Building your own trading strategy from scratch is difficult. It's a lot easier to find a trading strategy that someone else is trading successfully and tailor it to fit your personality.

With that in mind, I always keep my eye out for new trading strategies and test them out to see if they work or not.

I found this strategy in a Kindle book and it looked like it could work, so I gave it a test. In this post, I'll show you how the strategy works, the testing plan that I created and the results of my testing.

At the end of this post, I'll show you potential upgrades to this strategy and where you can see my additional testing results with this method.

The Trading Method Explained

This trading strategy comes from the book MT4/MT5 & TradingView High Probability Forex Trading Method by Jim Brown. I don't know Jim and I wasn't paid to review this book.

This book was purchased with my own money.

I actually had this book in my Kindle library for about a year before I got around to reading it. Something about it drew me in, but the spammy title also put me off a little.

When I finally opened the book, the trading method made sense and I read the whole book in 1 sitting.

It's an easy read with decent pictures to illustrate the concepts.

Jim is the inventor of this trading strategy and he uses it to trade for a living. Since this is Jim's method, I won't go into all of the details.

You'll have to buy the book to get all of his trading methods, insider tips and download the custom indicators that come with the book. However, I'll show you enough so you can see what I did.

If you like my results, you get the book. If not, you can look for something else.

On the upside, the basics of the trading strategy are simple.

It's made up of 3 moving averages and 2 momentum indicators. The method looks for changes in momentum and marks the chart at points where you can potentially get in at turning points.

As you're looking at a sample chart, you can probably tell that you can use the signals in a couple of different ways. You can either take trending trades or countertrend trades.

I decided to take trend trades only in my test.

The Testing Plan

The great thing about this book is it shows you some excellent entry methods. On the downside, it's light on exit strategies.

In fact, there are no exit strategies.

Jim gives some suggestions on how you can potentially exit a trade, but nothing concrete.

That's one of the biggest downsides of many otherwise useful trading books. They don't give you a complete trading strategy.

There could be many reasons why the author chose not to do this. Maybe his exits are based on reading the market, instead of having set rules.

Nothing wrong with that.

But from the standpoint of someone reading the book and wanting to learn how to trade, it leaves the reader hanging.

That's why I'm sharing my results here.

However, the book does give you a great starting point to create your own strategy.

The other downside is that this book doesn't give you stats on the trading method.

Again, I get why authors do that. They don't want to create expectations or get angry emails from readers who aren't getting the exact same results due to a multitude of reasons that would take a few hours to diagnose.

Therefore, it was up to me to come up with my own exit strategy.

But where to start?

I've found that the easiest way to start testing a trading system that doesn't have set exits is to use a 1X risk profit target. So if the stop loss is 100 pips, then the take profit will also be 100 pips.

This won't work in all cases, but it's a quick and dirty way to help me see if a method has potential or not.

So here's the trading plan that I put together to do my first backtest of the concepts in this book.

• Pair: EURUSD
• Timeframe: Daily
• Risk per trade: 1%
• Entry: Trend trades only. Wait for moving averages to stack up in order. Short to long (top down) in an uptrend, long to short in a downtrend. This is very similar to other trend trading methods that use multiple moving averages. Once the moving averages are stacked in the correct order, I wait for a dot on the chart, while price bounces off one of the moving averages. Red dots are sells and green dots are buys. Open the trade as soon as the candle closes.
• Stop loss: Set the stop loss on the other side of the last swing.
• Take profit: 1X risk
• Trade management: None, set and forget.

Long Example

In this long example, I entered a trade at the green dot marked by the arrow. It was a trade that hit the profit target easily.

As you can see, this trade made much more after it hit the take profit. I'll get into more about how I was able to take advantage of these “extra” moves and increase the output of this basic strategy, later in this post.

Short Example

It's a similar idea here. Enter on the close of a red-dot candle, when the moving averages are lined up correctly and price bounces off the short, medium or long moving averages.

Testing Method

I would normally use Forex Tester for a strategy like this, but the custom indicators are only available for MT4, MT5 and TradingView.

Great.

So I fired up TradingView and a spreadsheet to start backtesting. This method takes a little longer than using Forex Tester, but it gets the job done.

The data in TradingView goes back to 2003, so it's enough to do a solid test.

Testing Results

• Pair: EURUSD (daily)
• Trades: 84
• Win rate: 75.0%
• Total return: 42%
• Max losing trades in a row: 2
• Max drawdown: -3%
• Testing period: May 7, 2003 to January 19, 2022 (~224.5 months)
• Average return: 0.18% per month

Video Version

If you want to see the concepts in action, watch this video.

