Tuesday, February 24, 2009

The 8and8 EA, A Hopefully Profitable Expert Advisor

During this past few days, I had been implementing the 8and8 daily trading system into a forex expert advisor. When I finished coding the system and started back testing it's daily trading results, I realized that the system is unprofitable as an automated trading system due to the excessively large amount of mixed signals generated from the cross of two indicators. As it usually happens with crossing systems, whipsawing becomes a very hard problem to solve. On this month's daily chart, which is shown below, I tried to pinpoint the places that caused heavy loses due to intense crossing of the EMA and the RSI indicators.
The system does much better manually because trades are taken in a very discretionary manner. For example, you would not take a trade against the main trend when there is an important support/resistance level ithat has to be reached in sight. These things are not visible to automated trading systems (that easily), so it becomes very problematic and the experts fail when they have fixed SL and TP orders.

My first attempt was to try to fix the stoploss and take profit problems by making them ATR adjustable (hey ! it's my flavour of the month and it really works !). Sadly, the whipsawing problem absolutely killed the idea as too many bad entires happened due to the intense crossing of the two indicators (still it was much better than the original).

I then started to think about the expert advisors I know that are at least likely profitable, God's Gift, Simple Daily System, etc. I realized that their logic often involves some sort of volatility/range condition filter so that positions can only be entered when strong trends happen.

After struggling for several days with the idea and doing a ton of optimization with several range and volatility filtering ideas, I came up with the expert advisor I am presenting you now. The result ? A very clean equity curve in backtesting from 1999 to 2008 (EUR/USD). The expert advisor does a great job at filtering range conditions and just trading when the conditions are "right". Although the rules changed a little from the original 8and8 system, you could say that the main idea "daily trend following" is alive inside this modified trading system. The main modification is a simple filter based on the ADX indicator which makes the ea not to trade in raning market conditions. Lot sizing adjusted to volatility was also added.

Below you can see the backtesting image of the expert (from 1999 to 2008, modeling quality is n/a because of several mismatch errors in my 1999 and 2000 data but becomes 90% once you test from 2001 (2001 to 2009 is exactly the same anyway)).
Now, you may be asking yourselves if I intend to sell or give away this ea for free. Of course, it is available to anyone who buys my automated trading ebook or subscribes to my newsletter but feel free to buy me a cup of coffee and email me if this ea is all you want (a link is available at the bottom left for this). The ea is profitable according to backtesting although it's maximum draw down and yearly profits are almost alike, so you could expect a 50% yearly profit with a 40% maximum draw down. It will be forward tested from next week.

Other, expert advisors like God's Gift (specially my ATR modified version if you read the last post !) and the Simple Daily System are free expert advisors that do make profits and will most likely continue to do so in the future, if you would like to learn more about them and their settings please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

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