong". Like Micheal said, the candle in this setup screams buy, this is what you should be trading, not your failed signals.

 

[bigjoe79]

I think its a good idea mate! Ive been looking into different hedging strategies myself over the past month or so and this is a good one. I think i would just be happy closing all of the trades once one of them hits the take profit, - 0.5 is better than -1 any day!
To all you saying i'd be buying this, thats easy to say when you can see how it turned out! This is just an example of how it can be used, no need to be saying what you would have done. If you can have a chance of clawing a bit back without taking anymore risk whats the problem??

 

[TheForexGuy]

There are key moments on the chart where price will either make a run in one direction or the other.
In the example you provided, I would not have sold the rejection bar myself.

I am surprised so many people are focusing on the failed signal I posted.

Not the point, this is about a strategy that helps you recover losses, and potentially even make money from signals that fail. Despite what you would or would not have done here, for the trader who decided to short - this hedging strategy would have returned their loss and possibly even positive gains.

While l appreciate your focus was on your new strategy if you actually keep things simple and look at the candles ( although l would need the bigger picture really to see more of the previous downtrend) you see you have a triple bottom AND a rare (in FX) almost classic Morning Star formation screaming BUY BUy BUY!

Again missing the point. This example was used to show how the system works by recovering losses from a failed signal. So of course I am going to use an example of price action trade that didn't work.

You can analyze the crap out of this chart, but the point is not all trades are winners and this is a potential solution to mitigate those losses.

Here's my humble opinion. No matter how you cut it, you are diverting from your current price action strategy. I really don't think you want to create a system that opens positions because "your main signal is wrong". Like Micheal said, the candle in this setup screams buy, this is what you should be trading, not your failed signals.

I don't see this as a deviation from my current strategies, but rather an extension. I am still using all the core principles or risk reward here, and playing on them to create a hedging system that can help protect you when you're wrong.

No strategy will give you signal that work out 100% of the time. How many times have you seen your stop loss blow and the market power house the other way.

I am surprised I've gotten some slightly negative responses from this. Hedging isn't for everyone and I am not forcing people to try it - but always try to keep an open mind guys.

 

[TheForexGuy]

I think its a good idea mate! Ive been looking into different hedging strategies myself over the past month or so and this is a good one. I think i would just be happy closing all of the trades once one of them hits the take profit, - 0.5 is better than -1 any day!

Thank you

Worst case scenario, you walk away from the hedge trade with -1R, which is what you would be walking away with if the original signal failed. But at least you have a chance here to break even or potentially make some returns off the back of a failed signal.

I am very enthusiastic about it myself, but I am going to get this programmed into the War Room MT4 panel to make this a press button set and forget thing.

 

[exterior]

I think this is a really cool idea and because most people are just shitstorming till now, I want to say: Thank you Dale, for spending your time thinking about this method and sharing this with us.
I don't understand you guys. Complaining about the posted setup and that he should have went long... so what? Some less experienced traders or traders who aren't that much into pattern trading (which is - in my opinion - something completely different from price action trading) took this pinbar as a short signal for sure. And for those traders, that hedging method would have worked like a charm. Even more it might have created a slightly win instead of a 1R-Loss. Does the posted setup matter? Isn't the method the important part instead of the example trade? I don't get you guys...

 

[exterior]

I've got a question that I've forgotten in my previous posting:

Dale, do you know if this method works in Metatrader 5? The MT5 has another handling for multiple or opposed positions as far as I know.

 

[firehead]

Hi guys I am trading like this for month... and it works very well. Actually I am working in shorter timeframes but the idea is the same... I think it is the most propper way to trade. To use stops is like giving your money away anyway. Since I stoped using stops in a traditional way but used opposit order as a stop, I started to make good money.

 

[firehead]

I never posted about this before because I do things what price action dont recomend but.. If it works for me Im happy. Its absolutelly great that Dale come up with idea to share this. It took me some time to fine tune the idea and its hard sometime when you see the trades in the negative but as soon as you sort out your feelings and and leave only pure logic to operate everything become clear. Market can go only up or down and I dont need to worry any more did I picked the right direction or was that signal right... it always helps with the right entry. s

Someone told me there is only one thing between the bad trader and successful one - how you manage your loosing trades! Thats it. And I believe this strategy is a way to go.

 

[erebus]

Speaking of failed trades....

 

[erebus]

Yikes, losing trades and losing bets !!!

 

[TheForexGuy]

Dale, do you know if this method works in Metatrader 5? The MT5 has another handling for multiple or opposed positions as far as I know.

I don't think you can do this on MT5 as for some reason, they locked out hedging on that platform. You can't open multiple positions and you cant go long and short and the same time with good old MT5.

I really don't know why that coded these restrictions in.

If any MT5 uses can let us know otherwise, please do.

 

[superzeeshan]

Can you please explain using lots example? rather than 1R or 0.5R, it is confusing