2/3: Insights from Testing & Analysis – Part 2

Over the last week I carefully analysed the 50-60 trades I took over Dec/Jan/Feb.  I used the same approach as I had used for the DAX testing for 2013.

Why bother with testing?

  • Here’s one from Martin Walker’s website – Martin actually also offers coaching for people wanting to get into trading – he put up a great blog post entitled “Forex Trading Survival” recently, part of which stresses the importance of testing.  I highly recommend for aspiring traders to have a good read of it.
  • Also I find that testing sharpens my mind teaching it what I want it to see on the charts.

Recall, the findings/action points from Part 1:

  • Refined trading session preparations (implemented last week – tick!)
  • Refined checklist/setup template (implemented last week – tick!)
  • Multiple targets – findings have not drastically changed with the added data- although I still want to have a look at the trades where price went quite far/quickly past T1 – there might be some way for me to get extra profit out of those trades – I will look at this on Monday morning (3rd March) – I tried to work this but I didn’t get anywhere with it – (i) I looked at the trades with minimal retracements, (ii) those where price just blasted through T1, (iii) considered exiting all at T1, (iv) considered using EMA methodologies from the T1 level, (v) considered using the T1-touch candle for setting new stops, (vi) considered setting T1 further away, (vii) looked for differences between continuation and reversal trades – I don’t (yet) have an answer – I am scared that not figuring this out will stop me from trading profitably – I am scared that I am missing out on profits by not having this figured out.  It’s something that will stay on my list – but I will stop looking at this for now.
  • Expectancy numbers for win rate and typical RR – no significant change as a result of added data
  • No benefit from usage of EMA data in managing trades (implemented last week – tick!)

I spent significant time over last week carrying on over the last week.  This involved painstakingly reviewing trades, collecting data, compiling chart shots, and then using a lot of pivot tables in MS Excel.  Some of the findings that I made surprised me.  In the end the findings and action points come down to this:

Summary of Findings

  • Finding #1: Trades executed at key levels are more profitable than trades executed away from key levels.  In this regard, continuation trades using key levels as targets are fine.  Continuation trades not utilising key levels in any form do not appear profitable even when trading with the trend. There were 13 such trades producing a net loss of 3.6R.
  • Finding #2: Also shown in the above table – trades with solid technical patterns have a higher– trades without a solid technical pattern have a significantly higher chance of losing:
  • Finding #3: Continuation trades appear far superior to reversal trades.  The win rate and average size of winning trades is fairly similar across the two types.  However the average size of losing trades is significantly larger (-0.97R) than for continuation trades (-0.71R).
  • Finding #4: Little seems to be gained by using multiple exits.  The difference in results is negligible, yet the average trade duration increases significantly.  Therefore keep things simple and exit entire position at T1 – however I do need to come up with a way to catch trades that just fly past T1 with minimal retracement.
  • Finding #5: Closing trades on confirmed solid EMA 10/20 XO’s do not enhance the performance of the strategy
  • Finding #6: There does not seem to be any correlation between results and weekday, time of day, stop size or trade duration.  One small insight is that trades taken after 3pm tend to be more profitable than trades taken between 8am and 3pm.
  • Hypothesis #1:  The findings of importance of key levels, of technical patterns, and of substantial differences between trade types are very insightful.  I will proceed on the assumption that these findings will yield bigger fruits than figuring out exactly how to enter and where to exit.  On that basis, I will not complete analysis on entries and exits at this point in time.  However I will start to collect detailed data on entries and exit from this coming Monday, for both live and testing trades.  The live trades will be on DAX, Cable and Oil.  The testing trades will be on 2013 historical data for Oil and Cable.

On the basis of these findings, I will adjust the trading approach as follows for the month of March (for live and testing trades):

  1. Price being at a key level and/or the key level being used as a target (for continuation trades) is mandatory.
  2. Solid technical pattern is mandatory.
  3. The solid setup must occur at the correct position relative to the key level
  4. Reversal trades can use only 0.33R, except for setups using the 123 pattern
  5. All entries are to be taken ½ the position with stop-entry, and ½ of position on confirmation.
  6. Exit entire position at T1 (since I couldn’t come up with a better approach!)
  7. Maintain detailed notes on how alternative entry and exit approaches might have worked out on each trade

Questions to be answered in next 1-2 months

  • How can I reduce the average size of losing reversal trades from 1R to 0.8R? (Note added 5th Mar: …obviously without lowering the win rate!)
  • Can I turn the really badly performing setups into an alternate strategy?
  • Sometimes the setup works, yet still produces a losing trade? How can that be turned around?

Remember:

  • Keep this in mind: Expectancies – EV per trade 0.15R – win rate 45%/45%/10% – 0.15R expectancy implies a 15% edge – this would in fact be massive (in my book)!!
  • In terms of further analysis, the analysis needs to be undertaken in steps.  The 1st step is whether price is at a key level, then whether the trade was undertaken on the correct side of the level (this reduces the trades from 130 to 103), and then whether there is a solid technical pattern.  Out of those 103 the trades with solid technical patterns (87 of them) produced 25.5R, the remaining 16 produced a net scratch result. There’s no point analysing further if the answer is not “yes” to all three of these questions.  Thus analysing the impact of aggressive and conservative entries will be restricted to these.
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s