Trading System Test: 34 EMA Crossover System

Greetings earthlings! I, Robopip, have emerged from my pod to introduce the next mechanical trading system that I will be backtesting.

As promised, I will use my high-speed processor to crunch the numbers on the winner for February’s Best Forex Trading System contest, which is the 34 EMA Crossover System by paulaelli.

Aside from giving paulaelli the honor of joining our Best Forex Systems Hall of Fame, the 34 EMA Crossover System also caught my interest because of its sheer simplicity. It makes use of the 5 EMA and 34 EMA on the daily time frame to identify medium-term trends and the same set of exponential moving averages on the 1-hour chart to determine entry points.

The system can also include the RSI, Stochastic, and MACD for confirmation but since the precise use of these indicators wasn’t exactly specified, I decided to leave these out while mechanizing the system for backtesting purposes.

Without further ado, here are the rest of my mechanized backtesting parameters for paulaelli’s 34 EMA Crossover System:

Time frames used: Daily chart for direction, 1-hour chart for entry and exit points

Pair traded: EUR/USD

Amount risked per trade: 1%

Entry conditions:

Look for BUY signals only when the 5 EMA has crossed above the 34 EMA on the daily chart. Look for SELL signals only when the 5 EMA has crossed below the 34 EMA on the daily chart.

1. Buy when the 5EMA crosses above the 34 EMA on the 1-hour chart. Place long orders 20 pips ABOVE the close of the crossover candle.
2. Sell when the 5EMA crosses below the 34 EMA on the 1-hour chart. Place short orders 20 pips BELOW the close of the crossover candle.

Exit conditions:

The original system requires looking at previous highs and lows in the charts. But I’ve seen how some humans imagine tops and bottoms when there are none, so I decided to make the exit conditions less subjective:

1. Stop loss: Place initial stop loss at the high (for short trades) or low (for long trades) of the crossover candle. Add a trailing stop with the same size as the initial stop.
2. Profit target: Place profit target 150 pips away from the entry. I decided to use 150 pips because it’s close to half of the pair’s weekly ATR for the past year. This lines up with paulaelli’s goal of catching “medium-term” trends.
3. New crossovers: When a new crossover occurs in the 1-hour time frame while a position is still open, exit at the open of the candle after the crossover candle.

But before I retreat back to my pod to start working on this system, let me remind you that these mechanized rules that I came up with are just close approximations of the actual system that paulaelli designed. Be mindful that there might be a few discrepancies here and there as I tried my best to mechanize some rules that appeared to be subjective from this humble robot’s point of view.

Make sure you watch out for the release of the backtesting results on March 14, 2012. That’s next Wednesday!

Also, I’d like to encourage you to submit your entries to our ongoing Best Forex Trading System for March. As Forex Ninja mentioned in his “You Trade, We Aid” article, each complete submission corresponds to $1 donation to our charity of the month, which is World Vision.

On top of that, if your system bags the crown, you’ll be able to join our Hall of Fame and have BabyPips.com donate $10 to your chosen charity too! Ain’t that a sweet deal? What are you waiting for? Submit your entries now!

  • Danny

    it looks like a simple and easy to use system, I like it

  • Sufian Said

    Very simple and very objective. My kind of system. Perhaps I might juice it up a little adding fibonacci projections with it.

  • Julianht17

    I’d like to know why she chose 34 and not 35, 30 or 40 or any other number.

    • zhexiang

      5 EMA and 34 EMA crossover is taken from Awesome oscillator

    • Marshall Clarke

      b/c 34 is used by Raghee Horner, the famous Queen of BabyPips. The reason to use 34 and 5 is because they are “magic” Fibonacci numbers.

      In the real world…. the strategy would be programmed (as Robopip does) then ran through a series of hundreds of settings.

      For instance, one could try a long EMA of 30, 31, 32, 34 or 35. This is 5 options.

      One could then try a short EMA of 2, 3, 4, 5, 6  or 7. This is 6 options.

      One might want to experiment with a Take Profit of 100, 115, 130, and 145. That’s 4 options.

      A little math with the available number of options gets you:

      5 options * 6 options * 4 options = 120 possible combinations.

      All 120 possible combinations would automatically run through back-testing software to see which ones yield the most profit with the least account draw down.

      This is the process of strategy optimization & calibration.

      • Pon

         Great answer!

  • maruthi

    julianht17!
     because 34 is  a fibbonacci number

  • Fewticks

    It should be High, Low, or Close 5 EMA and 30 EMA  ?

  • http://fxchronicles.com/ FX Chronicles

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