Is the rising Swap rate eating your trades for breakfast?

To be less emotional when trading requires you to have a high win ratio, the more you lose the more mistakes you will make…the more you lose, its a feedback loop.
The average monthly return trading Forex is generally negative. The Forex market is all about borrowed money. So a monthly return really depends on how much you borrow against your account size, the cost of that borrowed money is called the swap rate. The swap rate is calculated daily and costs triple one day a week, this is how the brokers make their money, they are in the lending money business.
So with an account size of $1000 or a large account size does not matter. If you trade a micro lot size which is $1000 you have a leveraged ratio of 1:1 (based on your account size of $1000) the broker will charge you interest on that lot size daily. Depending on the pair and trade direction you may receive or pay interest daily, the interest rate will vary depending on the pair.
As you can see we haven’t even developed a winning strategy yet and we are on the back foot with interest payments. Brokers are very happy for you to be a winning trader because the more money you make the more you borrow and they charge interest on a larger amount of money (Win / Win) There is more to learn about the back end of the broker business but I will keep it simple.
Now let us assume you have developed a winning strategy that has overcome the cost of trading Forex. What is the best time to start withdrawing profits? Realistically looking long term I would say you will make about 1.5% a month so you will want to compound that return. After 30 years your account will be $212,703.78 with an annual return of $34,801.01 Based on a starting capital of $1000 that is a very impressive return per annum. Depending on your financial goals plan accordingly. I can imagine traders saying ‘Thirty years! way I need big cash now!!!’. Remember this is just starting at $1000, you can always add more over time…and sometimes the turtle does beat the hare.
Now the elephant in the room……how do you develop a successful trading system where you won’t become emotional and destroy your profits? I am extremely confident you will struggle to achieve that goal. Automation is the solution, use Mt5 for backtesting, not Mt4. Do all the backtesting and code up your own backtesting with variable parameters, have a minimum of a 1000 trade sample base, per currency pair. This becomes harder when choosing higher time frames, the data over a number of years can become unreliable from the broker. The reason for such a high test sample is to find the 0.01% outliers which can destroy a system. You will also need to find or become a very good and trusted coder. You may be asking right now ‘so have you managed to climb this coding mountain?’ The answer is yes but I can’t share it because of the forum rules.
I hope that is helpful for traders out there, good luck to you.

Hi Jckbt,
My broker only uses MT4 for running an EA for trading. If I was to use MT5 for back-testing my trading system, I would have to learn how to code MT5 then re-code the system back into MT4 - to be able to run on my broker account. Are you saying that’s what you do? I think that would do my head in.

In our experience backtesting in MT5 gives better real-world results than MT4. The backtesting detail is missing with MT4. It is a bit of work to transfer the code back to MT4 to work with the brokers and trade copy servers, but the results speak for themselves. Just make sure you run the code on a demo to pick up any errors before running with the live account.

I have been trying to build something with MT5 and back test it. Nothing is working for me when I back test it. Are you sure the back testing in MT5 is reliable?

Hi, do you mean no backtest results or bad backtest results? regards Greg

Bad backtesting results.

FX Smoke, based on my experience MT5 is working for you because your system results are negative. If you code up the same system with MT4 and back test you will get a different result. This is a very confusing process and it has meant hours of data analysis to determine what is going on and why. The short answer is MT5 is frustratingly accurate. I say frustrating because as I have explained before 99% of systems I have coded and built for other people will not beat the cost of the spread and swap rate.

do you know there are millions of combinations of strategy settings? How many strategies have you built and tested?

Hi ProfessorPips, yes there are millions of combinations in relation to strategy. Also remember there is also a very high degree of over lap with most strategies and settings. Many of the indicators are using similar mathematical formulas which use lagging price information. I have built and back tested more systems than you’ve probably have had hot dinners. I will give you this tip because I’m sure you would like more than how many systems I’ve tested, Automated EA’s need to be correlated and updated on a regular basis with each individual currency pair. The oscillation will move out of sync with all system designs because they are built on past data. Design each component of your trading setup to be correlated and adjusted based on the time frame you are trading. My systems are updated a minimum of every 6 to 12 months because I require a win ratio above 95%. per currency pair. That’s my preference, many traders don’t require a win ratio that high or they don’t know how to achieve it, each to their own.

