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# 25# Forex Gambit Forex Trading System

Submit by Janus Trader

This trading strategy uses logic and analysis from math and

chess. It’s bold, it’s aggressive, and you don’t lose sight of risk.

by Walter T. Downs

am an advanced chess player, and I have an advanced

education in esoteric mathematics. Together, these two

disciplines embody powerful logic and methods of

analysis. I have created a system based on the idea of

the gambit, a term borrowed from chess. In its essence,

it is the sacrifice of material in order to launch a bold

attack. The gambit is everything a trading system should be:

audacious, dynamic, and fluid. When it is successful, it reaps

great rewards.

Here, when I am referring to logic and analytical technique from chess and math, I will refer to chess as “C,” and to math as “M”:

C and M both favor economy of time and effort in relation to what is achieved.

In this regard, a daily time frame is the best choice. C and

M both state that the optimal strategy is composed of the

most prolific factors within the general theory and body of knowledge that governs the system. The general theory of technical analysis is:

n Market action discounts everything.

n Prices move in trends.

n History will repeat itself.

Within the body of knowledge, the most prolific factor that governs trend is the simple moving average (Sma). The most prolific price used is the closing price. The period used for

the Sma is determined by M and is a value that has statistical significance. Therefore, the value used is 30.

Within the body of knowledge, the most prolific factors that

govern market entry are the correction (a brief countermove

before the trend resumes) and the breakout (price action moving

above or below a defined point).

C and M state that the factor used should be the one with

the least risk and greatest reward potential. In this regard, the

correction is the right choice. Within the body of knowledge,

the most prolific factors of the correction are an action (countermove)

and reaction (proof of resumption of the trend).

Here is a simple definition of a correction:

n A bullish correction is two lower lows (action) and

a closing price greater than the midpoint of the bar

(reaction proving resumption of uptrend).

n A bearish correction is two higher highs (action)

and a closing price less than the midpoint of the bar

(reaction proving resumption of downtrend).

Now, let’s specify our risk point. This is the point at which

we will admit that our prediction of future events is wrong.

C and M dictate that the most prolific option should be

used. For long positions, this point is just below the low of the

bar on which you entered the trade. For short positions, this

point is just above the high of the bar on which you entered

Now, you must specify the points at which you will exit

a trade that does not hit your risk point and moves in your

favor. C and M state that these points are dictated by time,

and the most likely point at which a bullish or bearish phase

is complete.

Taking this into consideration, we come up with the following

exits:

n When a bar occurs the range of which is greater than

the previous three ranges and the close of which is

in the top 10% of the bar, exit a long position on the

first closing price that is lower than the previous

closing price.

n When a bar occurs the range of which is greater than

the previous three ranges and the close of which is

in the bottom 10% of the bar, exit a short position on

the first closing price that is higher than the previous

closing price.

n Close any position that has been in the market 16

days.

We now have all the factors we need to build the system.

The system

n Buy two lower lows and a closing price that is greater

than the midpoint of the bar and is above the Sma.

n Place a stop-loss order just below the entry bar.

n Sell two higher highs and a closing price that is less

than the midpoint of the bar and is below the Sma.

n Place a stop-loss order just above the entry bar.

n When a bar occurs whose range is greater than the

previous three ranges and whose close is in the top

10% of the bar, exit a long position on the first closing

price that is lower than the previous closing price.

n When a bar occurs whose range is greater than the

previous three ranges and whose close is in the bottom

10% of the bar, exit a short position on the first closing

price that is higher than the previous closing price.

n Close any position that has been in the market 16 days.

n Move stop-loss orders to break even on any trade that

has been in the market two days.

n Take only one trade at a time. Another trade is not

opened until this trade is closed. Often, you will have

multiple trade entry signals in several markets. Take

the trade with the least risk.

n Trade all available currency pairs.

According to the logic and analysis of C and M, this is an

efficient system. Figure 1 shows a buy pattern, exit condition

met, and long position exit. Figure 2 shows a sell pattern, exit

condition met, and short position exit. It is at this point we

will use C and M to create the forex gambit.

You need to establish a trading account that represents

minimum risk. First of all, open a micro trading account

with a reputable forex broker. (The brokerage should have a

deep financial base, and be a member of the Cftc and Nfa,

the two organizations that look after investor interests in the

United States.)

Fund the account with \$300. Your leverage level should

be set to 100 to 1, which is the maximum leverage allowable

under the law. Your unit size should be 1,000 units.

What will this mean to you in practical terms? If you open

a one-lot position, the margin requirement would be \$8–16,

and the value of your position would be \$0.08–0.13 per pip

(also known as a tick).

According to M, C, and gambit play, we will now seek

to gain maximum profit in the shortest possible time. Thus,

we come to the aspect of bet/position sizing. We will use

the logic of M to place optimal bets. The number of lots to

trade is the number that brings the dollar amount risked plus

margin closest to but not greater than your trading equity.

Here’s an example:

### Forex Gambit

IGURE 1: A BUY PATTERN. The blue square indicates a completed buy pattern (two lower lows, and a C > midpoint of bar and > SMA). The turquoise square indicates that the exit condition has been met (A range > three previous ranges and a C in top 10% of the bar). The yellow square indicates the trade exit (C < previous C).

FIGURE 2: A SELL PATTERN. The red square indicates a completed sell pattern (two higher highs, and a C < midpoint of bar and < SMA). The turquoise square indicates that the exit condition has been met (A range > three previous ranges and a C in the bottom 10% of the bar). The yellow square indicates the trade exit (C > previous C).

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