3% a month Thesis? - Black Swans are rare in a Fragile Market

12:05 PM

I have recently picked up Nassim Taleb's book Anti-Fragile. For copiers & followers, you will know that I am a huge fan of this man.

Black Swans is often where I live. And here instead I am taking the opposite view. Why? Monthly income.

As much as I love macro trading, in terms of frequency, it is not quite enough to live life. In 2016, according to Eurkahedge analytics, global macro style funds only made 3.77% in 2016. YTD 2017 only stands at 1.27%.

This is not a stat which is palatable to the eToro community. But who am I to beat professional managers? The answer lies in market structure and leverage.

If I can play in the space where retail traders mostly fail in a more controlled manner perhaps I can be successful. 

These certain advantages also are available which may be why this thesis should work for my copiers.


Fundamental Structure:

We are in a fragile market which is not used to shocks. Thus, volatility is generally low across asset classes. The Market Structure have evolved to a point where it does not allow for it. With High-Frequency Trading Algorithms and dark pools means that overbought and oversold conditions are quickly reverted to a mean.

Using eToro being a Level 2 / STP (Straight Through Processing) allows us to take advantage of a great amount of relative liquidity in a low volatility market.

This system is temporal; I do not think it will exist 10 years into the future. It is a temporary arbitrage. It is also only available because I have a small amount of capital, scaling this system up will likely fail.


The details:

There are three flushes of liquidity in a day, they are during the Asian Open, the European Open and the US open.

If the early part of these sessions produces a breakout, it should retrace to the mean quickly. High-Frequency Traders, Dark Pools and the like will sell (buy) overbought (oversold) conditions using RSI, MACD or MA which are programmable. It should then return to the mean quite quickly.

How can I trade these? Using MACD/RSI/MAs are probably arbitraged away and I probably can't be fast enough to get in. But what is not programmable quite yet? Chart Patterns.

It is difficult to program what a bullish engulfing candle is, but it is not hard to see how such a pattern could equate to a crossover of the MACD histogram. We can take advantage of this till it programmers finds a way to take advantage of these.

During my test, I was able to find a sweet spot at a 10 pip TP level while SL was 15 pips. This had an 80%+ success rate.


System failure:

The system fails during economic news or sentiment which doesn't allow the market to remain in its low volatility state. So it is key to avoid these timings. This system is not predictive of the news.

It also fails during low volatility periods 2hrs prior to entering the trade. Lower than 19 pips.


How I test my system:

Painstakingly. I will do a YouTube video to show how I do it.

 picture of my excel test results


Currency Used:

Only USDJPY due to lower spreads and also high trading volume. This should result in a lower standard deviation from the mean.

I have tried it with GBPUSD, but it has not worked out. For one the high spreads are a concern, the second if the runners tend to be quite frequent due to the European session. The spreads are no fault of eToro I understand this is the service that they offer. So, for now, USDJPY seems to be the most workable on eToro.

When am I going to start:

I started today, making barely breakeven because I wanted to test the change to my risk score. I will scale accordingly because I rather my risk score remains lower.

If all goes well, I shall start properly tomorrow.


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