Final Thoughts

I consider this a good test.

The strategy works.

A max drawdown of 3% is very good.

But this is just the starting point. There might be ways to increase the return of this strategy. 

If you want to learn all of the tips and tricks that Jim teaches, get the book here.

To get all of my future updates where I test new and potentially more profitable versions of this strategy, join my private membership group here.

The post A Simple 75%+ Win Rate Trading Strategy for Forex Trading appeared first on Trading Heroes.

As you probably know, I've been a big fan of Forex Tester, almost since the beginning of this site.

But curiosity started to creep in…

Is there something better out there?

I've been using Forex Tester because it works well, so I didn't have the need to look for other software solutions. But I believe that it's always a good idea to periodically review what you are doing in life and in trading, and make upgrades…when it makes sense.

So I decided to revisit the Forex backtesting software landscape this year and take a good hard look at all of the viable options out there.

Maybe there's something that's better, and at a cheaper price. If there is, then I would love to recommend it to my readers as a better solution…or at least a viable alternative.

To that end, I researched all of the manual Forex backtesting software solutions on the market and tested them with the same trading strategy.

Learn what I discovered, in this video:

Update: I recently discovered a new software that I feel is better than all of these options.

Learn about it here.

Rules for this Challenge

I wanted to test trading products that would be affordable for most traders, so here's the criteria I used:

1. The software can be purchased for less than $200 total (for one-time downloads), or less than $200 per year (for subscription products)
2. The software must be able to be used for manual backtesting
3. The software must be able to backtest the Forex market

From there, I'll backtest a trading strategy that I know nothing about, then reveal the results.

Actually doing the backtesting will reveal a lot about the software.

The Challengers

Based on the criteria above, I rounded up the following challengers:

• Forex Tester 4 (paid, one-time)
• Think Trader, formerly Trade Interceptor (free)
• Soft4X (paid, one-time)
• MetaTrader 5 (free)
• TradingView (free and paid, subscription)
• NinjaTrader (free)
• Excel (paid, one-time)

UPDATE: Forex Tester 5 is now available. Watch the review video here.

You might have a few questions about these products, so I'll clarify my choices.

Yes, the regular price of Forex Tester 4 is $299. However, they frequently have sales where you can get it for less than $140, which qualifies it for this test.

You might think that Excel doesn't belong on this list. I'll explain why I've included it in a bit.

I'm using the Pro version of TradingView, which is currently less than the $200 per year minimum. If you upgrade to the higher plans, then you would be over $200 per year. The price might go up in the future, but it currently qualifies, as of the original writing of this post.

The Categories

Here are the categories that I'll be judging these software solutions on:

1. Overall ease of use
2. Value for money
3. Data availability
4. Usability for manual backtesting
5. Best overall manual backtesting software

Alright, now that we have that out of the way, let's take a look at the strategy that I'll be testing.

The Trading Strategy

I've never tested moving average crossovers because they didn't make sense to me. My belief was that as soon as two moving averages cross over, you've already missed the easy part of the move.

…or so I thought.

…but what if they really do work?

I'm willing to keep an open mind, until I get conclusive proof.

That's why we test. 

So I approached this like a new trader and I Googled:

“moving average crossover strategy forex”

The first legit-looking search result that came up was from the DailyFX website.

When I clicked on the link, I was taken to the site with the trading strategy “rules.” This strategy was a perfect test because it's traded on the daily chart, so I could test it quickly.

The entries and exits are fairly straightforward, so you can test it too and verify my results.

…and it also highlights a few key weaknesses in most of the free trading education on the internet.

You can see the original strategy here.

According to the blog post, the following are the “rules” for the strategy. I use quotations because what I found wasn't a complete set of rules.

For future reference, the title of the post is: “Learn Forex: Trend Trading Rules with Moving Average Crosses.”

This is something important to pay very close attention to. Most of the blog posts, YouTube videos and free eBooks on the internet aren't giving you the rules for a trading strategy.

They are giving you trading ideas, guidelines or concepts. 

Ideas are a good start, but too many new traders think that this is a complete strategy, don't test it, and fill in the blanks with their own rules.

…and they wonder why they lose money.

Guidelines From the Post

Anyway, back to the DailyFX guidelines. Here's what I gathered from the post:

• Use the 50 and 200 moving averages, I'm assuming the simple moving average
• When the 50 crosses over the 200, then enter in the direction of the crossover
• Set the stop on the other side of the 200 SMA
• Trade this on the daily chart

Notice that there are key elements missing from this trading plan.

