Are You Up for a Challenge ? A Likely Daily Long Term Profitable System That Takes 5 Minutes a Day to Trade. Part Two -System Performance

Yesterday we talked about the use of a likely long term profitable system that takes only five minutes to trade everyday. The system is based on the following of momentum using the 10 period moving average inclination allowing us to get in early on long term trends and get profits in the long term on the EUR/USD. We discussed the system's rules including entries, exits, position sizing and accumulation of positions in favor of the trend if favorable movements happen. Another great aspect of the system we discussed - especially for busy people - is the fact that the system can be traded at the same time every single day, requiring very little time from the trader to actually execute the system.

In order to find out if this system actually has an edge and achieved long term profitability during the past 10 years of trading I carried out a simulation of this strategy by hand using Umaki and the metatrader 4 backtester. This showed me that the decision to entry/exit positions can be taken in a very small amount of time and that anyone trading this system would be able to do so every single day with just a few minutes available (I then performed a back test with the strategy coded mechanically to confirm that my results were accurate). Please take into account that the simulations were done on the EUR/USD daily charts - based only on past closed candles - making sure that backtesting interpolation errors remain to the absolute minimum. Daily simulations are most certainly back/live testing consistent due to the high reliability of this data.
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So does the strategy achieve profit ? The above graph shows you the performance from January 05 2000 to June 05 2010. As you can see the system achieved profits quite consistently over the past ten years, capturing almost every major trend that developed on the EUR/USD during this whole trading period. The system took 170 positions during the past 10 years, averaging about 2 positions every three months. The average compounded yearly profit of the system is 15.85% and the standard deviation of the yearly profits is 13.41%. The best year during the test gave a profit of 35.51% while the worst one was -6.94%.
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The draw down characteristics of the strategy are also very important to discuss with a maximum historical draw down of 13.81% and a maximum draw down period length equal to 554 days with an average draw down and draw down period length of 8.15% and 242 days. This gives the system a pain index value of 4.92 meaning that it will be easier to trade than the Turtle Trading system from a psychological stand point given the fact that its draw down characteristics are easier to handle.
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Another very important aspect to evaluate is the distribution of monthly returns which is shown above. Months were divided into classes grouping months within a 1% profit/draw down range ((-8)-(-7)%.... 1-2%, etc) giving the final distribution shown. This analysis gives us invaluable information about the system which will help us understand how the system trades and what we can expect from it. We can see that the system took trades through only 48 of the 120 months of the test and that the probability of one of those months to come out as a winner was 45% while the probability to have losing month was higher, at 55%. However the losing months were much smaller than the winning months with the average winning month being 11.7% while the average losing month loses only -3.7%. This reflects the risk to reward ratio of this system which along the ten year testing period was a little bit above 1:3.

So what we have here is a system that will only give you trades for about 50% of the months in which you trade it, there is a higher probability that one of those months will come out as a loser but any winning month you may have will be in average three times higher than your average losing month. This behavior is classic of daily trend following systems that aim to profit from long term trends that develop on the forex market.

After this analysis I think that there are simply no excuses. The above is the first manual system - to the best of my knowledge - which only requires 5 minutes to trade everyday, is offered absolutely for free and has a full 10 year historical analysis showing you exactly what you can expect and how your performance is likely going to be in the longer term. Sure, it won't be easy to trade and you are bound to have a few losing years within a ten year period but the system will allow you to develop your trading skills and most importantly your discipline and your ability to execute a trading plan. Finally trading this will become even easier during the following months as an indicator I developed for this system will be shared in a magazine I'll be writing for from October... Stay tuned to find out more !
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If you would like to learn more about other trading systems and how you too can design and trade your own mechanical trading systems knowing exactly what the average compounded yearly profit and maximum draw down figures are please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)

Are You Up for a Challenge ? A Likely Daily Long Term Profitable System That Takes 5 Minutes a Day to Trade. Part One - System Rules

I think it is not a secret now that I have always believed that one of the biggest problems faced by people new to automated trading - and their general lack of success - is the almost complete absence of evaluation and the use of a system that has accurate evaluation and a real statistical edge that can be used for longer profitability. This becomes evident if you start to ask traders about the long term characteristics of the systems they use or intend to use. You will find out that the large majority of people ignore the maximum draw down the draw down period lengths, the probability to have a losing or a winning month, etc. It is easy to see then why traders switch so much between different systems and why following a system is so terribly hard.

