Trading System Test: Red Light Green Light System

Beep boop beep!

Greetings my Earth friends! It is I, Robopip, here to backtest another amazing system of galactic proportions. Ladies and gentlemen, I present to you the Red Light Green Light system!

Since Forex Price Action, May’s Best Forex Trading System winner, is too discretionary, I decided to pick forum user vincejg327‘s system to backtest. It was one of the strongest contenders in February’s contest. It garnered 41 votes, second only to February’s winner, the 34 EMA crossover, which had 59 votes.

You don’t need your fancy human telescopes to see that the Red Light Green Light system is a very detailed and mechanical system. In fact, if I didn’t know any better, I would’ve mistaken vincejg327 as one of my kind!

As it is, I’ve only made very minor tweaks to the original system. Behold, Earth beings! Here are the parameters that I will use for backtesting:

Pair: EUR/USD

Vincejg327 mentioned in his forum thread that the system could also be applied to other major pairs. For backtesting purposes, we’ll use EUR/USD, the most commonly traded currency pair.

Time Frame: 15m

The system could also be used in higher time frames, but I will use the 15-minute time frame to stay as close as possible to the original Red Light Green Light system.

Indicators: EMA (9), ATR (14), ADX (20)

Again, I’ll be staying close to the original version of the system. For forex newbies out there, the EMA is simply a weighted average of past price action. The ATR helps in determining how much movement the pair can make in a given time frame, while the ADX helps gauge the strength of a trend. This time I’ll be setting the EMA to 9, ATR to 14, and ADX to 20.

Entry Conditions:

ALL conditions must be met in order to qualify as an entry signal:

Long:
1. Price crosses and closes above EMA (9).
2. ADX DI+ (of the ADX indicator) is above 20
3. ADX DI+ is higher than ADX DI-

Short:
1. Price crosses and closes below EMA (9)
2. ADX DI- is above 20
3. ADX DI- is higher than ADX DI+

Exit Conditions:

Long:
Candle closes below EMA 9 OR if ADX DI+ is lower than ADX DI-

Short:
Candle closes above EMA 9 OR if ADX DI- is lower than ADX DI+

Other trade management conditions:

  • Initial stop loss:15 pips
  • Profit target: 30 pips
  • Trailing stop: 15 pips
  • Close position when new signal emerges
  • Risk 1% of the account balance per trade

Now it’s time for me to head back to my pod and get my dual core processor processing all the data. I shall return on Wednesday next week, June 20, 2012, to announce how the system performed over the past weeks. Stay tuned for the results, humans!

Also, don’t forget that you can start submitting your systems for June’s Best Forex Trading System! It doesn’t matter whether you’re just new to forex trading or already a master. Just be sure to follow the rules and guidelines for submission, and you’re good to go!

Remember that BabyPips.com will donate $1 for every submitted to our Charity of the Month and June’s winner will get to pick one among our Golden List of Charities to donate $50 to.

So what are you waiting for? Go forth and earn pips, forex jedis!

  • Brodwyn Appanna

    Something I noticed above on indicator list — ADX (20) is defined. Looking at the original system post, the ADX is actually 14, with a level of 20 set. Should it not then be ADX (14)? I have no experience on ADX, though, so stand to be corrected.

    Anyways, additionally to the great results and consequent grading in the system review page (link to babypips.com…, I like this system because it is very easy to manually make a quick, objective decision on entry and exit, albeit on higher time frames to not feel rushed. I’ve been manually backtesting for myself on an H4 EURUSD chart, and with my own MM strategy, the results over the last couple months is quite encouraging. (With trying to simulate reality, I left out H4 close decisions that occur while I sleep and also discretely left out borderline EMA closes and borderline ADX DI crosses).

    I’m looking forward to forward testing this a bit as well.

    Thanks for these efforts Robopip.

  • EricGohi

    same question… What is the role of the ATR right here?

  • Otasos

    How you will use the ATR?