Breaking Four-Digit Quotes

Once, I was keeping an eye on the fluctuation of tick quotes. Breaking Four-digit Quotes and prices were quoted (4-digit is 1.1226, and five-digit is 1.12267). And there’s something I found very intriguing that I imagine many of you have also noticed:

Theory

While looking at the charts of 5-digit quotations against 4-digit quotations, it is clear that the 5-digit quotations provide a more precise image. Furthermore, if you overlay these two graphs, you get the following:

Now we know why there is so much back-and-forth movement in the quotes: it happens when a five-digit quotation moves at the same rate as a four-digit one.

As I studied this image, I wondered, “What if we initiate a trade around the quotation change zone? Is it possible for us to increase the chances of reversing the price movement?

Let’s have a look at how it might work in principle:

• Do you see it as well? For the price to rise by two points after a 4-digit quote, it must rise by 20 pips after a 5-digit quote; conversely, the price must fall by the same amount after a 5-digit quote to achieve the same result. To put it another way, we can save around 0.9 points by entering a trade just after the tick of a 4-digit quotation (9 pips). Assuming a refund of equal value is enough to cancel out the spread or turn it into a positive number.
• You may use the same strategy to get even more “free” points after you close a deal.
• A constant of 0.9 points is theoretically possible but improbable in practice. So let’s have a look at it.

Practice

• We’ll do our theoretical exam in two parts:
• Using an environment optimal for testing strategies.
• Trading in a simulated environment with real-world spreads requotes, and slippages.

Strategy tester

In little more than half an hour, I was able to develop the following expert advisor:

• The algorithm arbitrarily forecasts the market’s next move.
• If the tick is going up, the advisor is programmed to sell, and if the tick is going down, the advisor is programmed to purchase.
• The deal is automatically closed as soon as 5 points have passed in either direction.
• Have a look at the result, and we’ll see whether it was successful:

• The hypothesis is not without impact since the expert adviser demonstrates a consistent return under optimal circumstances (the tests were carried out without a spread, I already explained why this is necessary for this article).
• Also, I have adjusted the settings such that the predicted amount of profit corresponds to the average number of points gained for every transaction. The accompanying illustration shows that we make 0.33 pips on average from each deal. Compared to the 2-point spread, which I’ve temporarily removed, it seems weak.
• But I’m not one to give up quickly, so I’ve settled on the following strategies:
• Initially, discounts are available in the form of rebates (when the broker returns part of the spread to you). However, my research suggests that a spread of 0.65 pips is preferable to the current setting of 2 pips.
• Second, I still need to look at the advisor’s statement, but there will be some intriguing information there.
• I’ve spent some time tweaking the parameters, picking a trading period, and implementing a trade exit using the aforementioned concept, and here are the results:

Suppose the parameters above are followed. Then, this method will provide a profit even when entering the market at random, based on a comparison of the spread of 0.65 points (after the rebate is applied) and the profit of 0.91 points in each transaction.

Demo account

In addition, I have installed this expert advisor on a practice account to get a feel for how it operates. When it comes to the rebate this time, we’ll be doing the math the old-fashioned way. After being on for a while, we got the following results:

• One can observe that the equity curve has a downward slope and that the total loss after 331 transactions amount to $427.98.
• Let’s figure out how much of a refund could be available now. There is a 68% return rate and a spread of 2 pips. For every transaction, we would therefore get a return of $1.36. Our total refund, calculated by multiplying the number of transactions by the rebate amount, is $450, which is greater than our loss.
• Can you explain what this means? This signifies that the feature’s implementation effectively covered the spread.
• The good news is that this feature is only a means of entry into the market, and its impact will remain unchanged regardless of the technique used.

Field of Application

• You cannot expect to generate a profit off of this feature alone since it barely covers the amount of the spread. On top of that, you can only utilize it with skilled advisers, which means you can’t start or terminate a deal manually on time.
• But you can always include this in any of your Expert Advisors (those who trade at 4-digit levels) and increase your profits with each transaction.
• Moreover, some tactics are tailored to disperse rebates; typically, they all center around 4-digit quotations. Using these methods, even a slight improvement in spread size may significantly impact earnings.
• Last thought: I’ll be the first to confess that my research isn’t exactly ground-breaking and may even seem pointless to confident readers. Yet such minute details are the only way to build a plan that reliably turns a profit.