This is kind of addendum to my post about the secret formula, an example of using the formula to ensure success...
I've always been fascinated with 'gaming the system' and 'sticking it to the man', always trying to find loopholes and errors, arbitrage situations to take advantage of. I've always been intrigued with casinos and gaming odds, playing the probability game over long periods, trying to push the odds in my favour. Who ever heard of a poor casino ? it just works.
A good while ago, my broker wanted to be 'hip' and 'down with the kids' and introduced a product called 'binary options'. It was fairly new at time, not new exactly, but was becoming popular at the time in the retail market.
For those that don't know, a binary option is a kind of fixed limit bet. You answer a question, and if the answer is correct you win 'X' amount, and if it's wrong you lose 'Y' amount.
The question usually takes the form -
'The price of this commodity will be above X level by 3.00pm'
If you agree and it turns out correct, you win. If not, you lose. Just a simple straight forward wager. Obviously they stack the odds in their favour, you always lose more than you win on each 'bet'.
For my broker, the odds were 4:3 in their favour, if you won, you won 3 times your stake and if you lost, you lost 4 times your stake.
So that got me thinking... hmmm, what are the odds ?..
To break even, I needed to win 4 bets and only lose 3, so a success rate of approx 4 / 7 = 57%. In other words, slightly better than a coin toss or 50/50 guess.
On a bet due to expire in 1 hour, which was a standard time period, you only had to guess the color of the next candle. The beauty is it didn't matter how big the candle was, it could only be one single pip above or below and you would win or lose.
So that got me thinking, surely I can predict the next hourly candle, at least better than 57% of the time ? That's all it would take to make it profitable over time. And I could...
So I developed a simple momentum system that worked on some very selective stocks and backtested the hell out of it. I could predict accurately with about 70% success rate ! I picked stocks that were 'jumpy', like when they were disturbed they would jump up and then fall back again to the status quo, like throwing a ball in the air.
I used a momentum indicator to find when the stock had 'jumped' and 70% of time it would continue upwards in the same direction for at least the length of the next candle. So a strong white candle would be followed by a weaker white candle, before coming back down. And I could predict this at least 70% of the time with regularity..
So I plugged the numbers into the "secret sauce formula" to see what could be done with it.
70 * 3 = 210
30 * 4 = 120
210 / 120 = 1.75
Yes ! probability of success ! And it was successful..
I started off slow, being aware of 'bad clusters' ie drawdown periods, but I'd figured all that in before hand and was only risking a small amount of my capital overall. I could afford up to 8 or so losers in a row, 2^8 or 1 in 256 chance, odds I could live with.
And yeah, I made some decent money. The system worked well, I think my biggest drawdown was 4 in a row which was fine, nothing to worry about, the mathematics all held up as expected.
It was slow though. I'd started the system on hourly candles, so it was a case of checking and betting once an hour. I tried to move to shorter timeframes but the probability went way down, too much noise in the market. Could have went to a higher timeframe and bet more, but it was soooooo boooooring....
Never thought I'd ever be bored with making money but that's just how it is. Find a system with a 'casino edge' and exploit it over and over and over again, that's the way to make money. It's not shouting 'buy buy!! sell sell!!' into the phone while clutching your chest and reaching for the heart pills. It's actually really dull.
In hindsight, I should have made a lot more money. Like most people though I was listening to the demons in my head. I was thinking, 'this is too good to be true', 'I must be due for a major hit soon'. Maybe it's going to end up like some kind of Martingale and I'm going to have a run of such bad luck I'll need to start revenge trading and doubling up just to break even.
But it never happened though. What did happen.. my broker stopped the product. They stated it was 'too close to gambling' and 'not respectable enough'.
I think.. they just got caned, taken to the cleaners. I was making decent money out of it and I was pretty reserved. And I'm not the best or smartest trader around so other people were probably doing the same and completely hammering it !
I worked hard, did the maths and calculated virtually every probability. I used good money management to limit risk, and wasn't greedy. I backtested over thousands of trades and forward tested on a demo account, just to be absolutely sure my system had a chance of success.
So there you go, a real world example of the winning 'formula' and putting it to good use making money. It's all about finding that statistical edge that you can exploit over time.
A word of caution - there are plenty of places that still offer binary options, some places that's all they do. Be aware it's an unregulated market (for the most part) so you could end up stung. And it's a super risky business to try as well. If you have a bad cluster, which is going to happen at some point, you might find yourself in a bit of a hole... Don't say I didn't warn you !
Header image credit : http://jonvilma.com via Google image search, no affiliation.
About me -
I'm a full time financial trader, mostly in Forex and Commodities. I write for fun and try to help beginner traders get started, avoiding all the mistakes that I made. I'm always happy to chat or discuss ideas so please just give me a shout in the comments !
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