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Loss-Parking Strategy (LPS)
Money Printing Strategy is specifically designed for achieving unprecedented high ratio of gaining to losing trades. It uses the Loss-Parking Strategy (LPS), a highly efficient alternative to the commonly used Stop Loss Strategy (SLS).
The example below describes metaphorically the procedure to follow in case of a sudden and unexpected market trend reversal against the Money Printing Strategy predictions. First, we have to go through Trading-Checklist again to make sure that all criteria are still valid. We then have three approaches for handling the situation. Have you heard of the frog and the frying pan?
The hot frying pan: The frog jumps on the hot frying pan, notices the extremely high temperature and jumps out of the pan immediately. This is an example of behavior when we get nervous and decide to take losses immediately. However, the market may happen to resume the predicted trend just after losses are taken. This strategy is not a too bad approach to handle the situation. However, we have still suffered losses.
The slowly heating pan: The frog jumps in the pan, feels it is warm but still okay. As the pan gets gradually hotter, the frog does not realize and takes no action. Finally, the frog gets cooked without noticing. This is the case when we keep a losing position indefinitely until it swallows the whole trading capital. It is a catastrophic approach and the consequence of making a stop-loss price a permanently moving target. However, this case should not happen to Money Printing Strategy traders because it forbids placing of orders to open a position without the associated Stop-Loss order. In the worst case, we would take losses according to the initially calculated Reward-Risk Ratio.
The wise frog: it comes closer to the hot pan and feels the heat. It then asks the sensible question: can I cook an omelet with this pan? Well, this would be the case for knowledgeable investors. We know that market is trending against our open position, which is losing money each passing moment. At the same time, we do not want to take losses either. This is because we know that the counter-trending wave is going to be short-lived and the originally predicted trend should resume soon. How do we do it? It is done by checking the signals of VIX, DJ-30 as well as their associated TSV and MS indicators. In principle, they should all confirm the current market direction trending against our open position. We then decide to open a "Force Open" position in the opposite direction of the already open position with the same amount of shares . This way, our "Force Open" newly opened position compensates for the increasing losses of the originally open position as long as the market trends against it.
Within MPS, we call the process of “cooking omelet” the “Loss-Parking Strategy.”
Loss-Parking strategy requires proper trading context to be efficient. It works best within the following context:
We determine first the main trend of the wave at one degree higher.
We open a Long or Short position in line with the main trend, for example a Long position when the market is going upward.
Knowing that the main trend is bullish also implies that potential development of counter-trending waves would be short-lived and temporary. Therefore, we would expect the wave to rebound back toward the originally predicted trend after a short while. For this reason, it is inefficient to take losses should the market temporarily go downward. It would be better to temporarily "park" the losses. How does it work? Instead of placing a Stop-Loss order, we place a so-called “Force Open” order to open a Short position, with the same price as the one that would be used for a common Stop Loss order. What is a "Force Open" order? The order management tool of “IG” brokerage firm allows traders to open positions in two opposing directions at the same time. Let us assume that we have a Long open position of one contract of DJ-30. Normally, when we open a Short position, it would typically close the existing Long position. By ticking the "Force Open" checkbox, you convey to the IG trading tool that you want to open a new position in the opposite direction of the currently open position, instead of closing it. By default, IG considers all limit orders as "Force Open". However, the "market" orders require explicit ticking of the "Force Open" checkbox. You may recall that the MPS uses exclusively orders that are placed well in advance, and seldom market orders.
Let us take an example. We want to open a Long position at 100, close at 120, and Stop-Loss at 98. How does it work?
We place a limit order to open a Long position at 100, with a close at 120. It is assumed that the current chart price is above 100.
We place a Stop order to "Force Open" a Short position at 98.
Once the Long position is open at 100, then the price goes a bit up but suddenly, the market reverses trend downward and crosses the 98 levels. Our "Force Open" order would then be executed. Now we have two different open positions, one Long at 100 and another Short, at 98.
