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I have covered grid trading before on this site.  In the first article on grid trading we discussed the origins of grid trading and in the second article in this series we discussed a discretionary approach to grid trading which is described in the Bird Watching in Lion Country e-book. In this posting I will look at automated grid trading. I have looked at automated trading before, but never at automated grid trading. There are a number of automated grid traders on the market, including: Pipforia’s HGM, pointbreak, and carrygrid. In this article we will look at Pipforia’s HGM in detail.

Word of Caution: Please don’t accept everything I write here blindly as being correct.  Whilst I have tried my best to present my understanding of Pipforia HGM, my understanding might be flawed.  Therefore, you should do your own independent evaluation of Pipforia HGM before forming your own opinion on it.

October 2008 update: I originally covered HGM back in August 2008.  This version of the HGM product review has been written after I have completed the e-class and traded the system live with real money.

About Pipforia LLC

Pipforia Hedge Grid Method (HGM) is provided by Pipforia LLC.  Pipforia LLC is founded by Dave and Stella Robinson, both of whom are both traders who trade for a living and trade other people’s money (OPM).

Dave and Stella both live in the US.  After swapping emails with Stella, I found out that in her past life she was an Oracle Database Administrator, and got into trading almost two decades ago.  She has traded in a range of markets including stocks, options and forex.  She now is a full time forex trader.

About HGM

HGM is a expert advisor (EA) designed to work with MetaTrader 4 (MT4).  Compared to many other EAs on the market, HGM is not the cheapest and can be licensed for around $89 US dollars per month, or you can evaluate it on a demo trading account for much less. Lastly, if you want mentoring support for HGM and forex trading in general, Pipforia offers a range of seminars and mentoring courses.

Out of the box, HGM comes with some limited documentation and subscribers can also access a forum for support.  Compared to other commercial EAs, like pipboxer, the documentation is somewhat sub par.  If you are going to trial HGM, I would not waste your time with the demo trading version, as the demo trading version does not come with full forum access. Given most of the guidance on how to use HGM is in the restricted forums, the demo version isn’t helpful because it does not come with sufficient documentation on how to use it. In my case I blew up almost half of a demo trading account messing around with settings I didn’t understand. Eventually I caved and signed up for a month of full access so I could just get my hands on some better documentation.

After trying the live version on both demo and live accounts, I eventually signed up for their 3 week e-class as it gave me an even better insight into their methods.  Pipforia’s e-classes are unique in the sea of forex trading courses, because the e-class is the only one that I am aware of that covers automated grid trading.  I believe Pipforia are changing their business model around the EA.  In the future, most of the settings on the EAs will not be accessible to subscribers who have not completed a seminar or e-class.  So if you want to have more flexibility and control over your trading you have to go through the educational sessions first.

How it works

HGM is a grey box trading system, meaning that you do have some control over some of its settings, but the underlying logic is proprietary and is not visible to the trader. While out of the box HGM might be usable as a “set and forget” style system, it is really more of a trading tool which the user needs to set up to trade a particular strategy. You can use the system out of the box, but if you want to maximize your returns and minimize your risks you do need to use a reasonable degree of manual intervention.  I will come back to this later, because this point actually turns out to be extremely important.

HGM uses a twist on grid trading, based on trading the trend emerging from a break out from an anchor price range. An anchor price range is a band of prices above which if the price breaks out of the top it is likely to trend bullishly and if the price breaks below, the price will trend bearishly. A good example of an anchor is a support and resistance line.

To make an analogy in terms of options, HGM is synthetically creating a long strangle around an anchor.

Out of the box, by default, HGM is set up to find support and resistance lines and place the anchor point 30 pips above and below the S/R line (this distance is designed to prevent being whipsawed and can be increased for markets that are prone to whipsaws) . You can configure it with your own choice of manually set price ranges.  However, this feature in the future is only available to people who have done a seminar or e-class.

HGM places a grid of orders evenly spaced above and below the anchor prices (usually at about 17 pip intervals). As the price zig/zags around through the grid, the system will accumulate a set of positions. For example, the price could have broken out the top of the anchor range and triggered a long entry and then moved down to the bottom of the anchor and triggered another three of orders. Once the sum total of positions hits a predefined profit target, the system will then close any accumulated positions and begin the cycle again around a new anchor.

The objective of the system is to either hit the profit target or settle the positions for a very small loss. The system does the latter by seeking to close a position at a break even level if the system accumulates a certain number of positions above and below the anchor. HGM does not rely on stops. Instead it uses hedging positions to manage risk.

