Maxmin strategy

Here�s a late Christmas present for you � a long-term strategy that�s been thoroughly tested. It doesn�t use indicators, can be easily programmed or done manually � whatever you prefer � and with a bit of tweaking can be used for any currency pair successfully. That said, I�m only going to trade it with GBPUSD because it works best and it has such low spreads, and I know the currencies well.

[B]Good points:[/B]

  • great results backtesting
  • very simple and easy to trade
  • works on simple solid principles (ie, it makes sense)
  • is v useful to anyone trading this pair, irrespective of whether their following the system because it highlights areas of extremes where you need to trade carefully
  • Some simple discretion can improve on the already good results
  • You don�t need to be tied to a PC to trade it
  • Altering any of the variables leads a gradual deterioration of results, not a sudden drop, making it more likely that it�s a solid strategy rather than an optimized fluke

[B]Bad points:[/B]

  • Large stops (400) = large potential drawdowns. That said, historically, v small % drawdowns (in 43 trades over 5 years, the most amount of consecutive losers was 2)
  • Requires a lot of patience and ability to stomach losing months

Summary of results from backtesting


  • Use daily timeframe
  • All decisions to trade are made at close of candle (not during a candle). Strictly speaking, that means at midnight GMT, but I wouldn�t worry too much about being late on acting � just don�t act early.

[B]Short entry:[/B]
a) Close of yesterday�s candle reaches the maximum close for 22 days (signaling that it�s overbought)
b) Close of today�s candle is less than yesterday (1st reverse signal)
c) Close of today�s candle is less than the close of 2 bars back (2nd reverse signal).

[B]Long entry[/B]
a) Close of yesterday�s candle reaches the minimum close for 22 days * (signaling that it�s oversold)
b) Close of today�s candle is more than yesterday (1st reverse signal)
c) Close of today�s candle is more than the close of 2 bars back (2nd reverse signal).

In plain English, in an uptrend, when it�s making new highs after a month, it becomes much more likely to retrace, so when you do see candles falling back down, it�s more likely to be a turning point than just a blip. Opposite applies for downtrends.

[B]Stops and take profits[/B]
Stop loss is 400. You need to give the trade plenty of room to breathe. You shouldn�t exit a negative trade unless it reaches that stop after being pip positive for a couple of weeks and is now returning back down to your entry level. If that happens, it�s fair enough to bail out at break even and wait for a new entry.

Take profits. Don�t ever close a trade for positive profits unless you�re starting to see new 22 day highs or 22 day lows. Even then, you should leave it until you see clear reversals with a signal to trade in the other direction, or if the price seems to be hovering around a set level for a few days. If you�re not sure about discretionary exits, then best to leave it alone until you get a signal coming the other way. Candlesticks are really useful at these extreme levels � the signals are much more reliable

[B]When not to take a signal[/B]
This is where your discretion comes in, but generally speaking you may want to duck out if:

  • it�s been ranging a lot in price recently then a 22 day high/low may not be that high/low in the general scheme of things, so the signal is much more likely to be premature
  • the last 3 candles are have a very low range � ie, the reversals aren�t significant.
  • If the candle hasn�t broken through some obvious support or resistance

[B]Multiple entries[/B]
At your discretion, you may get more signals to trade in the same direction. As the strategy has backtested successfully, it won�t surprise you to know that multiple entries would have been massively successful.

[B]Trading with the trend[/B]
It also won�t surprise you to know that trades in the general direction of trend - which for the past 5 years has been mostly up on GBPUSD � are more likely to be successful than those against the trend. Of course the trend can reverse but bear this in mind and be more hesitant exiting a trade in the general direction of trend, and more cautious entering a trade in the opposite direction. If you were really cautious, you might just want to trade in the general direction of trend. You�d be out the market for weeks if you did this � not necessarily a bad thing of course.

[B]Timing entries[/B]
Once you�ve got a signal to enter a trade, treat the closing price of that�d day�s candle as the worst possible price to enter a trade. Don�t even think about entering above that price, and see if you can get a better one. You could be waiting for a couple of days, but it nearly always returns to around this price.

Current position is short GBPUSD as of 13/11/07. See below

What a nice Christmas gift. I have been looking for a daily longterm system. I have been reading and studying your system and just love the simplicity of it. Thanks and I will continue to follow your thread and demo trade your system. Happy holidays to you and yours.

Thanks again!

You’re welcome, glad you’re enjoying it.
I’ve been tweaking around with a few things and I reckon I can improve on this slightly - certainly in terms of potential drawdown. Will try and post this in the next couple of days.

OK, now replaced with something similar but slightly improved. See follow the crowd

I did nothing with this strategy (or the other one mentioned above) because I’ve been keeping busy trading in quite a different way. But still, keeping an eye on the strat outlined above, it’s been stunningly successful, but with some rather tedious drawn out drawdowns (18 days for example). But no losses.

There’s just been a turn signal yesterday so I’m in long now on GBPUSD at 19825 with an SL of 400.

This is not a trading recommendation! Bear in mind these trades go on for a few weeks so … so be patient.