Two-Stroke System (Mechanical Price Action +300 pips per month)

Inflection, thanks for sharing such an interesting system with us! I'm also a Forex newbie, and have spent a lot time myself finding almost-"Holy Grail" systems, which then turn out to not be such!

So I have a few concerns. Firstly, I'd suggest that you always take spread into account - although it does not seem much, it does add up, and especially when compounding is used, seemingly small differences in pips can have a dramatic effect.

For a dramatic illustration suppose you get 1% a day for a 1000 days - after compounding, $1 turns into $20,959, however if you get 0.9% for the same period, you only get $7,783 in the end! Almost 3 times less!

Another point is that I'm concerned that this system - at least the EUR/USD and USD/CAD version of it, relies on long-term decline of the dollar. By always going long on EUR/USD for example, you are betting that the dollar will eventually go down. While this has been the case for the past 5-6 years, this hasn't always been the case, and definitely won't be always.

In fact, if you plot the total number of pips you get (again on EUR/USD), the plot practically mirrors the daily chart of EUR/USD. The massive drawdown you get in 2005 is due to a retracement of the long-term trend.

Suppose somebody decided to start using this system in 2001, and looked at the few years before then, they would find that it's best to use this system going short all the time. But they would then more likely than not go bust when the dollar lost its strength in the ensuing few years.

Therefore it would be nice to somehow introduce short trades as well, to take into account a possible change in the overall longterm trade.

This could either be by using another currency pair where you go long on USD, or somehow identifying changes in the long-term trend, or retracements of long-term trends.

In any case, try testing over a longer period of time. Historical daily data is readily available quite far back, so it would be wise in my opinion to test over at least one full up-down cycle, so that you could test ways to detect changes in the prevailing trend.

Overall this system looks promising, and hopefully you'll develop it further! Good luck!

Hi sgrig -

Thanks for your critique. Here are a couple quick responses to the two main issues you raised.

First, spreads. I have already mentioned this. Yes, you are absolutely right. And I agree. Spreads have a major impact. Anyone here could take the files I have provided and deduct their broker spreads from each transaction and say, "Hey look, you idiot. This is a losing system."

But before anyone beats me to the punch I'll do it myself.

Deducting the published spreads at Oanda from every transaction (1pip-4pips), yields something close to the following for the 6 pair portfolio example I provided:

30154 pips total

vs.

50707 pips total

The adjusted equity curve lands you at around $200,000 instead of $520,000 (beginning with $50,000). It's still around 550 pips a month, but that's 62% less money.

Is that a losing system? You'll have to decide for yourself.

You can calculate the difference in the compound interest rates from these numbers. I think the real impact depends on the average return. If your average return is only 10 pips, a few pips make a bigger difference. But in the example I provided, the average return is 50 pips per day. With spreads included for all pairs, it's around 30 pips a day on average.

You'll have to take a look at the spreadsheets and see if I did this all wrong ... which is oddly something that no one seems to want to do (?)

The other thing you mentioned is responding to changes in the major trend. I also mentioned this before. I think there are only a couple ways to develop a system so that you can have a really good chance of it performing well for a long time. It has to either be so robust that it needs no modification ... it works in all kinds of markets. Or, the system itself has to be responsive to changes. This system - as it is - has neither of these qualities. It needs some optimization. I would not use a system like this blindly. I would not assume that the portfolio would remain the same over time.

I have some ideas, but I don't know that I have a really ideal way of responding to those changes. I'd like to keep it simple, because every rule or every constraint you introduce into a system can change things significantly. I'm still hoping for suggestions from you all.

All the best!

EDIT: I just modified this post because I had mis-typed the spreads for the JPY pairs. The number is smaller now, but you get the idea.

Here is the adjusted spreadsheet. Please tell me if you think I may have done something wrong.

Hey sgrig -

I really don't want anyone to get the idea that I'm presenting this as a "Holy Grail" system. It's more like a "Holy Fail" system. It's rough, but it can be refined.

