I was amused when I had Forex Gump explained to me the story of the Three Little Piggies and the Big Bad Wolf. If the wolf merely had possession of my ray gun, then he wouldn’t need to huff and puff to blow away a house. In any case…
Here’s a quick recap of the 3 Little Pigs Trading System. It makes use of simple moving averages on three different time frames in order to establish a trend.
Last week, I mechanized the system to give an easier method to calculate stop loss point. Here are the backtest results after testing it on EUR/USD over the past 18 months:
In addition to the backtest results, here are the scores for the system, which I graded using the Robopip Standard for Mechanical Systems.
I must say that I am pretty impressed that with the results of the system. After mechanizing it, the system generated a profit of 28.65% over the past 18 months, giving us an average of 1.59% per month during that period.
What’s interesting is that the system had exactly 50% winners and 50% losers, but still came out ahead thanks to an average winning trade bringing home 2.14% (as opposed to the .70% average loss). This just goes to show that even if you win just half the time, if you have a great reward-to-risk ratio per trade, you can come out ahead.
It’s no surprise though that we saw some huge wins. After all, it is a trending system and it did do a good job of giving enough breathing space to allow trades to capture a majority of a trend.
Risk tolerance: 15/20
The system’s risk management rules are pretty standard. They aren’t impressive and they aren’t lacking either.
According to the stats, the system did not lose more than 1.00% in all of the trades it took. In addition, the system cut its losses short, as the average losing trade was only at 0.70%.
I also approve of its 50% win rate. It’s right at the middle, which is good for a human’s psychological health. There are systems out there that are profitable but have an extremely low win rate, which can take a toll on human emotions.
The system uses multiple time frames, so a newbie forex trader might have a hard time trading the system. On top of that, a different moving average is applied to each different time frame. You have to look at the weekly, the daily, and the 4-hour chart before you enter a trade.
The stop has already been simplified but it can be a chore to place too. For each trade, you have to look at the current value of the 34 SMA and then subtract 20 pips from that. In addition, you must use a trailing stop.
Total Score: 40/50
In conclusion, the system is a good one to try if you’re an average forex trader. I’d advise newbies to only delve into the system once they’ve understood the concept of multiple time frame analysis. It can be problematic if a wrong buy or sell order is placed. Other than that, I really like the system since its pretty profitable.