How much has the market changed?

Hello everyone,

Hopefully this is a quick question ;-)

I developed a strategy recently, and used Merlin's awesome "system behind the system" model (the thread is here: http://www.forexfactory.com/showthread.php?t=4446) for backtesting.

Everything looks great. I know why it works, the reasoning is sound (no martingale, hedging, gridding, insert your get-super-rich-or-blow-up-your-account-strategy here ;-) ), it's for a pair I'm very familiar with, and so far the forward test is going perfectly according to plan.

So, here's the question. I continued to backtest further and further back, and although it's still profitable, there are some VERY serious periods of drawdown in '03 and '99.

Is this something to be concerned about, or has the market simply changed in the last five years due to non-institutional traders entering the equation, or other factors?

If it has, why has it changed? Thoughts?

Thanks in advance for the input. FF ROX! :-)

I'm probably not going to give you your best ultimate answer - but I'll give you your first one. We would need to know what pair you're referring to.

Beyond that - the more details the better about how you're trading that pair.

And finally, I'm no super authority - but I believe the quality of your data going that far back could also be of concern.

Hi Brentmack,

Thanks for the reply and sorry for the delay. The pair is Eur/Gbp which has been one of my favorites recently. The system essentially looks for times when the pair is range bound and then places statistically high probability trades within the range.

I think I might have found the answer as to why the market moved so violently in early years here: http://en.wikipedia.org/wiki/Euro. It makes sense that since the Euro wasn't even really a currency in '99 and was only adopted in '02 by some of its members that there would be some pretty wild volatility (which would kill this system).

Does that seem to make sense to you as well?

Thanks again!


Seavo