I have always been interested by a peculiar challenge that presents itself in forex trading (and trading in general for that matter). Can we device a system that gives profit across all different currency pairs? Can we build a system that is able to achieve profitable results across a portfolio made up of the 30+ instruments commonly available on most forex brokers? Can we find a universal inefficiency? Certainly this is the ultimate diversification challenge as it will provide a strategy that would be almost “fail proof” as it would be based on a characteristic of the market which is so fundamental that in order to make the system unprofitable the market would have to, well, become another market. On today’s post I will talk about some of the traditional methods used to achieve this “universal profitability” what I have been able to achieve up until now and what the advantages and disadvantages of such an approach to trading are.
Certainly there are many ways to approach this problem and it has already been done on other markets. People who trade stocks have done it for years and it has been demonstrated – through several academic papers – that it is possible to outperform the market’s typical buy-and-hold strategy by buying stocks above 10 USD that reach new all-time highs with a 10xATR trailing stop. The fact that stocks are a positive-sum game in which wealth is created for market participants out of businesses makes the creation of such a system very intuitive as what it does is simply to follow stocks that are on an up-trend (reaching a new all-time high requires an up-trend by any definition), dumping them as the reach a trailing stop that signals a significant retracement from their previous bullish movement.
In other markets this has also been done, particularly this has been done successfully for the past 20 -40 years on the futures market, where portfolios are created out of a vast amount of futures contracts to use trend-following tactics. These systems made fortunes for those who used them in the seventies and early eighties and they also provided a lot of growth for trend-following hedge funds during the last decade. However futures are different from spot currencies due to several reasons, mainly because commodities – a large part of most futures portfolios – have a natural tendency to increase in value (due to inflation) and also because they seem to trend a larger percentage of the time when compared to currencies. Of course, the futures and forex markets are much more similar than forex and stocks and for this reason it makes sense to try techniques which have succeeded in futures to trade the forex market.
There are a myriad of published techniques that have been battle-tested in the futures market to generate money across all instruments. From volatility based techniques to Donchian channels and moving averages, there are a ton of places to look for and ideas to implement across the forex market. The simplest of all ideas – which is based on moving averages – was the first thing I wanted to try on forex instruments to see if I would be able to get a profitable outcome across all pairs.
Sadly since we only have daily data for most instruments back to 2003, I was only able to run a test for the past 8 years. The system I coded was designed to give reliable control point simulations on the daily time frame, a simple system that merely traded the up/down crossover of a 45 and 100 period moving averages on the daily charts, no stop loss was used and no take profit was used. The system did not trail stops in any way and only entered and exit positions based on this simple moving average cross over.
Of course, you may imagine that such a system can suffer from huge open draw downs, reason why I logged in equity using the latest (currently non-released) version of our Asirikuy profit and draw down analysis tool to get a true picture of how the system equity behaves, taking into account open draw down and profit generated by open trades. The results across +30 different currency pairs including all crosses of the EUR, USD, JPY, CAD, GBP, AUD and NZD were quite interesting with profitable overall portfolio results.
It is very interesting to see how such a simple technique is so fundamental to overall market behavior. It certainly does not work extremely well across all pairs but it achieves an overall profit, meaning that it tackles a fundamental aspect of the forex market’s behavior. Such a strategy is bound to be absolutely robust as it is as close as we can get to a “universal” trading technique, achieving profit on a portfolio made up of all the available forex instruments. The strategy also lets us see some of the sacrifices we need to make in order to achieve such large degree of robustness, the average compounded yearly profit of the strategy is just 9% with a maximum equity draw down of about 41%.
Certainly better results might be possible with other techniques or with other improvements of this particular trading tactic. However the current experiment does show that universal inefficiencies do exist in the forex market and that we can trade a fully mechanical portfolio of all currency pairs in a successful manner. If you would like to learn more about automated trading system development and how you too can develop your own systems based on sound trading tactics please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to automated trading in general . I hope you enjoyed this article ! :o)