All "Force Open" orders must include an embedded or a separate accompanying Stop-Loss order. We place the "Force Open" associated Stop-Loss order at 100. A "Force Open" order is never placed without an accompanying Stop-Loss order. Otherwise, the simple Stop-Loss Strategy could be used.
From this time on, whenever the wave goes upward or downward, our losses always remain constant at 2 points (or 2 percent). When the wave goes downward, the Short position gains, but the Long position increases losses, and vice versa. The two positions compensate always the gain and loss of each other.
How does the Loss-Parking Strategy work in practice? Well, taking into account this example, we now have one Long position at 100 and one Short, at 98. The "Force Open" accompanying Stop-Loss order is at 100. We assume that the wave price crosses down through the 98 level. We know that the wave is in counter-trending mode. From now on, we focus only on the "Force Open" position. As long as the wave goes downward, we constantly lower the trailing Stop price to secure the Short position gains. Whenever the Trend-Prediction Strategy signals a bullish trend reversal again, we would close the "Force Open" position immediately. Meanwhile, the Long position has been further losing while the wave was trending downward. The market having resumed the originally predicted bullish trend, the Long position starts progressively trimming losses until it becomes even and then gaining. As a result and when even, the Long position increases our capital by the amount of money gained with the "Force Open" position.
Loss-Parking strategy can produce losing trades. How? Let's assume that while we have an open position at 100, the markets trends unexpectedly downwards to 98, and the Force Open order gets executed. We have now two opposing positions, one Long and one Short. At the same time, the markets re-bounces back to trend upwards after the 98 price level. Once the Trading Checklist confirms the rebound, we have to take losses of the Short position immediately even before the market reaches the level of 100. In the worst case, the Force Open associated Stop Loss order at 100 would close the Force Open position. The resulting losses would be a maximum of 2 per share (or 2%) or less if enacted while the market price was fluctuating between 98 and 100.
What is the advantage of Loss-Parking Strategy (LPS) against Stop Loss Strategy (SLS)? The use of SLS leads to taking FREQUENT losses and paying frequent brokerage commissions. In case of tiny market fluctuations or side-way trends, the high frequency of taken losses may have huge consequence for our portfolio. In contrast, the LPS considers that the predicted market trend should prevail with a high level of probability and therefore, the Force Open order should be executed with a low level of probability. Consequently, the execution of associated Stop Loss order would be less frequent and the amount of losses contained and predetermined.
By using the LPS, we can avoid to (1) take a loss of 2 percent and (2) prevent our Long position from unnecessary closure. In particular, we can avoid a losing trade and instead, make two gaining trades. The only drawback is that we may have to pay interests if the money for the Loss-Parking position was borrowed on margin.
Utilization of Loss-Parking Strategy was the main reason why the second round of demo trading yielded a 97% gaining, and only 3% losing trades.
Loss-Parking Strategy is efficiently applicable in the following context:
For motive impulse patterns, we place orders in the direction of the main trend at one degree higher and the Loss-Parking orders, exclusively in the counter-trending direction. Utilization of LPS in the direction of the main trend is disastrous and therefore, part of losing trading strategies.
In corrective phases, we do not use the LPS. This is because the corrective waves tend to fluctuate frequently around a certain price level. Consequently, the Stop-Loss order associated with the "Force Open" order could be executed too frequently, leading to unnecessary losses. As a general rule, we avoid trading the corrective waves unless the wave patterns are clearly recognizable.
The "Force Open" positions require permanent babysitting and monitoring. Leaving the position open overnight, may also be dangerous as the associated stop loss orders may skip execution outside of the opening hours of the US markets. To avoid it, you may wish to use the "guaranteed" Stop-Loss order feature of IG or your broker.
It is reminded that once a position is gaining, a trailing stop loss order must always be in place and progressively updated to secure a major portion of the position gains. In other words, a gaining position must never become a losing one, when closed.
Money Printing Strategy is a winning trading strategy. However, it requires consistent discipline from your side. Once again, psychology plays a major role in trading. Applying the strategy under stress, or based on feelings or guesswork, is part of losing strategies.
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