You can also control your risk as through a range of different settings, including:

• You can control the lot sizes
• You can how quickly the lot sizes grow or shrink up and down the grid
• You can set up when the system should start seeking a break even position
• You can cancel all positions in an emergency
• You can get the system to “hibernate” after a single cycle and wait for you to manually initiate the next cycle

Performance

If you read the front page of their website, you will be confronted by their outstanding results, where they claim they claim to have averaged more than 20 - 35% per month (mean: 25% and standard deviation of 12%) for more than 12 months.

These numbers are quite substantial.  To give you an idea of how substantial this is, for a $10000 account the money management calculator will set a profit target of $48.  To make 25%, or $2500, in a month, you would need to close more than 52 cycles in a month.  In watching this system trade a single pair, it is common to see this system trade 4 - 6 cycles a week (or about 20 cycles a month).  As you can see unless you are over leveraging your account (either by raising the size of the lots traded or by running the system on multiple pairs), you cannot feasibly achieve the result presented on their front page.

I did manage to reproduce some reasonably good results myself, but I had to leverage my account higher than what was recommended in the pipforia manual.  In my case I traded three pairs simultaneously and managed to average around 15% per month on my account.    However, this in turn increased my risk of a major draw down.

In speaking to Stella about the results on the front web page it seems that she does a lot of additional manual intervention with her trading in order to get these kinds of results.  We will talk about this more below.

Margin and Drawdown

HGM’s Achilles Heel

If you are running this system with additional leverage to replicate the results on the pipforia webpage, you will pretty soon discover the achilles heel in this system.  The system itself consists of two major features:

1. It uses a Breakout trading tactic around the anchor.
2. It uses an anti-martingale method of adding to (or pyramiding upon) winning positions if the price moves in the direction of the break from the anchor.

This means that as long as the market trends cleanly in any one direction, you will make money with this system.  Furthermore, the nice thing is you don’t need to know the direction in advance, but it does need a solid move.

The downside of this system, however is:

1. Like any breakout system, the problem you consistently deal with is called a “head fake”.  This is where the price breaks out suddenly and then reverts back to the mean. A head fake can occur numerous times around the anchor point and it is not uncommon to see 1, 2 or even 3 head fakes.
2. Like all systems which pyramid into a trade, this system has the potential to make you money quickly, but if the trend bends suddenly you can be left with a large number of open positions in draw down.

As you can see the head fake can create a situation where you can be left holding a large pyramided position. Normally you can handle a small head fake and still walk away with a break even position at the very least, but there are market situations where you will get a reasonably large move up or down the grid, but not large enough to cause the system to exit, before the price travels in the opposite direction.

This can typically happen in markets where the price is tightly ranging, such as inside days, some outside days, broadening wedges, etc, HGM will start accumulating more and more positions either side of the anchor point.  Because the anchor point is at a key feature on the chart the price will keep on reverting to the anchor point until new information enters the market and the price breaks out.  In normal functioning markets, a single inside day is common and the price usually breaks out in the next 24 hours, but in markets where problems are brewing and traders are waiting on information, you can see two or more inside days as the market ranges very tightly.  In this kind of situation HGM will accumulate a large number of positions above and below the anchor point, and you will accumulate an increasingly large floating loss and margin.

Preventing the Achilles Heel

I believe Stella’s results on the pipforia web page are real.  The key difference is she uses HGM as a trading tool and does not use it as an automated trader. Stella watches the market continuously and chooses when to manually turn the system on. She is actually timing when she thinks the market will give her a good move in either direction.  Furthermore, I believe Stella is watching several pairs simulataneously, so she can choose to have multiple pairs trading and manually manage the collective risk of the portfolio.

This is why she can average more than 25% per month consistently with very few major mishaps, and I can only achieve 15% per month and run the risk of the occasional 30%+ blow up.

If you do her e-class, you rapidly find out that all her best students are manually trading HGM and many of them are able to repeat her results.  In the e-class, Stella teaches you her entry methods and over a period of a few weeks you can share your live trading experiences with her.

Parting Thoughts

I am not going to recommend if you should buy this system or not.  The system does make money, but it is not a fool proof system, so you need to handle it with care. If you do decide to trade with HGM, don’t go in under the assumption that this system is some kind of automated money making machine.  Look at it as a trading tool and invest the time to learn to trade it properly.

This entry was posted on Friday, August 1st, 2008 at 11:21 pm and is filed under Grid Trading, Product Reviews. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.