Statistic Trader is a ready-made trading strategy with two underlying concepts - event probability and money management. The Expert Advisor opens up huge opportunities for a trader in terms of settings and risk management.
Is it possible to have an equal chance of getting profit or loss if Take Profit is bigger than Stop Loss? Yes, it is!
The Expert Advisor skips the first N trades (performs them virtually when the relevant signal is formed) and opens a real position only after getting N consecutive losses. If N=0, the very first trade will be real. Or if, for example N=2, a real position will be opened only after two consecutive losses. If the first virtual losing trade is followed by a winning trade, the Expert Advisor will start the count over again. If the Expert Advisor opens a real trade which turns out to be losing, it will open the next one (when the appropriate signal is formed). This continues 10 times until profit is taken. After gaining (at any of the 10 steps of the series), the Expert Advisor will stop its operation.
I consider a change in the asset price as a random or unanalyzable process (due to a great number of affecting factors). For a trader who is opening a position, there may be two results - gain (Take Profit) or loss (Stop Loss). Numerous tests with various currency pairs, time frames and settings have showed that the results fall into line with a certain pattern. The key factors are values of Take Profit and Stop Loss, rather than indicators, filters, etc. If Take Profit equals Stop Loss, their chances are even; if Take Profit is greater than Stop Loss, Stop Loss is predominant, i.e. it will occur more often by as much as it is less than Take Profit. E.g. Take Profit = 100, Stop Loss = 50. Around 33% out of a 1000 completely random trades will result in profit, while about 67% will end in loss. And the more trades there are, the more accurate is the proportion of distribution of winning and losing trades.
But Take Profit is bound to occur even after a long Stop Loss series. Regular testing allows you to determine how many trades should be skipped. Statistics will show how many consecutive losing trades there are, on average, thus, giving you the number of trades that should logically be skipped. Certainly, the Expert Advisor may once in a while skip potentially profitable trades, too. But in the long-term perspective, it will enable you to avoid a lot of inherently losing trades.
Aggressive money management methods, such as doubling a position after a loss, scare away a lot of traders because a series of losses might be so long that a trader may eventually not be able to open a new position, losing a greater part of the deposit or seeing it wiped out. However, you should not totally deny yourself a possibility of recovering the losses and making profit. This tactics may be viable and profitable, keeping small drawdown under control with a proper risk management, while trying to avoid very long series of losses. It will sometimes even allow you to gain with strategies that would be losing if a fixed lot size was used.
The Statistic Trader Expert Advisor enables you to set lot sizes for a series of 10 trades. A trader has an opportunity to adjust the aggressiveness of money management as he deems fit, while expecting that the knowledge of statistics and having the first losing trades skipped will not result in a very long series of real losses.
- I select a symbol and determine its average daily volatility. Say, I have chosen EURUSD. Its average daily volatility is around 70 pips.
- I set Take Profit equal to the average daily volatility (70 pips) and Stop Loss of half the size of the Take Profit value (35 pips).
- Then I do backtesting of the strategy using at least 3 months history and determine the average number of consecutive losing trades with the specified Take Profit and Stop Loss values. Assume, it is 3. So, I deduce that I should skip 3 consecutive losses before opening a real trade. I set N=3 in the settings of the Expert Advisor (i.e. to skip 3 consecutive losses).
- My approach to money management consists in getting from 0.5 to 1% of the deposit per trade (series of trades). If there is one or more consecutive losing trades, I aim at recovering the losses, at the very minimum. The lot sizes in a series are set as follows:
1st step: 1 lot, 2nd step: 1 lot, 3rd step: 2 lots, 4th step: 3 lots, 5th step: 4 lots, 6th step: 6 lots, 7th step: 9 lots, 8th step: 9 lots, 9th step: 9 lots, 10th step: 9 lots.
It is easy to calculate that having gained profit at any of the first seven steps, I will recover previous losses and get some profit. Even with 5 consecutive losses, the drawdown will not be more than 4% of the deposit, or around 9% with 7 consecutive losses, or about 15% with 10 consecutive losses. This is not more and may in fact be even less than in some strategies that do not increase lot after losses. If backtesting results show that the longest series of consecutive losses consisted of 10 trades and occurred only once a year, we can expect that after skipping 3-4 consecutive losing trades, we may have 6-7 more consecutive losing trades at most, which is in itself very unlikely. Generally, profit is gained with the first or second trade after skipping several virtual losses.
