*beep boop beep beep*
Salutations, mortals! I have returned from my 7-day long stay in my pod where I conducted a backtest of the 4H Scalping Method by NickB. I have finished crunching the numbers and I’m ready to grade the system based on the Robopip Standard for Mechanical Systems.
Once again, below are the backtesting parameters:
Backtest period: February 2012 to July 2013
Currency Pair: GBP/JPY
Time frame: 4-hour
Entry rules: Used the swing highs and lows as scalp lines and entered on the break above or below these levels
Stop loss: 50 pips
Profit target: 50 pips
Risk: 1% per trade
So, without further ado, here’s my take on the mechanized 4H Scalping Method system:
After going through the data, we can see that the system was profitable on 59.52% of its trades, which is above my standard 50% benchmark.
Moreover system was able to generate a positive return of 12% over the testing period. At first glance, a human may think that this isn’t too bad, but considering that the testing period is over 18 months, that gives us a return of around .75% per month, which isn’t too great.
I also find that the reward-to-risk ratio is a little small for my liking. The profit target could be adjusted in order to help maximize return-on-risk.
Risk tolerance: 17/20
The per trade was limited to just 50 pips / 1%, which I find acceptable. This stop loss strategy allowed the system to cut losses if price faked to the upside / downside of the scalp lines.
My one concern though, is that I feel a 50-pip stop may be a little too tight if we’re playing a cross pair like GBP/JPY.
For the most part, the system is easy to understand, as no technical indicators are needed. However, I feel that there is a lot of grey area involved since determining scalp lines or swing highs/lows may prove to be too subjective. Newbies normally makes mistakes establishing swing highs and lows so this part might be a little confusing.
Furthermore, one also needs to be constantly watching the charts in order to anticipate breaks of the scalp lines. Some newbies may find this a little draining if they are just starting out.
Total Score: 38/50
Overall, I can say that it is a simple system. However, it is very subjective, which means it might be near impossible to duplicate another trader’s results. The reward-to-risk ratio can also still be improved. The pair that this was tested on was GBP/JPY, which is a highly volatile pair. A wider stop or even a trailing stop might have been better, together with a bigger profit target.