Robots never break promises. So as I vowed, I’ll backtest the winner of December’s Forex Trading System contest and run it through the Robopip Standard. Let’s see how it fares!
I would say that “Trading the MACD” is a fairly simple system because it only relies on three indicators: the 50 Exponential Moving Average, the 100 Exponential Moving Average, and the MACD with parameters 12, 26, 1.
But what makes it slightly more complicated is that it requires the use of two time frames. The longer time frame is used to determine the trend while the shorter time frame is for spotting entry points.
To learn more about the system, just head on over to its discussion thread. There you’ll find other traders that have either used, are currently using, or want to test the system out. Take note, however, that the creator of the system has modified it a bit so make sure you check out his latest posts too.
For my backtesting purposes, I will stick to the original version of the system as that is the version that garnered the most votes in the contest. I’ll make a few modifications to mechanize it, but I made sure to retain the original concept and philosophy.
The system has already undergone independent backtesting by some of BabyPips.com’s human forum members, and they seem impressed by the results of their studies. However, I thought it would be a good idea to backtest it myself so we can measure it against the Robopip Standard for Mechanical Systems!
To recap, here are the rules and parameters that I’ll be running through my processors:
- Buy: If 50 EMA is above 100 EMA on the 4-hour time frame, only look for LONG trades. Buy when the MACD on the 1-hour time frame crosses above zero.
- Sell: If 50 EMA is below 100 EMA on the 4-hour time frame, only look for SHORT trades. Sell when the MACD on the 1-hour time frame crosses below zero.
- Initial stop = 50 pips. (The rules of the system actually require us to place our stop above the previous swing high or below the previous swing low, which is sort of discretionary in nature. In order to mechanize the system, I decided to go with a 50-pip initial stop.)
- Move our stop every 50 pips that the market moves in our favor.
The system says we should have at least two positions per trade with two different profit targets, so:
- PT 1 = 50 pips
- PT 2 = 100 pips
We’ll risk 1% in total per trade, so each position will have a weight of 0.5%.
I think it’s better to stick with the 4-hour and 1-hour charts, as it’s what was recommended. I’ll give this system a whirl on EUR/USD since it’s one of the pairs that winstonereed has been using it on.
Unless my systems encounter a glitch, they should be able to pump out the backtest results and the final verdict by this Friday, January 20, 2012.
In the meantime, why don’t you use your time waiting wisely by submitting a system to January’s Best Forex Trading System contest? Who knows, your system could be next in line to take the Robopip Challenge!