An alternative, more conservative option is as follows: 1st step: 1 lot, 2nd step: 1 lot, 3rd step: 2 lots, 4th step: 3 lots, 5th step: 4 lots, 6th step (starting over again): 1 lot, 7th step: 1 lot, 8th step: 2 lots, 9th step: 3 lots, 10th step: 4 lots. In this case, if a losing series lasts longer than 5 steps, even though you might not be able to return to your initial capital, the losses will be no more than 5%.
When setting parameters, a trader can independently decide not only on values of Take Profit and Stop Loss and the number of trades to be skipped but also select a currency pair and time frame that would be more suitable at a given time, as well as set lot sizes in a series. You can decrease the number of trades to be skipped when the market is trending or in anticipation of important news releases and increase their number during extended periods of flat market.
Signals for Position Opening:
Since the strategy is based on probability, the choice of indicator for opening a position is of no material importance. I have decided on the standard MT4 indicator Parabolic SAR. When the price crosses the indicator in an upward direction, it is a signal for opening a buy position (LONG). When the price crosses the indicator in a downward direction, it is a signal for opening a sell position (SHORT). Positions are closed by Take Profit or Stop Loss.
Once again, I would like to emphasize that the choice of an entry signal is not material, which has been proven by testing all standard and many other indicators with more or less similar results. The key factor is the Take Profit/Stop Loss ratio that defines their frequency even in random trading.
Special Aspects of Operation:
When you start working with the Expert Advisor, it creates a global variable Start to store the start time of a session. When the Expert Advisor stops its operation (when profit has been taken), it creates a global variable Stop. After taking profit, you can start the new session by removing the Expert Advisor from the chart and deleting the corresponding global variables Start and Stop (to call the list of global variables, press F3 key or go to "Tools" - "Global Variables" in the trading terminal). During the new session, the Expert Advisor will again create the Start variable and then the Stop variable. This is implemented for stability of operation in the event of malfunction, lost connection, reloading, etc.
The Expert Advisor (with different UID and Magic) can be used for one or multiple currency pairs, with different settings.
Parameters of the Expert Advisor:
- UID=1 (unique EA ID; UID must be distinct to allow for operation of several Expert Advisors with different settings or on different currency pairs)
- Magic=123 (unique order number; Magic must be distinct to allow for operation of several Expert Advisors with different settings or on different currency pairs)
- N=0 (number of consecutive losing trades that are followed by a real trade. If N=0, the very first trade will be real)
- Lots_1=0.1 (order volume of the 1st step in lots)
- Lots_2 = 0.2 (order volume of the 2nd step in lots), etc. for a series of 10 steps
- Lots_3 = 0.3
- Lots_4 = 0.4
- Lots_5 = 0.5
- Lots_6 = 0.6
- Lots_7 = 0.7
- Lots_8 = 0.8
- Lots_9 = 0.9
- Lots_10= 1.0
- Slippage_= 3 (maximum deviation from the requested price when opening and closing market positions)
- SL_ = 35 (Stop Loss in pips)
- TP_ = 70 (Take Profit in pips)
- OpeningTwoSendings= true (true - sets Stop Loss and Take Profit for market orders after opening a position, false – right when opening a position)
- DigitsModify=true (point modification to normalize operation with quotes that have 5 or 3 decimal places)
Parabolic SAR parameters:
- ParabolicTF=60 (indicator chart time frame)
- ParabolicStep=0.02 (stop level increment for Parabolic SAR)
- ParabolicMaximum=0.2 (maximum stop level for Parabolic SAR)
- Alerts=false (true/false – enables/disables trade alerts)
- Comments=true (true/false – enables/disables comments when working with trade server)
- Sounds=true (true/false – enables/disables sounds when performing trading operations)
- Visualization=true (true/false – enables/disables visualization of trading operations on the chart)