I have been investigating Forex trading for almost a year now and have at last devised a strategy that seems to consistently produce a profit during back-testing so that only one of the last 8 years would have seen a loss. It is a simple trending strategy based on a combination of technical indicators, and as such suffers from the well-recognised problems of needing trends to make any decent return as otherwise the general market ups and downs produce a gradual loss. I don’t regard this as the final strategy, but merely a stop along the way which may give some further insights.
The question I have is whether the current results are good enough to start trading in the hope of providing some income while I learn a bit more (always good to get paid to learn and helps with the motivation).
For 1 hourly time-frame EURUSD over the last 8 years the strategy averages ~100 trades / year producing ~7 pips profit / trade (~700 / year = ~5600 total) with a maximum draw-down of ~700 pips and a ~40% hit rate. The hit rate is low by often reported standards but even so the profitable trades make more than the losses on average so that overall there is a profit. I have tried to cut down the losses, but every time it reduces the winning trades by a factor more than the profit/loss ratio so the overall effect is negative. Basically it seems you need to take risk to be in early with this approach otherwise waiting until you are more certain increases the hit rate, but reduces the remaining profit.
One further consequence of a low hit rate is that I don’t think stake compounding would be helpful as I have observed that at such low levels you tend to over-stake after a successful deal only to then loose a larger amount on the next deal which is more likely to be a loss. Compounding seems to work overall when you have runs of losses or successes and can benefit from adjusting the stake downwards or upwards after each position respectively. I did simulate compounding, but the results were always worse at the end of the period in question unless it encompassed a region of successive losses or gains.
The strategy is currently in demo and if it continues to be successful I intend to start on £1/pip, possibly working up towards £10/pip at which point I should get ~£4000/year on average assuming a 3 pip dealing loss / trade provided the market stays within the parameters of the last 8 years which seem to have covered some turbulent times. My fundamental outlook is that trends will continue to arise in the short to near term as the tectonic plates of economic adjustments continue to move due to the on-going credit problems. My 3 pip figure is a guess based on the fact that this is not a strategy specifically looking to trade at volatile times, but rather it trades just after the hour whenever I get the signal (hopefully SMS triggered when I look into it). In my brief early experience of live trading on Capital Spreads where they quote 1 pip spread on EURUSD this seemed reasonable at £1 / pip at least.
The only things I haven’t simulated properly in back-testing are the daily roll-over charges (or possibly even credit if interest rates are high enough) and the stop loss. Currently, the former seems to be around ½ pips for each working day, which should apply to many but not all trades. The stop loss I can only do at the time-frame level and from that 75 pips seems a good value for maximum pips. It may be possible to extent the back-test to do both of these properly, I will have to investigate further. At the often-quoted 1% of total at risk this stop loss would mean that I would need to fund £7500 for every £1/pip that I wanted to trade.
As a comparative newbie I would welcome any thoughts / observations on my plans, thanks.
The question I have is whether the current results are good enough to start trading in the hope of providing some income while I learn a bit more (always good to get paid to learn and helps with the motivation).
For 1 hourly time-frame EURUSD over the last 8 years the strategy averages ~100 trades / year producing ~7 pips profit / trade (~700 / year = ~5600 total) with a maximum draw-down of ~700 pips and a ~40% hit rate. The hit rate is low by often reported standards but even so the profitable trades make more than the losses on average so that overall there is a profit. I have tried to cut down the losses, but every time it reduces the winning trades by a factor more than the profit/loss ratio so the overall effect is negative. Basically it seems you need to take risk to be in early with this approach otherwise waiting until you are more certain increases the hit rate, but reduces the remaining profit.
One further consequence of a low hit rate is that I don’t think stake compounding would be helpful as I have observed that at such low levels you tend to over-stake after a successful deal only to then loose a larger amount on the next deal which is more likely to be a loss. Compounding seems to work overall when you have runs of losses or successes and can benefit from adjusting the stake downwards or upwards after each position respectively. I did simulate compounding, but the results were always worse at the end of the period in question unless it encompassed a region of successive losses or gains.
The strategy is currently in demo and if it continues to be successful I intend to start on £1/pip, possibly working up towards £10/pip at which point I should get ~£4000/year on average assuming a 3 pip dealing loss / trade provided the market stays within the parameters of the last 8 years which seem to have covered some turbulent times. My fundamental outlook is that trends will continue to arise in the short to near term as the tectonic plates of economic adjustments continue to move due to the on-going credit problems. My 3 pip figure is a guess based on the fact that this is not a strategy specifically looking to trade at volatile times, but rather it trades just after the hour whenever I get the signal (hopefully SMS triggered when I look into it). In my brief early experience of live trading on Capital Spreads where they quote 1 pip spread on EURUSD this seemed reasonable at £1 / pip at least.
The only things I haven’t simulated properly in back-testing are the daily roll-over charges (or possibly even credit if interest rates are high enough) and the stop loss. Currently, the former seems to be around ½ pips for each working day, which should apply to many but not all trades. The stop loss I can only do at the time-frame level and from that 75 pips seems a good value for maximum pips. It may be possible to extent the back-test to do both of these properly, I will have to investigate further. At the often-quoted 1% of total at risk this stop loss would mean that I would need to fund £7500 for every £1/pip that I wanted to trade.
As a comparative newbie I would welcome any thoughts / observations on my plans, thanks.
).