As promised in my blog update last week, I’m gonna start reviewing mechanical trading systems again. For this month, I’m taking a look at one of the past winners of my Best Forex Trading System of the Month contest… The Trend is Your Friend system by donnapinciotti!
The system is fairly straightforward, as it makes use of two basic technical indicators: EMA (100) and RSI (9). Using the moving average to gauge the trend and the RSI as a “filter”, a sell signal is generated when price is below the EMA and RSI is below 50 while a buy signal is generated when price is above the EMA and RSI is above 50. Reversal candlesticks are also needed as confirmation. Simple, right?
The owner mentioned that stops should be placed below or above the EMA while targets should be set at the nearest support or resistance level. I found this a wee bit subjective so I decided to mechanize it by specifying a 50-pip stop and 100-pip profit target. After all, the trading system is applied on the 1-hour time frame and the pair’s ATR suggests that these SL and PT sizes are reasonable.
Next week, I’ll be publishing backtest results from May 15, 2013 to May 15, 2014 and giving a few remarks on the pros and cons of using this mechanical system. After that, I plan to release forward test results for the month of May, to be followed by an assessment of how the system fared based on my Framework for Mechanical Systems.