Mechanical Forex

I decided to dedicate most of my last week’s free time (which was not much by the way!) to try and find the most simple, profitable trading system I could use to trade the forex market. The truth is that I wanted to find a very simple, understandable system that I knew was long term reliable and that could be easily explained to new traders so that they could trade a consistent, profitable trading system they could trust.

Throughout my whole search, I decided to center on very simple trading strategies that work in the long run and give a good amount of profit (at least 30%) a year, with an acceptable level of risk. The truth is that I could not find that many systems and the only one that certainly caught my eye was a very simple 4 week breakout strategy that just centers on obtaining profits from a breakout of a 4 week high or low. The systems rules seemed very simple at first :

– Buy on a breakout of a 4 week high (close any shorts)
– Sell on the breakout of a 4 week low (close any longs)

This system is indeed barely profitable since you often give back most of your profit because of the exit signal, which of course lags the market badly since it is just the same as the entry signal (but reversed). I decided to implement a suggested modification which simply moved the exit so that the system would close trades on the breakout of a smaller number of days so you would enter a trade on the breakout of a 4 week high or low but exit on the breakout of a 1 or 2 week high or low. This greatly improved the system, but draw downs were still a bit pronounced since we were getting in at trades on tops and bottoms when we had ranging markets.
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The solution that came to me then was pretty simple. Breakouts should not be entered as they happen but we should wait for price to be a certain number of pips past the breakout level to ensure we can enter a long term profitable trade. How many pips ? Well, this of course depends on market volatility so I decided to adjust it (and traded lot sizes as well !) as a percentage of the ATR indicator value. This of course guarantees that the ea self adapts to changing market volatilities. The results ? The backtesting curves you see for the past ten years for both the EUR/USD and the GBP/USD (modelling quality is n/a because of some chart mismatch errors in 2000 and 2001 but changes to 90% when tested from 2002). Notice that we get a small number of trades during the past 10 years with a very high probability of each trade being profitabe. Another interesting fact is that the average win is almost 4 times the average loss ! This of course speaks about the system tackling an essential characteristics of the market and not just tapping into randomness for profits to happen.

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