What I Added

Here's what I had to add, to make this a complete trading strategy. I added as little as possible, to make this a tradable plan. There are other tweaks that I would ordinarily make, but let's start simple.

• Risk 1% per trade
• Take profit when price closes on the other side of the 50 SMA
• Set and forget, no adjusting of the stops or take profits once the trade is entered

Now we have a complete strategy.

Remember that most trading “strategies” out there aren't really strategies because they are missing a lot of key definitions. You can use this worksheet to define a complete strategy.

Finally, I'm going to be testing this strategy only on the EURUSD. Since I'm going to be testing this strategy many times with different data sources, this will also give us a very good indication of if this strategy works or not. 

Example Charts

It helps me to have a visual of how this strategy works. So here are a couple of examples on a chart.

Here's a long example:

A short example:

Testing Results

Once I had a trading strategy to test, I started testing it on each software product. I also tracked the time that it took to test the strategy, so you can make software decisions based not only on cost, but on time savings.

You can see complete recordings of the tests in the video at the top of this page.

Here's a breakdown of the results from each test.

ThinkTrader

• Win rate: 39%
• Return: 16.7%
• Number of trades: 23

Learn more about TT here.

NinjaTrader 8

• Win rate: 50%
• Return: 38.4%
• Number of trades: 32

Learn more about NT8 here.

MetaTrader 5

• Win rate: 46.1%
• Return: 33.6%
• Number of trades: 26

Learn more about MT5 here.

TradingView (paid, Oanda data)

• Win rate: 47.1%
• Return: 34.4%
• Number of trades: 21

Learn more about TV here.

Soft4X

• Win rate: 28%
• Return: 61.8%
• Number of trades: 25

Learn more about Soft4X here.

Forex Tester 4

• Win rate: 33%
• Return:15.2%
• Number of trades: 21

Learn more about FT4 here.

Get the best Forex Tester alternatives here.

TradingView (free, FXCM data)

• Win rate: 38.6%
• Return: 24.9%
• Number of trades: 102

Testing Analysis

So all of the tests were profitable, but they had different results. Still, I would say that this strategy has an edge.

But you may be wondering why the results were so different between the different software products.

Let's take a look at why this could be and how this affects your confidence in backtesting results.

There are several reasons why the results could have been different:

• The data is always different from broker to broker and maybe that's just how it worked out.
• Since I only tested once per software program, I might have made some execution errors. This is why it's important to test more than once.
• There may have been some settings that were different between the platforms.
• The number of trades was relatively low, so maybe the averages haven't had time to work out yet.

This difference in results also brings up an important point. You should test with data from different brokers and currency pairs, to see how robust a strategy is.

Backtesting software that only allows you to use 1 or 2 data sets won't give you the full picture of how well a strategy works. 

But overall, this strategy was profitable across the board. So if this strategy interests you, it might be worth checking out. 

Be sure to test it a few times with different data feeds before moving it into forward testing.

Forex Backtesting Software Rankings

Testing Efficiency

Before I get into the rankings, I'll share with you my efficiency rankings.

I measured the efficiency of each software in days of historical data tested, per minute of backtesting time. 

According to this measure, Soft 4X came out on top.

But remember, faster isn't always better. You can miss trades when you go too fast. 

I actually like the fact that Forex Tester 4 has a reasonable top speed, so you don't overshoot trade entries. In the end however, it's up to you to set a speed that works for you. 

Since this was a simple and straightforward strategy, I could go really fast.

On this other hand, if this were a more complex strategy, I would predict that I would have to go slower and the efficiency rating would be very similar across the board.

Data is data however, and those were my results for this strategy.  

Now that I had a chance to try all of the backtesting platforms, here are my final rankings. I'll also give you some analysis on why I chose the top two in each category.

If you want to hear the complete analysis of all the lists, watch the video at the top of this page.

Overall Ease of Use

1. TradingView (paid)
2. Forex Tester 4
3. MetaTrader 5
4. ThinkTrader
5. Soft4X
6. TradingView (free)
7. NinjaTrader 8

TradingView is such a pleasure to use. You can use it on almost any device with a browser and you don't have to install any software. That's why it's my favorite charting and trading platform.

Forex Tester 4 is second because it's very well integrated, but it still only works on Windows, which is frustrating. You can also download a lot of different data feeds from within the program, making it much more useful than the other software on the list.

Value for Money

1. Soft4X
2. Forex Tester 4
3. ThinkTrader
4. MetaTrader 5
5. TradingView (paid)
6. NinjaTrader 8
7. TradingView (free)

Soft4X is currently under $100 and the best value for money. It provides 2 data download sources built-in, which is good enough for most people to get started. You can also upload your own data into MT4, if you want to test with data from other brokers.

