Testing Trade Setups

Hello everybody

Before I start trading on demo account, I want to develop a trading plan (every article about Forex says this). So, here are the key points of my trading plant: never trade around news, use stoploss for protection, and for exiting a trade I have a couple ideas (fixed tp or rsi above 70/below 30 or both, I could even add stochastic overbought/oversold, all of which seem to be working pretty well as exit points).

Now, what sets me back are entry points. To find entry points, IMHO, sky is the limit: ma50 above/below ma200, them going up/down, stochastic, rsi, bollinger bands, support/resistance, all of them combined in any way… So, I look at charts, on many pairs and all timeframes, and find a trade setup that seem to have worked a couple of times in the recent past.

In order to check myself, I go to metaeditor and write a script that shows me on the chart every time those conditions were met. I check to see what would have happened if I entered a trade at that time, and, guess what, most of the time the trade setups fail.

I am experiencing this for some time now, and every time I think I finally found something, the metaeditor script shows me the ugly truth. I can’t start trading even on demo without having the confidence that my strategy at least worked in the past.

I ask you, please, for advice on how to overcome this obstacle.

Thank you

Sounds a really rational approach.

Entry points -
I find entry points are the most interesting part of trading but also the least important. That said, we all need an entry point. So I’m going to bang on and on about it, just for free.

What does a good entry point offer?

  1. direction - it must indicate the more probable direction price will take from here
  2. objectivity - there must be no doubt or subjective judgement as to whether this is an entry point or not
  3. urgency - entry here will probably lead to imminent price movement
  4. technical rationale - if you’re a chart trader, don’t use news or rate announcements or presidential speeches as entry points
  5. a stop level - entry at price X, on rational TA basis, automatically suggests a stop should be set at price Y
  6. a target level or target exit behaviour - TA indicates profit target at Z, point at which further gains are less probable: or price action pattern which indicates the same thing
  7. fundamental rationale - entry now in such and such direction does not cut across the fundamentals: fundamentals are a reason to not enter, not a reason to enter
  8. market support - if the entire western world is selling JPY to buy GBP and USD and EUR, should you be buying it?
  9. asymmetrical reward/risk - one way or another, profit has to exceed loss, and this does not mean any specific r:r ratio is right or wrong
  10. potential for outperformance - while your risk in account currency (not pips) should be known and capped, at least some of your wins should have the potential to go stellar: one or two of these outperformers in any campaign will really help the bottom line at no extra risk, so your exit strategy should not throttle them as soon as they start to accelerate.

All of the above should point you towards trend-following, which I have avoided mentioning so far. But that is what I am talking about.

Hope this helps your own thought processes.

Thank you for your answer.

Now I would like, if you may, to go on and comment on your 10 points from my perspective.

2.check, my signals will come from EAs;
10. to keep in my greedy mind;

Now, IMO, the most important ones:

  1. As far as I can tell, here is where my setups fail, when they have to point direction.
  2. How can you know this?
  3. From this I understand to check higher timeframes?

PS: I also seek only trend following setups.

Cheers matey. I thought and hoped we might be on the same wavelength.

Just to fill in on your queries, just my own opinions of course -

  1. I wonder if you have this answer but there’s a reluctance to commit: believe your own TA, take the risk, embrace the risk: if you’re looking at trend-following set-ups, there’s your direction arrow right away
  2. the simplest test example I can think of is from Steven Primo - if price closes in the top 25% of its daily range and was already making closes above the 50, its probably going up some more very very soon, so put in a buy signal valid for tomorrow only - if it doesn’t trigger, nothing lost
  3. yes, I do that and not much else: e.g. I’m only a buyer if price is above the 50 and above the 200, and price has risen over the last 3mths and the last 6 (time-frames and periods adjustable to suit your own method of course, but the principle’s the same). But I also see if e.g. USD-based pairs are all bullish apart from the one I want to short, and then ask myself if I really can be the cleverest person on the planet?

Onwards and upwards.

Apart from short trades in downtrends, of course: more “onwards and downwards”, with those, one hopes? :wink:

Good thread - and extremely helpful suggestions from Tommor, above, of course … :cool:

I think I’m beginning to grasp what you’re saying. I remember I read somewhere that it’s better (easier for your mind??) to have more winning trades than losing ones, regardless of their average profit/loss, so I only looked for trade setups that are more times right than wrong. However, I think everyone agrees that with a trend following system, there are fewer and much bigger winning trades.

Anyway, starting from this subject, I’m being confused about something. We talked earlier about following a trading plan objectively, with no emotions and no deviations. I think is obvious that an EA will follow a trading plan much better than a human would. So, why don’t EAs work?

I’m asking this question because I think that, if I understand why EAs don’t work, I will have a better understanding of trading forex.

The way I see things , a trader should follow his trading plan rigorously, without emotions and deviations. My personal opinion is an EA could do these things better, but on the same time, EAs don’t make money. I think one can write in code almost all individual trading plans. So what’s the catch?

What can you tell me about trading plans that I can’t implement in an EA? How can I beat an EA if we follow the exact same rules? I’m thinking something like this: I sit down at my computer and start trading, and also turn on the EA, and when I quit for the day, I turn the robot off. And during trading we follow the exact same trading plan. Would I have better results? Why?