In our search for THE trading strategy, I guess many of us have come across dozens of more conventional trading strategies that made use of:
- technical indicators (ADX, MACD, Stochastics etc)
- price action
- support and resistance lines
- candlestick patterns (doji, harami, evening star etc)
- chart patterns (double top, flags, pendants, cup and handle etc)
As I got more acquainted with expert advisors (EA), I was exposed to some trading strategies, which I termed as “unconventional” trading strategies. Basically, in unconventional trading strategies, they don’t use any of the things listed above! So allow me to share some of the unconventional trading strategies that I have come across.
Correlation Trading
In correlation trading, people trade base on the relationship between the same or different trading instruments. I ever heard a course out there teaching people to buy a currency and sell another highly-correlated currency. Supposedly, this will cancel the effect of the currency price fluctuations and the profits will come from the swap. Not a bad idea…one don’t have to care about which direction is the currency moving (aka non-directional trading) - provided the 2 currency pairs are REALLY moving in correlation, that is… But my this friend got a hell lot of problem…
Trading mean reversion
My encounter with the PID EA taught me the concept of mean reversion. The main idea is that there is a high chance that price will move back to the average price (more details at investopedia). Interestingly, Dr Brett has the statistics to show that “a disciplined trader can make a living simply trading this pattern“.
Gambling and information theory applied to trading
A online buddy introduced this concept to me recently. I have not really dwell into this yet. Basically, some genius managed to represent gambling concepts mathematically such that the parameters can be manipulated and optimization can be done. Another genius applied this to trading. One such application is in Kelly Betting, that applies to money management.
Trading based on probability or other mathematical models
The Hedgecow EA trades base on a such a probability model. The high level concept is that it is highly unlikely to consistent lose for too many trades. So when there is a lose trade, we will increase lot size for the next trade. More details can be found here.
Disclaimer: I am not recommending any EA here. I am just illustrating some novel trading concepts that I have learnt from some of the EAs that I come across. In fact, PID caused many to get margin calls last year.
in post image by: FriaLOve(out of school!!!!)
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The only way to be truely satisfied is to do what you believe is great work and the only way to do great work is to love what you do… - Steve Jobs
Allow me to share my humble opinions:
When I was working in a hedge fund, some of my colleagues have been trading correlations. They discovered that Dow Jones and AUDUSD have positive correlations. So when they see Dow Jones going up, they will buy AUDUSD. They will take profit at 5 pips and identify the next trading opportunity. This means that they are scalpers.
They can have 200 trades in 1 trading session. They had stopped trading this method when they found out that Dow Jones and AUDUSD’s correlations have stopped.
I myself had been trading correlations for a while in the past. I am not a believer of scalping because I have often seen scalper traders take small profits for many trades. One losing trade is sufficient to give up all their past 20 trades’ profits.
At that time I trade oil and gold correlations. I create oil and gold ratio chart in bloomberg. Found out that the ratio chart is trading in a range. So I will trade on the extreme of the range believing that they will revert back into the middle of the range. But I have not been trading commodities for a while as my attention has been focused on forex trading now.
Trading mean reversion is actually not something new or unconventional. Through my years of trading, talking and working with professional traders, I come to a conclusion that basically there are two broad strategy of trading:
1. Trend following
2. Reversion to the mean
Often we have heard that the trend is your friend. They are basically trend followers. Many successful traders have claimed that they are using trend following.
Of course if you have been trading long enough, you will know that the trend is not always your friend. Sometimes they are your traps. That’s where reversion to the mean comes in. In recent months I have heard of more hedge funds calling themselves “reversion to the mean” traders. And they are successful in their trading.
My BL TS System is able to track if the currency pairs is trend following or reversion to the mean by tracking its past behaviour.
The most conventional trading strategy used by banks for many years is order flow trading. When they know that their huge customers is going to buy huge amount of AUDUSD, they just follow and buy some. Not much brain power is needed. And this has helped bank and bank traders to make millions and millions of trading profit at relatively low risk.
Due to my connections with traders from Asia, Europe and New York, they will share their order flows to me. I will share those information to my students in my online trading education program. This has benefited us a great deal.
For example if you are bearish on EURUSD. But you heard that Asia Sovereign and hedge funds are buying, certainly you will not choose to go against their view. Instead you may want to follow them and buy EURUSD as well.