Trading System Test: Seagull System II

Greetings, earth beings!

Now that the Seagull System II has been declared as winner of the November contest, it’s now time to set the parameters for our monthly backtesting exercise. Clean up your charts, humans, and get ready to backtest this system with me!

To the humans who weren’t around last week, you should know that the Seagull System II, made by gerrylint, simply tries to predict tops, bottoms, and potential trends. It makes use of two 4-hour charts and applies the super trend signal indicator (STS) as well as the EMA (10) and the RSI (12) indicators.

For his trade parameters, gerrylint buys (sells) at the close of the signal candle when STS 8 or 18 on any one of the 4hr charts changes from red to green (green to red) and RSI is equal to or greater than 50 (49.9 and below). He then closes trades when price goes above (below) EMA (10). He practices a maximum stop loss of 50 pips.

If the RSI doesn’t confirm the STS signals, gerryline waits for RSI to cross 50 and then place a 5-pip stop loss 5 pips below the low of the signal candle. For short trades, he places the stop 8 pips above the high of the signal candle.

The system maker already gave an MT4 file for his STS indicator in his forum thread, so it should be easy for old school human core processors to follow. Just extract the STS indicator from the corresponding folder and place it in the indicators folder under your MT4 files.

In his forum thread, gerrylint also mentioned that he applies this system on EUR/JPY’s 4-hour chart so I’ll also be using that pair and time frame for backtesting. Its entry and exit rules seem fairly easy for my aluminum alloy processor to implement so I won’t be making any additional tweaks on those.

As for the trade entries made after waiting for RSI to cross above or below 50, I’ll buy or sell at the close of the candle once RSI crosses. As gerrylint recommends, I’ll set stops 5 pips below the low of the entry candle on long trades and 8 pips above the high of the entry candle on short trades. I’m still wondering where he got those figures but I’m more curious to find out whether those will really work out.

Since I just got my 20th system upgrade (Yes, that’s how we measure our age in my home planet!), I’ve decided to backtest this system for a total of 20 months, starting from April 2011 to November 2012. I’ll keep you posted on the backtest results and the system’s grade based on my framework for mechanical systems next week.

For now, I’ll retreat to my pod to start crunching the numbers so it’s up to you, my dear humans, to continue the quest for the Holy Grail system! I suggest you put your own mechanical trading systems up for December’s Best Forex Trading System contest or search for systems that you think could deserve the crown.

Until then, this is your friendly robot signing off!

  • andrew

    Just from reading through the Seagull forum thread, I noticed that the EMA 10 thing didn’t seem to be used in gerrylint’s trade examples. Its not clear to me whether he meant to exit a long when it crossed above or below the EMA 10 (which is it?) but in his charts he’s showing entries where the price zigzagged across the EMA but he still held the trade, hence I’m at a loss as to how the EMA is to be used.

    Also he recently hinted at (maybe) looking to take profit at 150 pips, and he also said to cover breakeven when the price had moved the stop-loss distance into profit. Will you be using these in your testing?

  • andrew

    When you have to wait for an entry based on the RSI confirmation, you mention setting the stop just beyond the “signal candle”. I assume this candle is the one that caused the STS to change colour? Other questions: if this stop is larger than 50 pips, do we enter with a 50 pip stop or ignore the trade? Also, what stoploss should be used when the RSI supports the trade at the time of the STS change – the 5 pip signal candle thing (which occasionally could be very close), or a straight 50 pips? Lastly, are there any rules for covering breakeven or trailing the stop? Thanks :)