Does Anyone Use Standard Deviation, And/or THigh Probability Setups in Their Trading?

[Mysticforex 13]

The topic name is rather self explanatory, but to be specific here's what mean and the way I use it..

 

Lets say you pick a moving average. any moving average, ( the higher the MA, ie: bigger, the more profit potential. I use the 800 SMA. Now sooner or later, on any TF price must return and touch or break that MA. Now, the question has always been, How do we know

when price is ready to make a move back to the MA? My friend and Mentor has been obsessed with this for years. He and another friend of ours, who happens to be a genious with spreadsheets, figured it out about 2 years ago. They counted tens of thousands of candles on various pairs and different TFs to find a solution with the 800 SMA ( you can use a different MA, but then tens of thousands of candles would have to be counted again ).

It was determined that 500 candles ( we rounded it off, could be 481 on GBP/JPY or 509 on USD/CAD ) So, 500 candles is the first standard deviation, 1000 the second Standard Deviation, 1500 candles the 3rd etc.

Of course its more complex then that. You don't just start opening trades when the first or second deviation is reached. But it's not Rocket science either. As with any system, backtesting is key. Don't rely on someone else's backtesting. You must do your own, That's how you gain confidence, because you have tested it yourself. And confidence in my opinion falls into the realm of "Trader Psychology", which a lot of people say is 90% of the game,

 

If anyone is interested in exploring this further, I could go more in depth into this. However, I should add that I consider myself a good analyst, a decent trader, but a terrible teacher.

 

Chris

[Tams 20]

you can use ANY period for your MA...

soon then later, you will see the price touch the MA line.

[novicetrader 10]

try trading real time in a range bound market with an moving average of any length and u will know?

Std deviations are good for statistics and it has its use in backtesting, but then one has to use it wisely, and again the fat tails is another issue, std gaussian/bell curve does fit nicely here.

[Tradewinds 12]

This site has a nice option for your own blog. You could blog different trades that you have made, explain the logic behind the decision, and post whether it was successful or not.

[Mysticforex 13]

This site has a nice option for your own blog. You could blog different trades that you have made, explain the logic behind the decision, and post whether it was successful or not.

 

I am new here, didn't know that. Sounds worth looking into.

 

Chris

[Mysticforex 13]

you can use ANY period for your MA...

soon then later, you will see the price touch the MA line.

 

Exactly, do you use it in your trading?

[Tams 20]

Exactly, do you use it in your trading?

 

yes... of course. I don't know anybody who doesn't use MA in his charts

even those holier than thou "purist" PA traders secretly use MA.

[Mysticforex 13]

yes... of course. I don't know anybody who doesn't use MA in his charts

even those holier than thou "purist" PA traders secretly use MA.

 

Lol...

 

That's not what I meant. I have an indicator that measures the time and distance that price has been away from a certain SMA. I also know the standard deviation for time away from the SMA. So, when price is say 2 or 3 Standard devs from the SMA it is time to start watching the pair closely for a move back. It is actually "counter trend" trading.

Good on any TF. Obviously the bigger the TF the bigger the move.

 

I am on a Linux machine at the moment and can not access MT4. I will post a chart example later.

[Mysticforex 13]

Ok.

 

This is a system taught to me my friend and Mentor Rob Booker. The SMA we use is the 800 SMA. Like you said TAMS, one can use any MA. The 800 SMA is large enough to make a move to it worthwhile. And trades develop more often than one would first think.

 

1 Minute Chart.

The Dashed black MA is the 800 SMA, The Blue MA is the 200 SMA, and the Red MA is the 62 EMA. The indicator in the upper right hand corner is what we call The Radar Screen.

The first line of the Indi shows how far price is from the 800, the second line is how long price has been away from the 800. 500 pips is about average for 1 standard deviation, it varies slightly from pair to pair. So on the 1 Minute Chart, GBP/JPY has been away for just over 2 standard deviations. ( BTW G/J is the only pair I would take a 1 Minute setup. The pair has to be a fast mover, otherwise, say on E/U, the 800 may come down to price before price comes up to the 800. I also would not trade it on a Friday NY Session as things tend to slow down a bit. ).