Today I want to help new traders by sharing with them a simple strategy they will be able to use everyday which is adequately evaluated and has clear long term profit and draw down expectations that have been calculated according to reliable simulations, bringing them the opportunity to trade a system knowing in advance what to expect in the long term and what difficulties they will face when trading. This system also has the advantage of taking only 5 minutes to trade everyday giving you the opportunity to rely on it if you do not have the time to be "glued to the screen" many hours everyday.

It is however clear for me to say - before I start describing the system - that the most important achievement you will get while trading this technique is most likely not going to be monetary (since the profit and risk targets are very conservative) but you will achieve a good education regarding forex trading and - most importantly - you will learn to trade a system which is likely to be extremely difficult to handle from a psychological perspective. If you want to become a better trader and polish both your psychological and trading skills then I advice you to trade this system, but do so seriously and for at least 5 years. Trading this system won't take more than 5 minutes everyday and you will learn to be disciplined and to follow a system for which the statistical expectations are clearly laid out in advance.

This trading system is a very simple trend following system designed to be used on the daily time frame only on the EUR/USD. You should check for an entry signal everyday when your broker's daily candle closes (broker must have chart without Sunday candles, you can use the WithoutSunday EA available for free online to create a chart without these). The rules are very simple :

Long Trades :

If the past 6 bars show an increase in the 10 period simple moving average indicator (average in bar 6 smaller than 5 smaller than 4 smaller than 3 smaller than 2 smaller than last closed bar) and the difference between the close of the last bar and the tenth bar in the past is larger than 3 times the past closed bar's 30 period daily ATR value then enter a long trade.The trade is entered with no TP and an SL value equal to 2 times the mentioned ATR's value.

If a long trade is opened and the last bar close is higher than the close of the bar before the last long was opened open another buy trade and move the SL of the old trades to the value of the new one (which is 2 times the ATR from its opening point). Do this to open an additional maximum of 4 positions.

If a long trade has been entered and the past 4 bars' 10 period moving average in the past show a decline ( average in bar 4 is greater than bar 3 greater than 2 greater than last closed bar) then exit all trades.
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Short Trades :

If the past 6 bars show a decline in the 10 period simple moving average indicator (average in bar 6 greater than 5 greater than 4 greater than 3 greater than 2 greater than last closed bar) and the difference between the close of the last bar and the tenth bar in the past is larger than 3 times the past closed bar's 23 period daily ATR value then enter a short trade. The trade is entered with no TP and an SL value equal to 2 times the mentioned ATR's value.

If a short trade is opened and the last bar close is lower than the close of the bar before the last short was opened open another short trade and move the SL of the old trades to the value of the new one (which is 2 times the ATR from its opening point). Do this to open an additional maximum of 4 positions.

If a short trade has been entered and the past 4 bars' 10 period moving average in the past show an increase (average in bar 4 is smaller than bar 3 smaller than 2 smaller than last closed bar) then exit all trades.
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Lot Sizing

The lot size is defined by a very simple equation outlined below. This equation adjusts lot size against market volatility and account equity.

Lot size = 0.01*AccountBalance/(ATR*ContractSize)

The ATR is the value of the 30 period ATR as calculated on last bar's close. (ATR of the last closed bar) (value of the ATR as absolute price, (for example 0.0102)). The contract size is the contract size per STANDARD lot.

As you see the system is very simple and the entries can be checked very easily using just 5 minutes of your time everyday. Unlike other trading strategies with a similar approach - like the turtle trading system - this strategy does not require you to be constantly monitoring the market for breakouts and the addition of positions but it works your way so that every trading decision is executed at the exact same time each day - what I would call a perfect system for a beginning trader busy with a full time job.

On tomorrow's post we will learn more about this trading strategy as well as its results over 10 years of simulations, we will talk about the challenges this strategy poses to traders, the rewards you would expect to get and why challenging yourself to trade this everyday (even if only on a small 100 USD live account) will prove to be extremely beneficial in the long term not only regarding possible profits but also regarding what you will learn from both yourself and your psychological characteristics as a trader.

If you would like to learn more about how strategies like this can be turned into mechanical systems for their accurate evaluation and analysis please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)