I finished the testing using the 1H-timeframe strategy. I tested all of the currency permutations across the eight leading currencies (AUD, CAD, CHF, EUR, JPY, GBP, NZD, USD) with the exception of AUDCAD. I also applied the strategy on Gold (XAUUSD), Silver (XAGUSD), S&P 500 (SPX), and Oil – making a total of 31 instruments.
For ease of understanding, I have expressed returns in dollars, rather than in units of risk. I have assumed a trading capital of $100,000.
The testing period was from March 2015 to February 2016.
The results were as follows:
In summary, the statistics were as follows:
What does this mean?
The strategy is similar to flipping a coin – it wins about half the time, and loses about half the time (ignoring all the scratch trades that are produced in the process). However, the average size of winning trades is $1,230, whilst the average loser is only $892 – this produces a reward to risk ratio of 1.38.
Assuming that 1% of the trading capital is risked per trade, the entire trading capital is bet 4.7 times over the twelve month period (as there were 470 trades). The net return of $56,676 implies an annual return of 57%. A further way to look at is that every time a trade is entered, the expected return is $121.
This would be an excellent return on an annual basis.
Points to think about
- Although clearly profitable, the strategy’s performance is effectively flat/zero from early May’15 to the middle of Dec’15 – an entire 7 months. All the money is made in Mar’15 to early May’15, and then in Jan’16 and Feb’16. This would be quite difficult to stomach psychologically!
- The testing has not provided for adjustments in position sizing when multiple trades are open simultaneously. The above scatterplot shows that there are many sessions with 5 or more trades (in fact there is one session with 12 trades!).
- There are some additional practical nuisances which I will need to work through. No need to go into the details here.
- Are the testing results realistic? With this question I am thinking both about the profitability as well as the number of entered trades executed (I think 470 over twelve months is on the low side).
What will I do next?
I am continuing to trade the strategy live at present as I am comfortable enough that the strategy is profitable. I will keep on doing that.
Following all this testing, I will now look to do two more things. Firstly, I want to get a feel of how realistic the testing results are in estimating live trading performance. I will do this by scrutinizing the charts of March’16 and April’16, comparing my live trades with a a further set of test trades over the same period as well as with a review of spotting all the setups that I should be taking. After that, I want to investigate the testing data to explore potential reasons why the strategy seems to work in some months, and not in others, or whether the variation from one month to the next is purely random.