 

Entering the trade is discretionary, You can enter on the break of a trend line ( ok, but not great ), You can enter when a candle closes above the 62 EMA ( better, but still not best ) or you can enter when the 62 is between the 200 and 800 AND has broken a trend line ( My favorite ).

 

Trading off the 1 Minute Chart is not everyone's cup of tea, ( I started my current trader incarnation as a scalper, it to me a long time to delvelope into a swing or position trader ).

But as I said this can be used on any TF. The best case scenario is when a 1 Min segways into a 5 Min setup, then the 5 Min into a 15 min etc

 

For me, I have had the most sucess with the GBP crosses, Aussie, USD/CAD. EUR/GBP, CAD/JPY. The worst with the EUR/USD.

 

If you would like the indicator, PM me with your email and I'll send it to you.

 

Almost forgot, here's the chart:

[Mysticforex 13]

Lol...

I knew I was putting my foot in my mouth when I said I wouldn't enter on Friday, it's up about 40 pips now.

[ClocharT 10]

Ok.

 

This is a system taught to me my friend and Mentor Rob Booker. The SMA we use is the 800 SMA. Like you said TAMS, one can use any MA. The 800 SMA is large enough to make a move to it worthwhile. And trades develop more often than one would first think.

 

1 Minute Chart.

The Dashed black MA is the 800 SMA, The Blue MA is the 200 SMA, and the Red MA is the 62 EMA. The indicator in the upper right hand corner is what we call The Radar Screen.

The first line of the Indi shows how far price is from the 800, the second line is how long price has been away from the 800. 500 pips is about average for 1 standard deviation, it varies slightly from pair to pair. So on the 1 Minute Chart, GBP/JPY has been away for just over 2 standard deviations. ( BTW G/J is the only pair I would take a 1 Minute setup. The pair has to be a fast mover, otherwise, say on E/U, the 800 may come down to price before price comes up to the 800. I also would not trade it on a Friday NY Session as things tend to slow down a bit. ).

 

Entering the trade is discretionary, You can enter on the break of a trend line ( ok, but not great ), You can enter when a candle closes above the 62 EMA ( better, but still not best ) or you can enter when the 62 is between the 200 and 800 AND has broken a trend line ( My favorite ).

 

Trading off the 1 Minute Chart is not everyone's cup of tea, ( I started my current trader incarnation as a scalper, it to me a long time to delvelope into a swing or position trader ).

But as I said this can be used on any TF. The best case scenario is when a 1 Min segways into a 5 Min setup, then the 5 Min into a 15 min etc

 

For me, I have had the most sucess with the GBP crosses, Aussie, USD/CAD. EUR/GBP, CAD/JPY. The worst with the EUR/USD.

 

If you would like the indicator, PM me with your email and I'll send it to you.

 

Almost forgot, here's the chart:

 

 

Hi Mysticforex, does your indicator work even in Multicharts? Is it coded in EasyLanguage?

Thanks

[Mysticforex 13]

ClocarT,

 

No, just in MLQ. I know it can be programmed for "IntelliCharts".

I am not a programmer, I Use a programmer I know in Romania for everything I need.

 

I would assume some familiar with MLQ could convert it.

[Daryl 10]

Hi Mystic

 

I have read the thread with interest and would be most interested in looking at your methodology further - this might well be a good option to avoid some whipsaw experienced in my short term MA crossover strategy.

 

Are you therefore able to explain the methodology in more detail. I note that the 62EMA>200SMA >800SMA is there a trigger ie an oscillator or something to trigger the trade entry ?

 

Further, in regards to Timeframes do you feel that MTF is best or could we simply use one TF to see the trade setup amd manage the trade ??

 

Many thanks for your help

 

Regards

Daryl

[Mysticforex 13]

Daryl,

 

The main thing to remember is that this is counter trend trading.

 

I don't use any oscillators, but there is no reason why one could not. Say start looking for divergence on a MACD, or Stoch.

