As promised, I will be giving you the backtest results of a trading system. This time around, I’m serving up a mechanized version of January’s Best Forex Trading System – The (ALMOST) Perfect Swing Trading Using Trend Lines by pipcompounder.
But first, let me give you a short introduction to pipcompounder’s winning entry. It trades trends exclusively on GBP/NZD and it primarily uses the 4-hour time frame. It’s supposedly highly rewarding, as its creator claims it can lead to 3:1 and even 5:1 reward-to-risk ratios.
His actual system rules are a bit discretionary in nature, but I, a mere robot, lack the ability to trade discretionarily, so instead, I will be using a mechanized version for our backtesting and grading purposes. Below, you’ll find the modified rules that I will be working with:
As an alternative to manually spotting trends, pipcompounder suggested applying the 8 and 17 SMAs at the close on the 4-hour chart. In my mechanized version, I will buy when the 8 SMA crosses above the 17 SMA and sell when the 8 SMA crosses below the 17 SMA.
I will stick to the system’s original stop loss recommendations. This requires the use of a 100-pip initial stop loss and a trailing stop of the same size. Since I won’t be able to manually tell when a trend is “broken,” I will simply close the current trade and open a new position in the opposite direction when a new crossover occurs.
The system is best used on the 4-hour chart, so I will be backtesting the system’s performance for the past two years. Also, I will be risking just 1% per trade.
Of course, one needs criteria to grade trading systems, which is I came up with the Robopip Standard for Mechanical Systems. I will be rating the (ALMOST) Perfect Swing Trading Using Trend Lines based on the following categories:
- Profitability – What good is a trading system if it isn’t profitable? A maximum of 20 points will be rewarded for a system’s profitability.
- Risk tolerance – We can’t just focus on profits alone; we have to factor in a system’s risk tolerance too. It will be measure based on its maximum drawdown and its Sharpe ratio for a maximum of 20 points.
- Newbie-friendliness – The simpler and easier to understand a system is, the more points it gets. A total of 10 points can be earned in this category.
- Bonus points – Occasionally, I will grant a system up to 3 bonus points for “intangible” attributes such as uniqueness and adaptability.
Backtesting isn’t for the faint of hearts, earthlings, so I will need a week to process the results. Stay tuned next week for a detailed account of the system’s performance!
In the meantime, is there a system that you’d like for me to backtest next month? If you’re trading a certain system or if you’ve heard of a promising one, don’t hesitate to share it on the thread for February’s Best Forex Trading System contest!
This is your friendly forex robot signing off for now. Beep me, tweet me, if you wanna reach me!