Believe it or not there are some people who do not have the time or emotional fortitude to sit and trade live in front of the computer. I know this is a shocking revelation! I am going to describe my system which generates about 2 signals a month and returns about 30% pa, not bad for about 30 mins work per year! It will take me a few posts to put up all the information so please bear with me. I should also be able to find the time to keep the thread updated since there are so few trades! I have 2 reasons for posting this. The first is to demonstrate what it takes to develop a system, what the relevant stages are and how long it takes. The second of course is to get feedback on how it might be improved. My intention is to make posts covering system discovery, initial development over 1 year of data, the results of a 4 year backtest over an independant data set and finally the current results since it went live in May this year.
I am very grateful to a trader that I met in mid 2006, Jordan Lyndsey. I was just about to give up on this crazy business when I came across him and his group. It reinforced that there are people out there that are genuine and are keen to help. Paradoxically I couldnt trade his methods (although I understand he has now changed them) as they were based on a modified Martingale approach. However I was intrigued about a method that he used on a 4H chart for the majors. Statistically you could work out it would suffer a 10 successive loss losing streak (the maximum doubling run allowed) about once every 5 years costing around 30% of your equity. Once every 100 years it would have 2 in a row. The fact that backtesting showed this hadnt happened in the previous 6 years was not reassuring even though probability theory reinforces that this is neither good nor bad for the succeding years. Anyway this is how I discovered the use of a MACD with settings 9,64,112. I think it is important publicly to note thats how I came across this and then developed my own system from there. If you decide to set this up on MT4 use the OsMA function not the MACD which is entirely wrong. I am including my chart from Netdania and this is all that is required to trade this model
In scrolling through charts I noticed that this MACD setting frequently picked tops and bottoms in moves. Whereas the original intent of Jordan had been to use it classically to denote trend continuation I looked at what would happen if you traded against the signal. I will provide the detailed rules later but essentially an upside cross of the MACDH led to a short position and vice versa. Initial trade parameters were calculated for the year beginning May 2003 on the EURUSD. Note this is an optimisation strategy and as such must be tested on an independant data set before a system can be commissioned. The settings finally used came from trial and error and as such may not be fully optimised. This is partly because I dont have the computer skills to do it mechanically and also because I like to get a ‘feel’ for the data and the real life tradeability of the model. In the end I settled for a stop loss of 60 and take profit of 250 ie slightly over 4R for a winning trade. Results for 2003/04 were 24 trades (11 wins, 13 losses) and an ROE (assuming no within year compounding) of 70% based on a 2% risk per trade. Needless to say this looked encouraging, exciting even!
The strategy was tested on the subsequent years ie Jun 04 to April 06. It was then paper traded live for 06/07 confirming the broad results of the backtest. The results were as follows:
04, win:loss 7-15, return 30%
05, win:loss 5-19, return 4%
06, win:loss 12-8, return 84%
This is a cumulative compound return of over 400% from May 03 (and more if the compounding is done at the time of equity increase rather than at the end of each year). The live forward test did not result in any changes to the basic parameters (as this would require a further independant test) but did lead to clarification over what to do with conflicting or multiple signals
The one drawback of this system relates to drawdown. During 2005 between June and Jan 06 there were 17 trades 1 of which was break even and the other 16 were losses. Although that year ended positively you had to sustain a drawdown of 32%. From my perspective that is too much. In my live trading therefore I have moved to a 1% risk model as I am prepared to tolerate a 16% drawdown. Also never underestimate the markets ability to perform way beyond parameters ever experienced before. I reckon that you should take any drawdown in a published model and double it before you decide it is tradeable (remember LTCM!). You could make the system more robust by moving further down to a 0.5% model. Maximum drawdown would now be 8% (much more tolerable and far better than shares). Annually compounded return over 5 years would be 65% (again stock markets can only rarely produce these returns although for those who have only experienced markets since 1981 they may not realise that the last 25 years has been unprecedented and unlikely to be repeated). I can immediately see many traders now moving on given that other models are claiming 2-5% per day! and if you do move on good luck to you but how much have you actually made from fx yourself? If like more than 80% of traders you find that no matter what you do you only lose in this business then find your way back to this thread. I reckon that as an addition to an investment portolio of shares and property a longer term currency strategy is an important diversification especially if they are ticking away in the background making you money while you continue to earn an income either from your job or from shorter term trading. Anyway they are just my thoughts
I have not tested this on CHF as this is tightly correlated to EUR. UY is profitable but much less predictable. GU is like a poorly tamed horse, rider beware! It may be that with different settings profitable strategies can be developed for these and other pairs if the fancy takes you
Remember that I now trade a 1% risk model however I have altered my spreadsheet to reflect the 2% model so as to avoid confusion. After all individuals risk tolerance varies. As you can see so far the model is performing to expectations
When is he going to get to the damn rules I hear you say! Well now actually. Remember part of my reason for posting this is to show the sort of work that goes into system development and I am sure there are more experts out there that can add further important information about this. Remember I am an enthusiastic amateur, nothing more. Do not go out and trade this yourself with real money. You have to do your own due diligence and make a decision about if and how it might fit into your overall strategy based on your written trading plan (which of course you all have - dont you?!).
[B]1.[/B] On a MACD cross enter the trade 1 pip above/below the last completed 4 hr candle in the direction opposite the cross. Taking a short trade as an example if the candles continue to move up without breaking the last low the entry is moved to the bottom of the last completed candle. I will post screen shots of this to make it clearer
[B]2.[/B] Stop is set at 60, TP at 250
[B]3.[/B] If while in the trade another signal is generated in the same direction this is taken (ie you can have more than one trade open at the same time). However any signal in the opposite direction is ignored.
[B]4.[/B] Once a trade has moved to a profit of 60 pips the stop is moved to break even
Thats it. It is simple and effective and takes very little time to implement and monitor. As I said I will post some screenshots to clarify the trade management and I will keep this thread updated as the trades occur
I hear the immediate clamour of people wanting to help! Any things that you can think of to improve the method would be very much appreciated
The MACD cross provides the set up for a short below the last completed 4H candle. If this doesnt break and provide the entry it is moved up to the bottom of the next completed candle
I hear what your saying tonymand …You say MT4’s MACD is a no go huh?Well that is no good because that is what I happen to be using…do you think I could configure it somehow to make it work?I like your post of the process…nice.
Thanks to pipalot on the cowabunga thread he has discovered that the OsMA function on MT4 will provide you with the right histogram. It is an MT4 chart I used on my last post
tonymand how many computers and screens do you recommend for monitoring. one seems like it is not enough for the news, monitoring other pairs etc, what do you have b/c i also need to know how many brokers you use to have the correct correlation factor of information, ie positions, time frames and if they all correlate. thanks. joanne.:rolleyes:
Hi Joanne. I have a desktop with 3 screens and a laptop. So in all I have 4 screens and the laptop has a backup wireless card in case my internet fails. I have 4 broking platforms although generally use 2 of them in preference. The others again act as back up so I can hedge a position in an emergency if I cannot access the broker for any reason
i think im going to go with three for now and see as i advance what i will need. thanks joanne:)
Thanks tonymand I will try that and see what I come up with!!