A Trading System For the Crowd that Needs to be Right Sometimes


by Gabriel Grammatidis

In Van’s approach to developing trading systems, traders need to understand their beliefs behind their trading systems. I have followed this approach developing my trading systems — I have built the trading ideas on beliefs I have about the market — mainly about the market participants. Over time, I have developed some beliefs about why market participants, in particular the counterparts of the trade you are in, tend to do what they do. My System 1 (Busted Breakout) takes a counter-intuitive approach to a certain recurring price pattern of breakout failures. The system puts you into a relaxed position to observe how other peoples’ stops get fished for your benefit (see my last article). This is actually the system I remain most passionate about. After having taught my three systems in many workshops, a number of other traders prefer System 2, though. The reason might be that it has a straightforward logic and ease-of-execution.

Let me explain more about my System 2: Flat-Level Breakout (or FLB). While it does not require learning different concepts from Busted Breakout, System 2 uses many of the same “ingredients” as System 1 — but it has a different “recipe”.

System 2: When the Crowd Needs to be Right

General Description

This is a trend-following system based on a specific multi-bar pattern that requires a specific breakout. This time, however, the breakout is in direction of the primary trend. Although 80% of standard-type of breakouts fail, this specific one has a high chance of actually being successful. Common market logic says that the “crowd” (that is participants who on average lose) gets the chance to win once-in-a-while in a big and cheerful way. This excites and keeps motivating those consistently losing participants and it attracts new actors (and fresh money) into the markets. The main idea here is to only trade WITH the crowd and once a setup has all edges on your side, take only the best ones. The rules make this system fairly reliable with an average win rate of around 55% as most trades occur during a well-established trend.

The system works equally well for any FX pair as well as other liquid instruments such as equity index futures, ETFs or even stocks. Based on the fractal nature of markets, it can be traded in any time-frame going both long or short. The system offers a set of clear rules with a precise entry level and initial stop. This allows you to pre-set your orders into the market. Actually, I screen my charts for both Systems 1 and 2 at the same time, using the same charting tools and templates. (For information on statistics on this system please refer to the Van Tharp Institute workshop description regarding win rate, average expectancy, opportunity and SQN — http://www.vantharp.com/workshops/forex.asp)

At times the crowd needs to be right — so why should you ignore these once-in-a-while opportunities, as they set up on a regular basis? It would be a pity to miss trading them and making money, wouldn’t it?

Other Beliefs

Apart from riding the primary trend, one of the other main beliefs behind the system is that a good number of market actors overestimate the success of breakouts that form on a horizontal price level in the markets. Once such a breakout forms — something that even a novice can detect, it seems very logical to take the trade in trend direction. You should, however, be very cautious and remember that 80% of standard-type breakouts fail. Only trade those breakouts with the crowd that have a real edge in the market. What does that mean?

Most novice traders over-trade and forget several other components that make a breakout consistently profitable. For example, one of those is the application of higher time-frames. The FLB system also uses additional important criteria. The system not only requires a specific price level, but also the right “time” or timing. Patience — the capability to wait for things to set up nicely in price and time — is an important soft skill and ingredient for successful trading (just watch the trading conversations in a chat room and you’ll know what I mean). Euphoria, greed and hope are actually counter-productive emotions that create more losers than winners. Rarely is it a good idea to follow this kind of strategy: see a breakout — get excited about it — and just get in hoping for a big winner.

As in System 1, this system is based on pattern recognition which indicates the psychological dynamic of buyers and sellers at a certain price level with the dynamic building up over time. This “psychological footprint” can easily be detected in the time-frame you trade. It requires some experience and intuition to distinguish the good ones from the not so good ones. I enjoy teaching those subtleties so students can accelerate their learning process.

Low-Risk Idea Behind the System

The core of the low-risk idea is that you wait for a specific charting situation setting up in the market: a small, well established consolidation that forms after a momentum move in trend direction. Good trends require this consolidation to regain strength and develop a nice follow-through. But how do you know when this pause in trend (or refresher) is sufficiently accounted for? Do not follow your gut — follow the rules instead. As this type of breakout attracts the “crowd”, it is important to be very cautious and wait for additional criteria to be able to tell it’s ready to move again. One criterion is strong built-up pressure in trend direction supported by higher time-frames. The possibility for a tight stop that is well protected adds other important edges to the system. If “price and time” are well aligned, then the breakout is ready for a nice and impressive R-multiple trade.

Actually it can be fun to trade with the crowd and experience how everybody in the market gets excited and celebrates an overdue winner. These are typically those chart situations that can be seen as “spiky exhaustion moves” that cause many people to jump in too late. By that time, most experienced traders (and traders following this system’s rules) will have already exited with profits. Beware when the crowd gets excited and starts to over-trade after such a winner — you should not.

Trades from this system are the ones you can talk about at cocktail parties to watch how easily people can get impressed. Taking a trade in a full-blown trend — especially one that everybody knows and talks about — shows how clever, determined and tough you are. Your social status will instantly increase! How little do they know how difficult trading actually is — but I guess you already know that by now…

Good trading,
Gabriel Grammatidis

About the Author: Gabriel Grammatidis is a successful full-time trader and graduate of the Super Trader program. He has extensive experience trading Forex and shares his knowledge at his Forex and Live Forex Trading workshops, held regularly at VTI.

For more information on the system please refer to his Traders’ article (Become a Hunter).

As well check out his website at IntuFX.com about the Busted Breakout system for articles (http://intufx.com/busted-breakouts-in-forex/) and trading videos (http://intufx.com/trading-videos/). For a free 30min webinar on this specific strategy sign-up at IntuFX.com for the webinars’ free download.






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