None of us is as smart as all of us. I'm presenting these ideas in this forum because I've benefited immensely from reading here. But if this system has potential, I think it will take the contributions of others to realize it.

I hope we will see more of your ideas and the ideas of others who have already posted soon.

All the best.

I see that you get value errors in your spreadsheets, so I do not know how you add your columns up. Example:
0.0101 #VALUE!
-0.0013 #VALUE!



This is information from columns K & L
You need to change your formulas in column J & K as follows:
'=IF(AND(F958="EXIT",H957="SHORT",H958=""),I957-E958,"") to
'=IF(AND(F958="EXIT",H957="SHORT",H958=""),I957-E958,0)
and from
'=IF(F958="EXIT",G958-E958,"") to
'=IF(F958="EXIT",G958-E958,0)

this will give you:
0.0101 0.0101
-0.0013 -0.0013in columns K & L

If you do not want to display the zero values then you can go to Tools/Options/View and unclick the ZERO VALUE. That will have the effect of displaying blank cells where you have zero value.

You are getting the value errors because your formula is looking for a cell with nothing in it, but your cells have formulas in them so they are not empty.

Regards

Hi silver -

Thanks for the feedback. I use OpenOffice, so I'm not getting #value errors. I just exported the spreadsheets into excel format.

I think if a formula returns nothing (i.e. doublequotes ""), then excel does not consider this a number and spits out a #value error if you try to do any math operations on those cells, such as a sum or product.

The only problem is that some values might in fact be zero, so it might mess up the average a bit. Anyway, I will go back and fix that.

Can not remember the last time I was so excited by a thread. Nearly missed it but luckily my attention was drawn to it by a dear friend. Inflection - hats of to you mate.

I had a look at the original spreadsheets, and to get around this problem, simply replace the formula in the "Total" column by

=IF(AND(J3="",K3=""),"",IF(AND(J3="",H3=""),2*K3,IF(J3="",K3,J3+K3)))

So now it just ignores the "" in the "XTEND" column.

Hope this helps.

Hey Inflection,

To be honest, I'm really surprised that such a simple system does actually seem to give profitable results, so hats off to you!

I'm sure this system has potential because in essence this is a trend-following system, and you can't go wrong when trading with the trend.

Inflection,

Maybe just one quick comment on your results and something that might later prove worthwhile should you take this method further.

If you remove just 12 of your most profitable trades out of 780 odd trades then you sit with a basically flat - zero sum game- equity curve. So all your upward movement on the equity curve is locked into about 12 trades and if you missed them because you were sick/away/busy you would sit with a flat equity curve. So just bear in mind that you would have to ensure you don't miss a single trade or you would lose confidence in your method.

This is similar to a MA crossover system in that it consists of a few losses and a few wins of equal size but the real profits are made by just 1% of the really big moves...so be carefull when going live that you don't miss the good ones...of course it would be OK to miss some of the losing days...:-)

Hope this helped

To determine a long term trend on a daily chart, you could try something as basic as a 200ma...Close above long trades only, close below short trades only...Sometimes the simple things can work..

I haven't taken in to account Trader888's previous post, which poses a very valid point..

Thanks sgrig -

I will look into it.

Alright, applying the system to shorts when when the price is below the 200 SMA, we get a further 2882 pips on EUR/USD, for a grand total of 12,362 pips in 4 and half years - more than 200 pips a month. Now I hope *I* didn't do anything silly! lol Because this seems to good to be true!

Ok, I did do something stupid, so please disregard all of this. In fact it is less profitable when the 200 SMA filter is used. Sorry about this.

What I originally did is I compared the 200SMA with the the close of the current day, but set the entry price as the open of the current day, so of course this yielded great results because I used information from the future. lol However, the SMA has to be compared with the previous day, and then things aren't as rosy.

Hi Trader888 -

Yes, you have an excellent point. If I am not mistaken, I believe this is a phenomenon of most "always in, trend following" approaches, because this is a phenomenon of the market in general. Most of the movement overall just averages out. A small %age of days contribute the largest %age of the gains. Miss those days and you miss the market. There has been some very interesting research over the years in this area.

