*beep boop beeeeeeeep!*
It is I, Robopip, and I bring glad tidings. I have been closely watching Forex Ninja‘s Best Forex Trading System contest and I believe I have found a system worthy of being graded against the Robopip Standard for Mechanical Systems.
I was impressed by this system because it is simple and it is easy to mechanize. It appears as though I am not alone in my admiration for this system as it has been voted one of August’s Best Forex Trading Systems. Humanoid friends, I speak of none other than donnapinciotti’s The Trend is Your Friend System!
Over the next couple of weeks, I will be releasing backtest results of this system. I will first release trade results from January 2011 to April 2011, and after that, I will publish results from May 2011 to August 2011, together with my final verdict.
To get myself warmed up for this task (Yes, robots need to warm up, too!), I took a quick glance at the rules of The Trend is Your Friend System. While the logic behind the use of indicators and the entry and exit signals appears to be sound, I realized there were some important details that needed to be clarified. Thus, I sought out donnapinciotti herself and arranged a little rendezvous on the interweb to discuss her system. Guide newbie traders, I must!
Together, we came up with this improved version of The Trend is Your Friend System:
Entry Signal: Short if price is below the 100 EMA and RSI is below 50. Go long if price is above the 100 EMA and RSI is above 50. For a bounce play to be considered valid, there must be reversal candlesticks first.
What qualifies as a reversal candlestick? This was one of the many details donnapinciotti and I needed to iron out, and we agreed to define reversal candlesticks as those that touch the resistance/support EMA without closing above/below it.
Where EXACTLY should the entry order be placed? If the trade is in favor of a bounce off the EMA, we shall enter the trade right after the reversal candlestick. If the trade is in favor of a breakout, it’d be best to wait for a candle to close above/below the 100 EMA (a.k.a. breakout candle) then take a long/short position at the open of the next candle.
Stops: The original rules of the system state that the stop loss should be set above the 100 EMA for short trades and below the 100 EMA for long trades, but I advised donnapinciotti that it’d help to set an actual stop instead of one that varies depending on the EMA. With that, we decided that stops should be placed 10 pips above the high of the breakout candle or the reversal candle for short trades or 10 pips below the low of the breakout candle or the reversal candle for long trades.
Profit Targets: According to the original rules, profit targets should be set at support and resistance levels as long as the reward-to-risk ratio is at least 1:1. Before I could say a word, donnapinciotti herself exclaimed that this exit rule was too subjective. Ahh, the newbie is learning from me! So proud I am of donnapinciotti!
We decided to set a fixed profit target, based on the daily average true range of the currency pair. Since I’m planning to backtest this system on EUR/USD, I crunched the daily ATR (20) values of the pair and decided to set a 120-pip target. To stay within the 1:1 R:R rule, only those trade signals that have AT MOST 120-pip stops will be valid.
Of course, this profit target rule will depend on the pair you’re testing or trading, so make sure you check that pair’s daily average true range first before determining your target and which signals will be considered valid.
As I had mentioned before, I will be grading this system using the Robopip Standard for Mechanical Systems. I shall run the system through my flux capacitor-powered brain to gauge its profitability, risk tolerance, and newbie-friendliness.
I hope you are all as excited as I am about this. I can barely keep my pip-o-graphic levels from rising! If at any time you feel the need to ask questions or share your thoughts, please do not hesitate to do so. I am not programmed to bite. At least not yet. I will gladly answer all questions and consider any suggestions as they may help me determine how many bonus points to give a particular system.
Also, I invite you all to submit your systems to undergo the Robopip challenge. If you would like to have your mechanical trading system graded against the Robopip Standard, just drop me a line and we’ll see what we can do.
Until next time, this is Robopip, signing off!
*beep boop beeeeeeeep!*