Friday, January 8, 2010

Watukushay No.2 Goes British... Profitable Results on Another Pair :o)

Many of you may have heard or had access to the Watukushay No.2 expert advisor. For those of you who haven't heard anything, Watukushay No.2, also reffered to as WA2 is an experted advisor programmed by me as part of the Watukushay EA development Project. This expert advisor is unique in the sense that it does not use ANY indicators to get its entry or exit signals (besides the ATR for volatility adjustments).WA2 works entirely based on self-adaptive candlestick patterns which evolve with the market. Such an approach has made Watukushay No.2 reach very high profit targets with adequate risk expectations. For the past two weeks, Watukushay No.2 has been tested on several live accounts with very good results.

Up until now the EA has only been traded on the EUR/USD (pair for which I designed it) because other pairs have different candlestick pattern characteristics which Watukushay No.2 was not able to deal with. What was so different about the candlestick patterns of the other pairs ? That is difficult to say. I'm going to talk about the differences with the GBP/USD pair which is the next pair for which I wanted Watukushay No.2 to be profitable on

The GBP/USD is a more volatile pair than the EUR/USD. It only takes a second to note when you take a look at the settings of Watukushay No.2 for the EUR/USD run on the GBP/USD pair that many positions taken end up in loses as the pair quickly reverses from a continuation candlestick pattern. Besides, the closing logics also seem to be pretty off. More often than not, reversal candlestick patterns fail to trigger closes (because they are not detected appropiately) and overall profitability is greatly reduced and draw down levels are increased. This is the particular reason why I never released settings for the GBP/USD, the EA is simply not well adapted to trading conditions on the pair.
Then I suddenly saw things clear as day. I reanalyzed about 100 trades of the EA (made on backtesting) on the GBP/USD and I found out that the pair changed in character far quicker than the EUR/USD and the problem was not that the patterns were not there or that they did not lead to profitable trades. The problem was merely that the pair changes too much and this reduced profitability tremendously. The adaptations made by the EA of the candlestick patterns "lagged" the market significantly. The solution for those of you familiar with the WA2 code may now appear obvious. It was a simple matter of reducing the ATR adaptability code to lower the number of periods and voilá, I had an equity curve similar to that of the EUR/USD. It surprised me that this simple change made the EA adapt to the new pair in such a good way. The fact is that when you make adaptation quicker the EA is more "in-tune" with the swings of the pair and its changes in "character".
Further analysis and changing of the closing criteria to adapt against the different characteristics of candles on the GBP/USD relative to the EUR/USD led to the backtesting graph shown above (backtesting from Jan 01 2000 to Jan 01 2010). The GBP/USD settings still have a little to envy their EUR/USD counterparts with about a 7% average yearly profit achievable for each 10% maximum draw down one wishes to risk. This shows that the adaptation criteria is vital for changes between different currency pairs since the actual description of the patterns seems to actually address an inherent characteristic of the market, since candlestick behavior is a very good indicator of market sentiment and direction. Is this change translatable into other pairs such as the USD/JPY and the USD/CHF ? We'll see within the next month !

Newsletter subscribers will find the settings and backtests on the FTP where the experts are located while ebook subscribers will find an ebook update containing that same information (settings will be uploaded on Saturday). If you would like to learn more about Watukushay No.2 and how exactly it was designed and programmed from scratch 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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