12/20★The limit-entry itself is a contrarian (counter-trend) entry
FX Automated Trading, the EA developerReiwa’s Double-I.
Today’s topic is
"Limit-entry itself is a counter-trend (contrarian) move"
,
In discretionary trading,
when a trend is established,
if you want to buy on dips or buy on pullbacks, or sell,
you may want to buy when the price dips to this line,
you may want to sell when the price returns to this line,
you want to hold a position in the direction of the trend, but
you want to enter at an advantageous price by waiting for it to align.
At times like that, you might position yourself properly
by placing a limit order.
As an EA developer,
for such dip-buying, pullback-selling logics,
when translated into an EA, the win rate is about 70%.
However,
the win rate is high, but
the ratio of average gained pips to average lost pips tends to
be around 1:2, meaning losses can be twice as large.
In other words, it tends to be a lose-slow, win-big scenario.
By achieving a reasonable position sizing,
even with favorable entries,
the risk-reward tends to be 1:2,
which means it’s easy to have slow-and-steady losses escalate.
Since this is a scalping method of dip-buying and pullback-selling,
the tendency is for that to happen, but
when price dips and you buy,
and afterward price keeps dipping, you incur losses,
or
when price returns and you sell,
and afterward price keeps returning, you incur losses.
In such times,
to improve the EA’s performance,
stop losses tend to be deeper, and
long-term profitability tends to move into positive territory,
but a single stop can cause a big loss.
From the EA development perspective,
to avoid the slow-and-big losses,
extend gains by letting profits run when taking partial profits,
strengthen the trailing power along the trend, and let profits run as much as possible,
cut losses with shallow pips for stop losses,
then the win rate may drop to 40% or 50%, but
by aligning with trend-following logic,
you can get closer to a small loss, big gain profile,
which may be appealing both for discretionary trading and EA development.
Perhaps that is the direction worth pursuing.
By the way,
when price dips and you buy,
and afterward price keeps dipping, you incur losses,
or
when price returns and you sell,
and afterward price keeps returning, you incur losses,
as mentioned earlier,
placing a limit order here means,
in other words, that itself is contrarian.
In the long run, positions are taken in the trend direction,
but when the trend moves against you, that is, price goes opposite,
the limit order hits and a position is opened,
so that itself is contrarian.
This is the dip-buying/pullback-selling method.
Therefore,
even among professional traders, many dislike contrarian strategies,
and many trade without placing such contrarian limit orders, focusing on trend-following.
From an EA development perspective as well,
trend-following tends to underperform less against spreads,
as supported by past validation data.
Most commercially available EAs are
scalping using this dip-buying/pullback-selling logic.
Compared globally, Japan’s spreads are narrow,
so this logic is quite viable in domestic accounts.
With this in mind,
if you want to use EAs other than dip-buying/pullback-selling,
consider trend-following or swing EAs,
or EAs with around 40% win rate in backtests,
which may also be worth exploring!
Generally, people say they don’t want to use them because win rate is low,
but as described above,
lower win rate does not mean profits aren’t positive.
Rather,
it’s a small-loss-big-win scenario,
so if you want to try, doing so will broaden your operation scope,
and I think it’s a great thing for EA developers too!
Well then!
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【Reiwa’s Double-I: EA Listing】
https://www.gogojungle.co.jp/users/112481/products
Specifically categorized Reiwa’s Double-I EAs by genre
https://www.gogojungle.co.jp/finance/navi/articles/67162
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【Reiwa’s Double-I: Serialized Articles】
■EA Beginner Course
https://www.gogojungle.co.jp/finance/navi/series/1700
https://www.gogojungle.co.jp/finance/navi/articles/64703
https://www.gogojungle.co.jp/finance/navi/articles/65978
https://www.gogojungle.co.jp/finance/navi/articles/64738
https://www.gogojungle.co.jp/finance/navi/articles/65619
https://www.gogojungle.co.jp/finance/navi/series/1714
https://www.gogojungle.co.jp/finance/navi/series/1701
https://www.gogojungle.co.jp/finance/navi/articles/64723
https://www.gogojungle.co.jp/finance/navi/articles/65010
https://www.gogojungle.co.jp/finance/navi/series/610
【Reiwa’s Double-I: Beliefs】
Develop EAs by proper methods,
seek the support of as many people as possible,
and maintain a long-term WIN-WIN relationship,
aiming to invigorate the EA market and raise literacy.
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