Trading System Test: Simple Day Breakout

First and foremost, let’s once again give a round of applause to the winner of October’s Best Forex Trading System kbfc00. His system, the Simple Day Breakout, garnered the most votes.

The Simply Day Breakout system will be featured on the BabyPips.com front page for the entire world to see. In addition, kbfc00 gets to donate $50 to the charity of his choice from our Golden list of Charities.

Another benefit of winning is that his system will be backtested by yours truly. Yes, that’s right, I’m going to take his system, mechanize it, and test it over the last couple of months to find out whether it was profitable or not.

Now, since kbfc00 has already begun backtesting his system on EUR/USD, I’ve decided to backtest it on GBP/USD instead. One issue I had when I tried to backtest it is that it relies on the 4-hour chart for trade management.

This makes backtesting difficult as I could not see the intrabar moves in the 4-hour chart. Therefore, I’ve decided to zoom to a lower timeframe for more accurate results.

Below are the parameters under which I will put the Simple Day Breakout system to the test.

  • Backtest Period: March 2012 to October 2012 (8 months)
  • Currency Pair: GBP/USD
  • Time frame: Daily and 1-hour time frame. The 1-hour chart will be used to determine intrabar movements and will make the signals of any breakout more accurate. We will be using the Asian open (4:00 p.m. EST) as our day open price.
  • Entry: Buy at PDH or sell at PDL. Once one order is triggered, the other order will be cancelled.
  • Profit target: As mandated by the original system, we will set a single profit target at 20 pips.
  • Stop loss: For long trades, stop loss orders will be set at the PDL. For short trades, stop loss orders will be set at the PDH.
  • Risk per trade: 1%.

Trade Management

Since we will be zooming in to the 1-hour chart, we will have to make some adjustments for the trade management as well. Once 4 candles have formed, if price has yet to hit our take profit (or stop loss), we will adjust our stop loss manually.

If we are in a long trade, we will move our stop to the lowest point of the previous four bars minus 5 pips. If we are in a short trade, we will move our stop to the highest point of the previous four bars plus 5 pips.

Let me give you an example so that you can more easily understand this.

Let’s say that we went long GBP/USD at 1.6000, with an initial stop at 1.5975. Over the next four hours, the pair trades within a range of 20 pips, never trading above 1.6010, nor below 1.5990. After the first four hours are done, we will move our stop from a 1.5975 to 1.5985 – the lowest point (1.5990) minus 5 pips.

This method will continue until either price has hit the adjusted stop loss or our profit target.

I will now retreat back to my pod and begin the backtesting process. I shall return in one week’s time with both the backtesting results, as well as my final grade for the system.

Will the Simple Day Breakout strategy survive my grading framework? We shall see, humanoids!