The only downsides to Soft4X are that it's little clunky and it doesn't automatically save your work. If you don't hit the save button before you close, you will lose all of your data.

But Soft4X does automatically track your backtesting trades, which is a huge bonus. It also provides a MT4 report for your trades, which is really nice.

Forex Tester 4 is slightly more expensive than Soft4X, when it's on sale. However, it is a much more integrated solution and easier to use, so I feel that it's worth the extra cost.

If I'm only considering value for money however, Soft4X is the better choice.

Data Availability

1. Forex Tester 4
2. TradingView (paid)
3. TradingView (free)
4. Soft4X
5. MetaTrader 5
6. NinjaTrader 8
7. ThinkTrader

Forex Tester's data service allows you to download data from multiple brokers, right in the software. That alone is a huge time saver because you don't have to search for third party data, then store it on your computer.

However, if there is third party data that you would like to use, then you can upload that into Forex Tester to. It really is the best solution.

TradingView gives you instant access to data from multiple Forex brokers, which is awesome. But you cannot upload your own data, so that's why it's at number 2.

Usability for Manual Backtesting

1. Forex Tester 4
2. Soft4X
3. ThinkTrader
4. TradingView (paid)
5. MetaTrader 5
6. NinjaTrader 8
7. TradingView (free)

Forex Tester still wins in this category. It's a much more integrated solution, it tracks your backtesting trades automatically and it has most of the frequently used indicators.

You can also have custom indicators programmed for you (find a programmer here), and you can even test automated strategies.

Since Soft4X is a plugin to MT4, there are limitations to the software. But since it also saves you from using a spreadsheet to record trades, it's a great option.

Learn about the best Forex Tester alternatives here.

Best Overall Software

1. Forex Tester 4
2. Soft4X
3. TradingView (paid)
4. MetaTrader 5
5. ThinkTrader
6. Tie: NinjaTrader 8 and TradingView (paid)

Forex Tester 4 is still the best Forex backtesting software for manual testing. I can't say that I'm surprised.

However, I'm extremely surprised (in a good way) with Soft4X. 

It has matured into a very viable backtesting option. If you're strapped for cash, or if you aren't sure if Forex trading is for you or not, then it's totally worth checking out Soft4X.

The only caveat to that statement is that I haven't stress tested Soft4X, like I have Forex Tester. I've literally tested tens of thousands of trades with Forex Tester, but only a handful with Soft4X.

In addition, since MetaTrader is phasing out MT4, who knows how long we will be able to use Soft4X, because they don't have a MT5 version yet.

So, if you want the absolute best product on the market, Forex Tester 4 is it. 

Excel

I mentioned in the beginning that I would explain why I've included Excel on this list.

There are certain individuals out there that believe that Excel is the best solution for manual backtesting.

So if you come across anyone that insists that Excel is a good manual backtesting solution, then point them to this post.

Excel can be used for testing some automated strategies.

But it's totally worthless for manual testing. There are no charts and you aren't practicing the mechanics of entering trades. 

Backtesting software can also be used for trading practice, much in the same way that a boxer goes to the gym to train.

Excel cannot be used for that either.

Final Thoughts on the Best Manual Backtesting Software for Forex

Whew, so that's it!

This took a lot of time and research, but it was worth it.

In the end, Forex Tester is still the best software out there for manual backtesting. 

But I'm glad that I also found Soft4X. It's a good software solution that has some drawbacks, but can be a good solution for some people.

I'm just a little nervous that it only works on MT4, when that version is being phased out.

I also found another trading strategy that could have an edge. More testing would have to be done on this strategy, but it looks promising.

Trade well!

The post Best Forex Backtesting Software for Manual Testing (Comparison) appeared first on Trading Heroes.

Is the RSI indicator good for swing trading? Let's find out…

In this post, I'll show you my actual results from backtesting the RSI Divergence strategy on 27 currency pairs. The test had an overall +235.39% cumulative return, showing that this could be a viable RSI strategy for swing trading.  

But remember that good backtesting results do not guarantee success in live trading. Always test strategies for yourself, never trust anyone that says a strategy works (including me). You may have a different way of looking at the market, which will cause you to trade it in a different way.

Backtesting also helps to:

• Show you if a strategy has a historical edge and works for you
• Give you a reference point to compare your live trades
• Build your confidence in trading a strategy
• Give you practice with a trading strategy (even when the markets are closed)

Just to be clear, this was a manual backtest.

I might try to automate this strategy (or do Incremental Automation) in the future, but I was looking for a manual trading strategy, so that's how I tested it.

