Trend following has always been a very popular strategy in Forex and commodity trading. In the past I have published many articles about this topic, almost always centered around the results that can be achieved for Forex majors and the improvements that can be made to diminish some of the problems that these strategies have, such as very low winning rates and very high maximum drawdown period lengths. Today I want to talk about trend following in some Forex minor pairs, how a very simple trend following strategy performs and how the results differ from the results of Forex majors when trading the same setup. We will discuss the 30 year balance curve of some of these individual symbols as well as how a portfolio trading all of these minors actually behaves.
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The reason why I have never published trend following results for Forex minors is because with most of the systems I have tried – if not all of them – the results are very negative for the large majority of these pairs. However I have recently coded a very simply trend following strategy – that uses just one parameter for entries and an SL – which we can use to perform a very broad analysis over symbols as the strategy is both computationally cheap and simply impossible to overfit given the very restricted degrees of freedom within it and the very large amount of market data available for testing. The exact logic for this strategy will be published in the October edition of FXTraderMagazine, so I will not talk about it specifically within this post. For now you can simply consider that this is a trend following strategy and that it only has 2 parameters one for trade entries and another for trade exits.
To evaluate this strategy on Forex minors I decided to test this system on the EURGBP, GBPCHF, CADJPY, AUDJPY and the CHFJPY using data from 1986 to 2016. I used constant spreads of 5 pips for all of these symbols which may be an underestimation in some of these cases. However – given the trading frequency of these long term trend following setups – a larger spread does not have a tremendously large impact. The two parameters mentioned above were optimized in large variations – with a total space size of 20 tests per symbol – and the parameters that gave the best result (measured as the best Sharpe) were used to construct the curves shown.
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The first image in this post shows the balance curves for the best performing strategies for all the different pairs. As you can see the results do not look that good, something which is in line with my previous experience with trying to make trend following strategies work on these symbols. However – to my surprise – many of the symbols could actually achieve a net profitable result after 30 years and some even had even somewhat consistent balance curves with R² values above 0.5. Although some of them – like the EURGBP – had losing results basically from 2000 to present, others, like the CADJPY, could actually achieve new equity high quite consistently for most of the testing period.
The second image shows the result of trading an equally weight portfolio of all the minors through the past 30 years. As you can see the results are not that bad, with surprisingly good results till around the year 2000. However after that trend following has become much harder for the minors and basically few net gains have been made since then. The last equity high for the portfolio was made in 2014 but soon after that the portfolio gave up gains significantly. However right now the portfolio seems to be running up again, meaning that it may be going towards new equity highs in the near future as well. With more than a decade of stagnant trading in this portfolio it is worth considering whether another significantly favorable period for trend following will start.
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The results from minors are significantly complimentary to those of major pairs trading the same strategy which suggests that a portfolio using both majors and minors might be the best combination when using this type of trading system, particularly this extremely simple trend following approach — keep an eye out for my FXTraderMagazine article in October to learn more. This is evident when looking at 30 year tests but it might be much less evident when looking at shorter term periods. If you would like to learn more about trading system building and how you too can create and backtest your own strategies please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach towards automated trading.strategies.