 

I use the 62 EMA and the 200 SMA for visual reference only. The 800 SMA is the base line for the deviation. When the 62 is above the 200, and the 200 is above the 800, it is obviously in a trend, even if the Radar Screen tells us that price has been away from the 800 SMA for 1500 candles ( 3 standard deviations ) So we do not enter a trade just because price has been away from the 800 for a long, long time. But, when price has been away from the 800 for more than 500 candles it means we can start looking for a reason to enter a counter trend trade.

I mentioned earlier that I like to see the 62 EMA between the 200 and the 800. SMAs. The cross of the MAs has no significance for me, it is not a trigger. But when the 62 is between the 200 and 800, what is the Visual Reference telling us? That the pair is no longer Clearly trending in whatever TF you happen to be looking at. It may just mean the trend is pausing before continuing, or it may be time for a reversal, again, just on whatever TF you are looking at. A reversal on the 15 min TF might just look like a long lower wick or shadow on the Daily TF. And yes, in answer to your question, this is a single TF method. If you start to use it, have some success, become more comfortable and proficient with it, you will see how a setup might be able to "Blend" into a higher TF. But let's not get ahead of ourselves... first, baby steps.

 

So let's look at this chart. It is the GBP/CHF 15 min. The Radar Screen tells us that price has been away from the 800 SMA for 715 candles. The 62 EMA is above the 200 SMA with some nice separation I might add. My personal preference is enry on a candle CLOSE below a TL. On this chart if/when a candle closes below the TL, the 62 would probably be between the 200 and 800 SMAs.

The TP target would be the 800 SMA which at this time is 245 pips below current price, not even visable on the chart.

Some people may not feel comfortable aiming at a moving target. ( remember the 800 is moving towards price, slowly, but moving nonetheless ). There is no reason why one could not use a substitute target, say, a Fib point, a PP, or a strong psychological number. Just make sure that your reward justifies you risk, and use good MM.

Here's the chart:

[Mysticforex 13]

Daryl,

 

It's Friday afternoon here. What say we follow this chart into next week?

[Daryl 10]

Hi Mystic Forex

 

many thanks for your explanation and the chart also was most helpful.

 

Be great to follow the chart over the next week to see how it progresses into a good trade.

 

I note also your comment on the use of a "single timeframe' and imust admit this appeals to me as i am often confused by traders who talk about MTF when the trade has already gone through the initial stages on the lower TF by the time you see it on the higher TF. So a single TF is great.

 

MysticFx are there better pairs to trade this ?

 

thanks again

[Mysticforex 13]

Not to confuse the issue, but on the subject of MTFs. That is something you may want to start looking at once you have a lot of screen time under your belt with a single TF.

 

As far as gbp/chf at the moment. We were watching the 15 min chart. Price has just broken R3 ( BTW I cannot remember the last time GBP/CHF did not hit R3 or S3 on a monday. Just knowing that information, A trader with experience should be able to devise a way to make money with that knowledge. Imagine taking one trade a week, on monday, and taking off the redt of the week ). At this point GBP/CHF is also beyond 500 candles on the 5 min chart as well. So let's look at the 5 min, draw another TL, and wait for a close below that TL.

The Daily chart is in a strong bullish trend, but these small shorts on the 5M and 15M will just look like a hiccup on the daily.:

 

Here's the 5 M Chart

[Mysticforex 13]

Ok. we have broken our TL on the 5M TF. Broken the Daily pivot Point, and Hit the target of the 800 SMA Came within 8 pips of S3 ( I always use a 20 pip buffer and consider a point hit if it is within 20 pips. ) The trade has not opened yet on the 15M ( the lower TL), but the 800 sma is now visible 153 pips below. When we get to the lower TL on the 15M, watch for a break or a bounce.

[Mysticforex 13]

I shorted on a close below the 5 M TL ( upper TL ) TPed at the Weekly Pivot ( Orange Line ) just above the 15M TL. Expect to see a break below the 15M tL today for a trade down to at least the 800 SMA @15453.