I have some thoughts on mods to the system which could address this issue. I'll share more later.

I want to share a little bit about my motivation and approach for doing this. I'm sorry this is a really long post, but I just felt the need to write. I guess I started the thread, so I'm allowed.

My general approach in working out a mechanical system is to first find something that is simple and fairly robust and then only make very specific changes in the three areas that I mentioned before: (1) selection, (2) trading rules, or (3) risk management. In general, I am more inclined to try things in #1 and #3 first, whereas many people would start slapping more rules and filters on top of the system to get it to "prove out" the historical data.

You can see what I mean if you can look at several super-popular approaches that many people here on FF discuss and follow, among them the jacko and james16 methods. Jacko is doing pure and simple trend trading. Very simple rules. Long term perspective. The power comes from position sizing, compounding, and risk management. That's how he explains that he's done so well. All of that from only one or two pairs, EURUSD and GBPUSD. James16 on the other hand uses many more rules and much more discretion, but he's very very picky about his trades. He emphasizes selection and trades many different markets. His selection criteria have helped him spot high potential trades. These methods emphasize the #1 and #3 aspects of system development. Another that I like is Phillip Nel's approach. I think his approach is insightful and sophisticated.

Anyway, these are not mechanical systems, but it goes to show that much can be done by tweaking #1 and #3 before you even have to deal with lots of additional rules and filters. Most of what I have found trolling around various places are the same old worn out indicators tweaked and combined a hundred different ways with a gazillion rules and filters. It doesn't mean that it doesn't work. There are thousands of systems and approaches that work, even using those same indicators. Phillip Nel is a great example of that. Three moving averages and one simple rule. I think you can make decent money if you trade that way.

I guess what I'm trying to say is that I am striving to keep things simple and systematic. I don't know about you, but the more complex something is, the more I doubt my own ability to keep up with it. I have a number of things that I'm working on and I intend to share them all, but I must admit that it's hard work. The cynical side of me says that if I would have posted something half-baked to the tune of "Hey! Check out my system with 7 indicators, 2 oscillators, and boxes and triangles all over the place. Just scan your charts and you'll see it works! I've been doing this for two weeks and it's great! Hope it works for you." ... then I would have had half a dozen people saying, "Great! I'll start testing this now!" ... and another half a dozen posting ready-made Metatrader EA's or something like that within 24 hours. Well ... I hope I'm not that cynical, and I will continue to plod on and share what I can.

Why am I doing this?

I have hundreds of thousands of $'s in my account. It's not that I'm so smart or such a great trader. I think I just got lucky. I made some good investments in IPO's and real estate, and for the past several years I've been using a statistically derived mechanical system for trading the stock markets, based on some ideas from a Russian physicist. I used to day trade stocks, sitting in front of three screens, trading Level2 opening gaps, breakouts, and swing trades. I did fine. I made some money. But it just got old for me. My brain isn't really wired that way. So I went on a quest for more intermediate term, more mechanical approaches. I'm a quant by nature, though I'm certainly no mathematician. So I sort of stumbled across and further developed this system I use now. It's been okay, and has enabled me to be doing volunteer work for the past several years. A couple years ago, my wife and I sold our house on the beach in L.A. and moved to another country with our two little kids to work with a non-profit organization.

A simple, mechanical stock trading system is our only means of support.

Believe me, I know what it's like to be depending on a few excel formulas to pay the bills. It's not easy. Sometimes I break out in cold sweats, asking myself what I think I'm doing. And I must say that last year was really tough. I've suffered because of my constant attempts to tweak and refine and optimize the system. I made it too complicated. My return was okay, but not enough to be living where I'm living, doing what I'm doing. We've had to tighten our belts. I cannot tell you how much I would really really like to not have to go get a real job. Of course I'm okay with that, but I'm more interested in continuing on with what I'm doing now. I like the freedom. And I wish that very much for you, that you could spend a couple hours a day with your system and have the time and resources to do something important that makes a difference in the world.

