Beep bop beeeeeeeep–pzzzt!
Greetings, Earthlings! It’s that time of the month again. I shall once more take a break from all forms of human interaction and head on over to my Robo-cave and backtest April’s winning system, Next Stop (Trading Method) by digitalpipsy!
The system is a little bit subjective, so I have taken it upon myself to implement a few tweaks to mechanize it and make it possible to backtest.
Here are the guidelines I came up with:
Digitalpipsy did not cite a specific pair on which his system works best in, so I took the liberty of choosing everyone’s oh-so favorite pair: EUR/USD.
Timeframes: 4-hour and 1-hour
Although the system requires one to checkout at three timeframes–daily, 4-hour, and 1-hour–I will only be looking into the latter two to make it more backtest-friendly.
According to digitalpipsy, he uses the higher timeframe to determine what the general trend on the pair is. It helps him determine his risk, but is not necessary in entering trades.
For instance, it’s still possible to go long (if conditions on the 4-hour and 1-hour timeframes are met) even when the pair is on a downtrend on the daily chart. But knowing that a trade is against the trend, he only enters with a smaller position size.
Since support and resistance levels may differ from one trader to another, I will be removing this subjective aspect in coming up with mechanized rules for backtesting.
I will also omit the Tenkan-sen which digitalpipsy cited in his entry primarily because it is only used on the daily timeframe.
Conditions for entry:
For long trades:
1. Price should be above Kijun-sen on the 4-hour timeframe.
2. Buy when price crosses Kijun-sen from below on the 1-hour timeframe. Enter at the close of the hourly crossover candle.
3. RSI should be above 50.
For short trades:
1. Price should be below Kijun-sen on the 4-hour timeframe.
2. Sell when price crosses Kijun-sen from above on the 1-hour timeframe. Enter at the close of the hourly crossover candle.
3. RSI should be below 50.
Risk management: Option #2
As you can see in his forum thread, digitalpipsy listed 3 options for risk management and I picked the one he recommends for newbies.
Basically, the initial stop will be 40 pips. Profit targets range between 80 and 120 pips. To make it easier for my titanium alloy core processor to crunch the numbers, I’ll stick to using an 120-pip target for all trades.
As for his other risk management rules, I will keep the 60-pip trailing stop and move stop to breakeven as soon as a trade goes 40 pips my way.
There ya go! I think I have specified all the modifications I will implement to backtest the system. I will return next week with the results. This is Robopip, signing off!