Edited February 15, 2011 by Mysticforex
spelling

[forrestang 10]

I have done quit a bit of testing with trading w/deviations. But it was all WITH trend testing that I had done. It was basically finding a channel, starting with the beginning of that channel.

 

The idea was using 3 timeframes in which to base a trade. Big std deviation was BIAS, finding a timeframe smaller was the CounterTrend Channel, entering on a Break of that.

[GlassOnion 12]

I have done quit a bit of testing with trading w/deviations. But it was all WITH trend testing that I had done. It was basically finding a channel, starting with the beginning of that channel.

 

The idea was using 3 timeframes in which to base a trade. Big std deviation was BIAS, finding a timeframe smaller was the CounterTrend Channel, entering on a Break of that.

 

You say with the Trend. So, lets say its a Bullish Trend. Are you looking for a "bounce off the bottom of the channel up to the top of the channel?

And where does the deviation come into play?

[forrestang 10]

You say with the Trend. So, lets say its a Bullish Trend. Are you looking for a "bounce off the bottom of the channel up to the top of the channel?

And where does the deviation come into play?

 

Basically, it was using the +- 2 standard deviations as the boundry of the channel. The idea, say for a long..... was to look for price to move near the bottom 1/4 of the channel, which in my case was between the -1 and -2 standard deviation bands minimum, it could go lower of course.

 

At that point, I would draw a counter deviation from that last major high, and enter on a break of the +2 standard deviation line of this new smaller channel.

[Daryl 10]

Mystic

 

Many thanks for posting the chart of the GBP/CHF and also for the tip on the Monday pivot break - I will watch this.

 

Mystic are you using daily pivots on the 5 min chart

 

In terms of targets you enter on the 5 min but target a point near the 800SMA on the 15 min chart - is this right.

 

While I realise that the 4Hr and daily charts are much longer TF's do they provide better surety of trades due to the longer TF ?

 

 

Thanks again this approach is most helfpful

 

Daryl

[Mysticforex 13]

Mystic

 

Many thanks for posting the chart of the GBP/CHF and also for the tip on the Monday pivot break - I will watch this.

 

Mystic are you using daily pivots on the 5 min chart

 

In terms of targets you enter on the 5 min but target a point near the 800SMA on the 15 min chart - is this right.

 

While I realise that the 4Hr and daily charts are much longer TF's do they provide better surety of trades due to the longer TF ?

 

 

Thanks again this approach is most helfpful

 

Daryl

 

Hi Daryl,

 

I was getting ahead of myself. Instead of sticking to the 15M setup we were watching, I also posted the 5 min to show what I actually do. I entered the 15 min setup from the 5 min chart. It's something that comes with experience and familiarity with the Method, but probably caused some confusion because strictly speaking it is not part of the topic we are discussing. For the time being, we will stick to 1 TF at a time. Down the road we can expand a bit to show how more profit can be gained.

 

So for now, The 15 min setup did open on a close below our Trend Line for a gain of about 62 pips.

 

As for the 4 HR and Daily TFs, technically the probability should be the same on any TF.

My subjective opinion is the shorter amount of time you can be in a trade, the less "exposed" you are.

[Mysticforex 13]

Mystic

 

Many thanks for posting the chart of the GBP/CHF and also for the tip on the Monday pivot break - I will watch this.

 

Mystic are you using daily pivots on the 5 min chart

 

In terms of targets you enter on the 5 min but target a point near the 800SMA on the 15 min chart - is this right.

 

While I realise that the 4Hr and daily charts are much longer TF's do they provide better surety of trades due to the longer TF ?

 

 

Thanks again this approach is most helfpful

 

Daryl

 

Daryl,

 

If you follow the set ups I have posted on the EUR/USD intra/inter Day Analysis, you will see a perfect example of what I mean by blending a trade fron one TF to the next, in this case the 15M to the 30M.

 

http://www.traderslaboratory.com/forums/f24/eur-usd-intra-inter-day-analysis-9356.html