Trading System Test: 3 Little Pigs

As you all probably know by now, the 3 Little Pigs trading system of harmonicphil won the Best Forex Trading System contest for the month of July.

The system makes use of a method called Multiple Time Frame Analysis to enter swing trades in the direction of the weekly, daily, and 4-hour charts. To determine the direction, the system uses good old Simple Moving Averages (SMAs).

It’s important to note that he didn’t develop the system, but rather, it was introduced by a friend. After doing his own testing, he thought it was a good system and opted to trade it live. It worked great for him because it was a long-term system, which means he didn’t have to spend too much time in front of the charts. He claims that it works on 8 different pairs.

Backtesting Parameters

Timeframes: As I mentioned, the system uses multiple time frames to determine the trend. It uses the 4-hour, the daily, and the weekly.

Indicators: The system uses 3 simple moving averages, with each simple moving average applied to a different time frame. Specifically, the 55 SMA is applied on the weekly, the 21 SMA is applied on the daily, and the 34 SMA is applied on the 4-hour time frame.

Entry Rules:

Buy if the 4-hour closes above the 34 SMA AND price is above the 55 SMA on the weekly and 21 SMA on the daily

Sell if the 4-hour closes below the 34 SMA AND price is below the 55 SMA on the weekly and 21 SMA on the daily

Exit Rules:

Stop loss: A slight tweak will be made to simplify the stop loss process for newbies. Instead of using the original ATR method, we will be using a simpler version. The stop is the 34-SMA value minus 20 pips. We will still implement the trailing stop method that harmonicphil uses though.

Profit target: Since this system is meant to hop on the trend and catch big pips, we will abide by the original rules and keep the position open until the stop loss is hit.

Pair: EUR/USD

Timeframe period that system will be tested: The system will be tested over the past 18 months, covering the period of January 2012 to June 2013.

Reminders

Keep in mind that we will be making a slight change to the stop loss process, so the results may not 100% accurately reflect results that harmonicphil may have compiled over the same time period.

I will spend the rest of this week backtesting the system and going through the numbers. This time next week, I’ll be back with the results, as well as my System Review of the 3 Little Pigs Trading System.

As a similar alien cyborg once said, Hasta La Vista, baby!