The only reason that I believe that it's possible for us here to develop something that really works in the Forex market is because I know it can be done elsewhere, even if in a small and perhaps temporary way.

I really wish that what I was posting was a complete, ready-to-go, tried-and-tested system. I'm just not that smart. But more than that I really believe in the power and quality of collaboration. I believe in the "wisdom of crowds." You know, there's a great book by that same title. Let me quote from it:

"Most of us, whether as voters or investors or consumers or managers, believe that valuable knowledge is concentrated in a very few hands (or, rather, in a very few heads). We assume that the key to solving problems or making good decisions is finding that one right person who will have the answer ... The argument of this book is that chasing the expert is a mistake, and a costly one at that. We should stop hunting and ask the crowd (which, of course, includes the geniuses as well as everyone else) instead. Chances are, it knows."

When a diverse group of people meet certain criteria, then its estimations, judgments, and solutions are likely to be superior to that of a single expert. I believe this forum has the potential to be that kind of group.

Am I worried about developing and sharing successful trading systems in a public forum? Not really. The reality is that this is still a big boys' game. The vast majority of all Forex trades are executed by a handful of institutions. Even if every single of the few thousand active FF members were all doing exactly the same thing, we are still small fish. Others might disagree and say that the only edge to be gained is in proprietary approaches, aka "my secret system." In any case, it doesn't matter, because no system works everywhere all the time. You have to use what works while always looking ahead.

Some people would say that it's stupid, amateur that I am, to share what I'm developing. They would say I'll lose my secret edge and won't end up with that shiny red Ferrari parked in my garage. I say that's rubbish. Literally. Even shiny red Ferraris rust and fall apart. The money means nothing. It's only a means. I wish it were true that wealth always flowed into the hands of those with good hearts and good intentions. But there are more than a few greedy jerks who get filthy rich. Even so, it doesn't matter, because I know there is more to life and living than that. If I may wax a bit philosophical, then let me say that the only thing that really matters is people. I may be infinitely naive, but I can honestly say it would bring me great satisfaction to know that I had contributed in some way to making others financially free. Not for the sake of shiny red Ferraris, but so that others might have the means to do something great with their lives.

I hope you will join me in that pursuit.

And if you do happen to have a shiny red Ferrari, drop by and let's go for a spin. I know some great destinations :-)

Hey sgrig -

Keep trying. We will find the solution.

@ Inflection,

I must say that your message really "hit home" with me.

Yes, there are a lot greedy people in the world...but I too believe that there also others (with a good heart) just like you. You have good intentions and are very clever. Your ideas about what is "really" important are correct.

We are all very lucky to be working with you. Thanks for being here!

G'day Inflection,

Amen to that. I think most people believe in this. Why would anybody post their ideas on a public forum if not for the opportunity to get feedback and improve on their original ideas?

I applaud your endeavour. You explain yourself exceptionally well and you know your limitations. This is one of the most refreshing threads in a long, long time.

We are on the same journey only in different crafts. Please continue your efforts. I'm sure many will chime in with their own back/forward-tested results/opinions when the time is right.

Cheers,
Art...

Inflection, that was a great post, and you should be proud of your ethics and demonstrating your lack of greed.

I myself have been ditching most of my indicators and looking at basic price breakout strategies, but for your information, one indicator I have found invaluable and continues to be so is the Fractal Dimension Indicator (FDI). Since this is a trend following strategy, it may benefit your cause. I do not have the programming skills in Meta Trader that I do in E-Signal, but the difference it made to the results for all of my trend following strategies was very remarkable. Its a basic trending/ranging filter which may allow you to refine your entries. There is a version coded for it for MT4, but I am not sure where to find it unfortunately.

Anyway, I don't want to crash your thread with a ton of indicators, and I hope it doesn't open the floodgates for that, but I thought I might mention it to the forum to see if any others had experience of it, or could look at the validity of using it on this system.

Good Thread, Good Luck, I shall be following this with much interest.