A fellow trader emailed me a few days ago asking me if I had ever used the Lindencourt daily trading system which he considered was a very good idea based on the daily time frame that could be used by those people interested in gaining profitability in the long run without dedicating too much time to forex trading. As the strategy was made freely available by the Lindencourt people, my friend was excited about it and asI like strategies that attempt to exploit long term trading opportunities I decided to give this system a shot and see if it was actually worth using in live trading. On today's post I will share with you my journey in the evaluation and use of this system and what conclusions I have drawn from this seemingly simple trading tactic.
First of all, my friend was very excited about the system but he had no answer to any of my questions about the system's fundamental characteristics. What is the system's average risk to reward ratio ? What is the average compounded yearly profit ? What is the maximum draw down ? My friend couldn't answer any of these questions something which made me believe that the analysis the people at Lindencourt did of this system was nothing but superficial and that the long term quality or viability of this system was yet to be proved. I find it amazing how people can trade systems which have trading characteristics they ignore, I could never trade any system without doing a very serious analysis beforehand to see if a) it is long term profitable and b) it has adequate risk and profit targets.
Since the system is absolutely mechanical and clear rules are defined to enter and exit positions I decided that I would code this system into an EA to easily evaluate its 10 year trading performance on a few instruments. I was especially careful to get ALL the logic right and to code everything EXACTLY as it was explained on their website. The first results (shown below, Jun 2000 to Jun 2010 on the EUR/USD) allow us to see that even though the system is indeed profitable during the past 10 years the average compounded yearly profit to maximum draw down ratio is abysmal, almost worse than 1:15. The system therefore will grant you profit in the long term on the EUR/USD but you will have to weather extreme draw down periods that will not be worth the profit you will be getting in the end.
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Then when we analyze other currency pairs things turn out to be even worse with most not being long term profitable at all and the few that are having very bad average compounded yearly profit to maximum draw down ratios. For example, the GBP/USD results shown below allow us to see how the system inevitably fails during most of the time only achieving new equity highs a few times during the past 10 years.
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It is however particularly interesting to note here that this system has some very profitable periods that may make people tend to think that the underlying logic is very good at capturing daily trending movements. Some profitable runs in almost every year show that the system does have very profitable moments which are sadly followed by draw down periods that almost wipe all the previously achieved success.
The problems with these system are several, a general lack of adaptability and the use of a 100 period EMA to determine trend direction are a few. In the daily time frame the daily 100 EMA is not a great trend direction indicator since price will tend to go towards it a lot of the time, periods in which the EA takes a lot of loses. Another problem of this system are the huge amount of crosses on the Stochastic Oscillator with an 8,3,3 configuration that often lead the system to repetitive whipsaws that cause large loses of equity when the system is trading over the EMA or under a strong consolidation period. Some of these problems are shown below on the GBP/USD ten year backtest.
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In the end I believe that the people at Lindencourt only did a very superficial analysis of this trading system that didn't cover a wide arrange of market conditions or a statistically meaningful period of time, if they had done so they would have noticed the poor trading characteristics of this system and the inherent problems with what it attempts to do. This shows - yet again - that having adequate long term profit and draw down targets is an absolute must for the successful trading of any given strategy or system. It is impossible for anyone to trade a system if they do not know its potential for long term profitability, its average compounded yearly profit and the length and depth of draw down periods. Trading a system just because a set of 10-20 trades is profitable or because the logic "looks good" is a big mistake that often contributes to people not achieving their long term profit targets.
The evidence clearly shows that the Lindencourt daily system has some serious flaws and that a strong development effort would be needed to improve the average compounded yearly profit to maximum draw down ratios. However the people of Lindencourt deserve some congratulations for sharing their daily system for free so that adequate analysis over its logic can be done :o).
If you would like to learn more about automated trading systems and how you too can build your own systems based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !
First of all, my friend was very excited about the system but he had no answer to any of my questions about the system's fundamental characteristics. What is the system's average risk to reward ratio ? What is the average compounded yearly profit ? What is the maximum draw down ? My friend couldn't answer any of these questions something which made me believe that the analysis the people at Lindencourt did of this system was nothing but superficial and that the long term quality or viability of this system was yet to be proved. I find it amazing how people can trade systems which have trading characteristics they ignore, I could never trade any system without doing a very serious analysis beforehand to see if a) it is long term profitable and b) it has adequate risk and profit targets.
Since the system is absolutely mechanical and clear rules are defined to enter and exit positions I decided that I would code this system into an EA to easily evaluate its 10 year trading performance on a few instruments. I was especially careful to get ALL the logic right and to code everything EXACTLY as it was explained on their website. The first results (shown below, Jun 2000 to Jun 2010 on the EUR/USD) allow us to see that even though the system is indeed profitable during the past 10 years the average compounded yearly profit to maximum draw down ratio is abysmal, almost worse than 1:15. The system therefore will grant you profit in the long term on the EUR/USD but you will have to weather extreme draw down periods that will not be worth the profit you will be getting in the end.
-
-Then when we analyze other currency pairs things turn out to be even worse with most not being long term profitable at all and the few that are having very bad average compounded yearly profit to maximum draw down ratios. For example, the GBP/USD results shown below allow us to see how the system inevitably fails during most of the time only achieving new equity highs a few times during the past 10 years.
-
-It is however particularly interesting to note here that this system has some very profitable periods that may make people tend to think that the underlying logic is very good at capturing daily trending movements. Some profitable runs in almost every year show that the system does have very profitable moments which are sadly followed by draw down periods that almost wipe all the previously achieved success.
The problems with these system are several, a general lack of adaptability and the use of a 100 period EMA to determine trend direction are a few. In the daily time frame the daily 100 EMA is not a great trend direction indicator since price will tend to go towards it a lot of the time, periods in which the EA takes a lot of loses. Another problem of this system are the huge amount of crosses on the Stochastic Oscillator with an 8,3,3 configuration that often lead the system to repetitive whipsaws that cause large loses of equity when the system is trading over the EMA or under a strong consolidation period. Some of these problems are shown below on the GBP/USD ten year backtest.
-
-In the end I believe that the people at Lindencourt only did a very superficial analysis of this trading system that didn't cover a wide arrange of market conditions or a statistically meaningful period of time, if they had done so they would have noticed the poor trading characteristics of this system and the inherent problems with what it attempts to do. This shows - yet again - that having adequate long term profit and draw down targets is an absolute must for the successful trading of any given strategy or system. It is impossible for anyone to trade a system if they do not know its potential for long term profitability, its average compounded yearly profit and the length and depth of draw down periods. Trading a system just because a set of 10-20 trades is profitable or because the logic "looks good" is a big mistake that often contributes to people not achieving their long term profit targets.
The evidence clearly shows that the Lindencourt daily system has some serious flaws and that a strong development effort would be needed to improve the average compounded yearly profit to maximum draw down ratios. However the people of Lindencourt deserve some congratulations for sharing their daily system for free so that adequate analysis over its logic can be done :o).
If you would like to learn more about automated trading systems and how you too can build your own systems based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !
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