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Hi after reading your post, especially this quote

I am sure you don’t know anything about my trading skills :slight_smile:

What do I know I have been doing this for 14 years :wink: Indeed creating strategies with a 95% win ratio requires secret knowledge, and it is enough to use negative RR. Thank you for this lesson :grinning: :+1: Regards Greg

Hi Greg, The line “I have built and backtested more systems than you’ve probably have had hot dinners” That was just having fun, don’t take it as a negative. Congratulations on trading forex for 14 years. Creating a win ratio of 95% is no secret anyone can do it. What do you mean by negative RR?

" I have built and back tested more systems than you’ve probably have had hot dinners." a good joke and I fell off my armchair :rofl: :sweat_smile: :joy:… As you know, there are two types of Risk: Reward ratio, positive when your Profit Target is bigger than Stop Loss, and negative when stop loss is bigger than profit Target. Do you use only MT5 for creating and backtesting strategies? Regards Greg

Hi Greg, yes I only use MT5 and then re-code it for MT4 for the brokers. Be aware you will find the algorithm used in the testing will approximate market price data input, this is to shorten the time taken to analyze the data. This result means you will get a distortion between backtested results and real-life trades. Once I understood why the results were not matching (a complicated and time-consuming process). I went into the program to make it do a complete test (another complicated and time-consuming process) with the real data and then ran the systems real time to see if the results matched forcasted trade success. The time taken to do all this is a couple of years so you are getting a very cut down version of events. The upshot of all the extensive design and testing real and simulated is no system will produce a positive risk to reward.
Data shows and the sheer number of people over the years who have been unable to make it work realtime needs to be factored in. The general assumption is this simple data input (open, high, low, close, volume and time) can forecast the future because another assumption is "the financial market repeats itself over and over again”, this is possibly a false assumption. As I have said before the cost of active trading will be the number 2 issue for most system designs, number 1 is psycological exacerbated negative RR.
There is more to trading than just backtesting a system and trading it, you can backtest till the cow’s come home with all the CAGR and Sharpe ratio bells & whistles. Real-time results are where the rubber hits the road. If trading success was as simple as backtesting a system, implement the rules and let the money roll in, then you would just buy a system off the shelf and that would be it. The biggest error with people attempting to trade the FX market is a belief that the market trends, the data shows that is false across all time frames. Each FX pair has its own unique oscillation that must be identified and correllated as i refered to previously.
Now I wont leave you with such a negative outlook because I have created a solution to over come the inherent idosyncracies of the FX market. A major part of the solution requires a extremley consitent and high win ratio, thats why I require above 95% wins. I am very cautious as to saying much more about my system details because I will get flagged for being too commercial and my posts will be deleted as has happened quite a few times. I am ok if you want for message me privately.

Hi, You created a method, how to build strategies in Meta 5, good for you :grinning: but Meta 4 and 5 are great platforms … for trade, if you are using Meta 5 for creating and backtesting strategies, well, this is your decision :slight_smile: Now you need to understand I am really not interested, how to build strategies in Meta, I have own solution. Regards Greg

Hi Greg, sorry from your questions about how I backtest with MT5 I thought you were wanting to know how to improve your system design using Meta Trader software. So have you built and implemented a succesful automated FX strategy or do you just manually trade using charts? Do you have a positive Risk to Reward number or do you just fucus on a positive expectancy over a number of trades?

Hi, I create purely automatic strategies with a different risk-reward ratio as I want to have different strategies in my portfolio. Regards Greg

ProfesorPips - I too have worked on risk-reward ratio strategies and in my backtesting the results are - short term trading or a small number of trade per month - it may work - but once you extend the backtesting results out to years or increase the trade volume - they all fail.
What are you using for backtesting your stragegies?