“Huck loves her bucks!” I always say. The problem, of course, is how to make those bucks!! In this blog, I'll be posting my adventures as I traverse the forex world, while trying to catch some pips along the way. To do this, I will make use of classical charting methods as well as develop my own Good day, forex friends! I had a relatively light shift at the coffee shop today so I was feeling energized and ready to work on my trading skills. As I was doing my research, I got so intrigued with Pip Surfer's blog because it made me realize that it was possible to trade, and even profit from, a purely mechanical system.
I've read that the biggest issue that prevents traders from winning is the psychological burden of entering a trade, holding on to a trade, and eventually exiting a trade. By having a mechanical system with a strict set of rules, this psychological burden is lifted from the trader and makes jumping in and out of a trade easier.
Philosophy
I keep hearing that "the trend is your friend" so I decided to come up with a system that would allow me jump in a trade based on the general direction of the price movement. I'll be combining a trend-following indicator (moving averages) with an oscillator (stochastic) for confirmation.
On top of that, I'll be adding filters in order to avoid fakeouts. I will be forward testing this system as well as adjust it as time goes by. I don't really know if it will work... But I guess we'll just have to see together, eh?
In any case, I will be recording all the trades that I take using this system so that I can keep track of the number of wins/losses, longest winning streak, largest pip gain, and maximum drawdown, etc. This way, I'll be able to gauge the system's profitability and make adjustments if necessary.
So, here it goes (drum roll, please)... THE HLHB Trading System!
Things you need
- 4-Hour Chart of the EUR/USD
- 20 EMA applied to the close
- 10 EMA applied to the close
- Slow Stochastic with parameters 14, 3, 3
Entry
Basically, I will use the two EMA's (10 and 20) on the 4-hour chart to determine when to buy or sell. I'll also include a couple of filters to avoid getting faked out. Who wants to get faked out anyway? Getting faked out in a trade is just as bad as getting "flaked out" on a date. But that's another story, for another time...
Anyway, the idea is to open two long positions whenever the following conditions are fulfilled: the fast 10 EMA (blue) crosses over the 20 EMA (red) from under and stochastic is in between 50 and 80.
In order to avoid whipsaws and get additional confirmation, I'll set my orders 30 pips above the previous crossover candle's high (roughly 25% the pair's Average Daily Range).
Some clarifications:
- After the 10 EMA crosses the 20 EMA, check whether stochastic is overdone or not
- If stochastic is not yet overbought or oversold, set an order 30-pips above or below the cross-over candle
- Close the open order if it doesn't get triggered when the candle after the crossover candle closes
Here are some examples:
Long entry
Going short is just the doing everything the opposite way. This means I will open two short positions 30 pips below the previous crossover candle's low whenever the 10 EMA (blue) crosses over the 20 EMA (red) from above and stochastic is between 20 and 50.
Short Entry
Exit
Profit targets are simple. I set my first profit target equal to the Average Daily Range of the pair, which is roughly around 150 pips for the EURUSD pair. Once that is hit, I will put a 150 pip trailing stop on my second position to ride the wave and create a risk-free trade.
Of course, I know that I won't be hitting my target all the time as trends sometimes reverse. Because of this, I will also exit my trade manually when another cross over occurs.
My stop loss points would be set 10 pips above / below the low / high of the candle BEFORE the crossover candle. If that happens, I believe my trade idea is invalidated. My stop cannot exceed 150 pips. Below are examples of where I would put my stop loss orders.
Long Entry Stop Loss
Short Entry Stop Loss
Other Important Notes and Some Clarifications
There are times that I will stay on the sidelines on major economic reports releases. These include interest rate decisions, GDP release, employment reports, and retail sales data. This will enable me to avoid unusual amounts of volatility which could wipe out my trade.
If I have an open trade and a major economic report is coming up, I will close it before the report is released. This list is not set in stone as market conditions are always changing. A market moving report today might not be anymore tomorrow. I will be using BabyPips.com's Forex Calendar for this.
I will never risk more than 1% of my trading account on a single trade. I will adjust my position size depending on my stop loss.
That's it, my forex-mates! I hope this HLHB mechanical trading system of mine helps me catch those pips! Oh, and if you're wondering what HLHB stands for... Huck Loves Her Bucks!
Related Posts:
- Huck Needs YOUR Help! 00:22 14 January 2011
- HLHB Weekly Update - January 15, 2010 21:29 14 January 2010
- HLHB System Makeover 00:59 18 November 2009
- HLHB Weekly Update - November 27, 2009 23:32 26 November 2009
- HLHB Trend-Catcher Q1 2012 Performance 00:01 06 April 2012
Archived Comments (23)
Looking back at my trades, it looks like most of my losses (seems like they are all I get lately) would have been avoided if I followed your 'Enter 30 pips above/below the high/low of the crossover candle' rule. Noted. I guess I'm just greedy for those 30 extra pips! I'll give that a try for a while, see if it improves my trades.
