(1) I have taken the first few modules on Babypips course,
(2) read 2 books on monetary policy and foreign exchanges
(3) Set up two paper trading accounts in Interactive Brokers to get my hands dirty.
(4) Coded two systematic (simple) strategies on python and connected a Virtual Machine (or a server) to Interactive brokers servers to trade systematicly (directly with python)
(4-1) Strategy 1: A simple carry trade with a stop loss and re-entry
(4-2) Strategy 2: a mean reversion strategy based on three checks RSI, Bollinger Bands and bearish/bullish diversion. If signal is ok then trade. If Alert then exist.
My aim:
(1) According to my reading, beginners take about a year or two before becoming profitable, my plan is to trade on a paper trading account for 6 months to a year before switching to a real trading account.
(2) Develop systematic trading strategies based on macro data and economic news (i.e., medium term strategies and not intraday trading - I am not looking to stare at a screen all day)
Questions:
(1) The mean reversion strategy I developed (strategy 2) is too tight and the signal to buy/sell is not triggered. My hope is to refine it by including macro signals and relax some constraints. Is it the right way to go about this? What I mean is: Do I have to keep iterating until I find the sweet spot?
(2) At which point can we say this is a good or a bad strategy? what is the optimal sharpe ratio?
(3) How many solid strategies do we have to develop before gaining confidence? How many currencies do we have to target?
Any expert advice is strongly appreciated. I am a big believer that the best way to learn is to get our hands dirty.
Great start brother, you are already ahead of 90% because you are building systematic not gambling on Gold 1min.
Yes, iterate but not by adding more filters. Tight signals usually mean you over-filtered. Start by loosening to get trades, then measure. Mean reversion on FX daily/4H works but you need to allow wider bands.
Good vs bad = over 200+ trades on paper. Look at Sharpe > 1.2 and max drawdown < 15%. If it can’t survive 2022-2023 USD trend, it’s not robust. Don’t chase high Sharpe on small sample, it breaks live.
You need 1 solid strategy on 3-4 majors, not 5 strategies on 20 pairs. Get 1 working on EURUSD, GBPUSD, USDJPY first. If it works on all 3, you have confidence. Adding more currencies doesn’t give confidence, it gives overfitting.
You’re on the right track. Just don’t relax the rules only to get more signals, as that can lead to overfitting. Adding macro filters makes sense for your medium term approach if they have a clear reason behind them. Also, don’t judge the strategy by Sharpe alone look at drawdown, expectancy and out-of-sample results. One or two robust strategies across a few pairs is enough to start.
(1) Add wider bands to let in more trades and compute sharpe ratio (>1.2) and maximum drawdown (<15%)
(2) Backtest on two years of data to check robustness (and complement with live trading on paper account to further confirm). Maybe use Meta Trader Strategy tester on python or something similar
(3) Test strategy on 3-4 major pairs. When testing for example on EURUSD and GBPUSD. Aren’t we double-shorting the USD?
(4) Carefully add macro filters if it makes sense (there are so many of them!)
Few questions:
(1) Is it ok to not necessarily aim for daily checks but rather weekly checks (hence medium term macro trading)?
(2) Regarding my carry trade strategy mentioned above, is it worth studying it at all? right now I am just accumulating the interest rate differential but I know that a sharpe decline in FX could wipe out the whole small gains.
I’d be careful about solving a low trade count by adding macro filters, because you can easily end up curve-fitting even harder. I’d first simplify the mean-reversion rules, get a decent sample across different regimes, then test whether a macro variable actually improves the out-of-sample results. And I wouldn’t obsess over one “optimal” Sharpe — stability across periods, drawdown and how sensitive the results are to small parameter changes matter more