Card Counting
Despite what is commonly thought, card counting does not entail memorizing every card dealt from the shoe. It's unnecessary to meticulously track the quantity of specific cards like 3s and 4s from previous hands. Rather, the focus lies on gauging the overall value of the remaining deck. By doing so, one can adjust their gameplay and bet sizes accordingly.
In blackjack, the odds favor the player when the deck contains more cards valued at 10 or 11 points. Therefore, through card counting, one can effectively monitor the balance between low-value and high-value cards remaining in the deck.
Card Counting for Trading
In Blackjack, knowing or at least having a clue about the value of the remaining deck gives us an edge. Can we also estimate the value of the "deck" in trading?
Let's think for a second what a deck in trading could be.
Trading Deck
While most people think of Volatility or price movement directions, I see the deck rather as a collection of trades to come. This is super simple, since we kind of design the cards of the game we play. Lets assume we are using a martingale strategy, where positions of same or increasing size are opened until some profit is reached. If the strategy is designed right, every trade is one of the following:
a trade has 1-5 positions before it is closed - occurs quite frequently
a trade has 6 or more positions before its closed - occurs quite rare
So we designed a game with only two types of cards: a boring card and a devli card.
In order to estimate the "value" of the remaining trading-deck, we want to know how many boring and devil cards are in there. Is that possible?
Estimating Trading Deck
First we run a backtest and see how many positions are normally used before a trade can be closed with profit.
This is a const-lot backtest from BFG9000 with low risk from 2019-2024
We can see some spikes in the chart which indicate the in some cases the EA had to open more positions in order to resolve the drawdown.
I extracted this data and created a histrogram over all trades. The horizontal axis illustrates how many positions where used before a trade was closed. The vertical axis shows how often such a trade happened in the backtest above.
As expected, the EA uses usually needs in most cases 3 or less positions to close a trade. In some rare situations these are 4. And the devli trades have 6 or more positions. The histogram however just gives us a feeling of what might be in the stack. What we are still missing is the information of the time between the devil trades!
The hidden Secret
The duration between the devil trades reveals the hidden value of the trading deck.
We define 6 to be the number of positions in a trade for a trade to become a devil trade.
And this is the histogram of the amount of trades between the devils:
What is the minimal amountof trades between two devils? It's eleven.
In the zoomed chart, we can see that we have at least 11 trades before the next devil card comes 🔥
Trading Before the Devil Comes 💰️
When we know, that the devil will come 11 trades later, what can we do? Riiigggghhtt! Crank up the positions and your trading goes Brrrrrr!
Application in Real Trading
Let me mention the BFG9000, which is the first EA applying this methodology for the first time. The EA will be made available to the public on February the 22th.
The EA basically tracks the trades and detects the devils. After that, it applies the scaling approach introduced previously in an older blog post. The final outcome looks like this:
We clearly can see the few devils on the equity chart and that the EA scales up for a short time and continues using minimal lot size waiting for the next devil. Its simple as that.
I hope you liked the article. Share it with everyone who is interested in serious Forex trading.
Thanks you!
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