This learning thing is exhausting.
Very similar to what I do, although I'm still fine-tuning my system. You'll do well with this.
Looks good. Simple and easy to understand and implement. A much quicker way to evaluate this system would be to back-test it. If your backtesting look sgood then by all means proceed to forward testing.
When testing, pay special attention to the following statistics: reward:risk, drawdown potential and percent accuracy.
I worry about your profit target simply because it will often be less than the risk involved in the trade. That said, if this system is right more often than wrong, then you could get away with a tighter reward:risk.
Just some thoughts
Hi Huck, just dropped in and congratulate you with the journey.
About the system, looks simple and easy to use. Since you gonna mechanize this, do you also use trendline and sup/res for entry/exit consideration?
Appreciate your feed back guys. personalme, I would probably eventually consider trend lines and support/resistance when taking my trades! As you can see, this mechanical system is pretty raw and needs a lot of tweaking and I hope to add more to it as time goes by. :)
I wonder how you came to choose 10 and 20 as your parameters for your moving averages. You can optimize these values through backtesting.
Also, your profit target might stunt your account's growth.
Wel am jst into forex n i think the only way to know is to try. That's what ma uncle told me
Hey pipsofacto, thanks for the feedback! I chose the 10 / 20 EMA because when I tried out the 5 / 10 it seemed like I was getting too many signals. My mechanical system is still a work in progress so I'll keep trying out different EMA combinations and backtesting them. In the meantime, I'll stick with my current profit target but I'll probably make some adjustments in the future. I'll surely take your comments into consideration once I have back-tested and forward-tested this system.
I have always likened the idea that your stops should mirror your entries since entry and exits are basically the same thing anyways. Good read, and good luck!
sounds simple enough. i wonder when i would be 'grown' enough to be able to write a system of my own. it seems so difficult now.i guess i can use other peoples systems for now. let's know when you are done with the testings. well done
one more thing Huck-which currency pairs do you plan to use the system on?
Hey Dieupips, thanks for checking out my trading system! I'm actually doing some back-testing on the EURUSD pair right now. Hopefully I'll be able to write about my findings in a couple of days. I'll keep you posted!
Thanks Huck
instead of trading for 150 pips why not trade 3 lots and go only for 50 pips ,beacause you will have more trading opportunities and the more opportunities the more chance for success so when trainding try to trade 3 lots a take profit at 50 pips and a stop loss somewhere around 30 pips
Hey Huck,
Seems like you trying to build up a mechanical system, it's ok cause some of them work but there is
one BIIIG BUT(T) :o))
Your system relies on trading with the trend, it's perfectly ok. The problem is when you trade trend it's roughly only 30% of the time, the rest of time markets spend in ranging unfortunatley. Then your EMA's SMA'S and other trend indicators will be crossing over and over again, entries can also be triggered just on another candle to fire the stop loss. I don't want to bash on you hard just food for thought. Unless your occassional winners are able to erase losses from ranging market and you can demonstarte it. Did you try honestly backtest the system taking into account lets say 1 month period ? I would be very interested what conclussions you have drawn out of this testing. Hope this will help you to fine tune it.Unless you have a method of avoiding a ranging markets.Regards for all your efforts.
I really like this strategy, as it doesn't require me to be glued to the screen. I have a question to ask. When placing my orders, which type of order should i make? (ex. market, oco, limit, stop, trailing stop order, parent and contingents, scale out)
Just open up two positions. For the first position, put an OCO (150-pip profit target and place the stop 10 pips above/below the high/low of the candle before the crossover candle) order. For the other, just put a 150-pip trailing stop. :) Oh, and remember to close those positions if you spot a new cross over!
What do you think about what Dieupips had to say in his comments? Any pros or cons? Seems like a good statement.
@andrausg Some tweaking must be made. I have set my stops and profit targets based on the average true range of the EURUSD so I don't think it would work as is. :)
Hi there. You mechanical system is quite similar to one that I've been testing out. However, my EMA are a little tighter at 5 & 10. But I added another confirmation step: after the EMAs crossed, it has to also cross the MA(25). I find this prevents alot of fakeouts, which I get ALOT since I use the hourly chart instead. My SL is the high/low before the EMAs crossed. My other problem (if you can call it that) is when to take profits coz sometimes it goes to 50 pips and reverses, and sometimes it goes to 400 pips.
Hi!I'm wondering why you did not choose RSI as a confirmation?
A newbie
@zlpcp Just a personal preference, I guess :D
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