Alright, now let's get into the details…

The RSI Divergence Swing Trading Strategy

This strategy uses RSI Divergence to identify potential trades. To learn the basics of divergence, read RSI Divergence explained.

If you want the complete trading strategy plan that I tested, you can get it in this blog post. For a detailed description of how the RSI indicator works, read this blog post.

There are some trade entry filters that might make my entries different from how other traders trade it, so be sure to reference the strategy blog post if you have any questions.

I only tested this strategy on the daily chart.

Testing Tools

For this round of testing, I only used 2 tools:

• Forex Tester
• Numbers for Mac

Forex Tester speeds up the process by automatically recording your trades, calculating stats and gives you an easy way to download historical data.

Trading Heroes readers get a discount on Forex Tester. Click here to get your discount coupon.

You can also use other platforms like TradingView or MT5, but the process will be slower because you have to update a second spreadsheet to record your trades.

I only used Numbers to record the results of testing, so I could get totals and averages.

Historical Time Period

I tested each pair with as much historical data as I could get my hands on.

Most of the major currency pairs were tested from 2003. The crosses and more exotic pairs were tested from 2006, and a couple started as late as 2012.

That's the data that Forex Tester had available, so that's what I used.

Testing Time

Since this test was done on the daily chart, each pair could be tested in about 90 minutes. So the total test took about 40 hours. 

When testing the daily timeframe and higher, it's possible to test all of the data in a reasonable amount of time, so I do a complete test.

If I'm testing a lower timeframe, I usually “spot test” certain date ranges to get a good feel for how well the strategy works, without wasting time.

The most important thing to note here is that most trading strategies out there are easy to learn.

However, most new traders don't understand the additional work that goes into mastering a trading strategy.

Testing and practicing a strategy takes time. 

Anyone who tells you that you can learn a strategy today and be successful tomorrow is straight-up lying to you. 

So if you are serious about becoming a successful trader, you need to put in the time to test and practice.

Overall Stats

Before we start digging into the results from each currency pair, here are the overall stats:

• Average win rate per pair: 78.74%
• Average return per pair: 8.71%
• Average number of trades per pair: 14
• Total number of trades: 373
• Total return: 235.29%

Since this is a swing trading strategy, a lower number of trades per year is expected.

The yearly return may also seem a little low to some traders.

Before you write off this strategy however, consider this:

• You can always add more strategies later
• This might also work on lower timeframes
• You might be able to add more currency pairs
• You might be able to increase the return on each trade

But these initial results are solid and worth moving forward with. Now let's get into the specific results by currency pair.

Backtesting Results

Win Rate

First let's look at the win rate. The win rate for this strategy was pretty high, averaging about 79% per pair.

So this is potentially a good strategy for traders who like to win a lot.

In the future, I could test going for bigger wins per trade, but at a lower win rate.

However, for now, I like these results, so I'm going to move forward.

Total Return

Now let's look at the total return for each pair.

Again, these returns look low because if you divide each of them by the number of years tested, you get a really small number. However, if you add all of the pairs together, the average is about 13% per year.

Not too shabby for one simple swing trading strategy. Add a couple more strategies with a similar return and you can potentially beat many fund managers.

Of course, you could filter out some of the lower performing pairs, to potentially boost the performance of the strategy.

Number of Trades

Finally, let's take a look at the number of trades that were executed for each currency pair.

Some people may say that this isn't a valid test because there weren't enough trades per test to achieve a high enough level of confidence. There is some validity to that argument…if I only tested 2 or 3 pairs.

However, when you test the same strategy across 27 pairs, you can get a big enough data set to make some statistically valid conclusions. Since there were 373 trades in this round of testing, that's more than enough trades to warrant moving on to the next step of forward testing (or beta testing).

How to Get RSI Alerts

Luckily it's easy to setup alerts, when trading RSI. This means that you don't have to sit in front of your computer all day, in order to spot RSI trades.

There are 3 simple steps to using an alerts indicator for RSI divergence trading:

1. Install the indicator and set it to your favorite overbought/oversold settings.
2. When the indicator sends you an alert, but that currency pair on your watchlist.
3. Check your watchlist pairs at the close of every candle, if possible. When there is divergence, take a trade.

You can download easy-to-use RSI indicators here.

Final Thoughts on this RSI Strategy for Swing Trading

Since my testing shows that RSI Divergence is potentially a good swing trading strategy, the next step will be to put these into forward testing to see how well this works.

If you want to discuss RSI Divergence every week, join the private group. It's free and can help you find new setups and learn more about this strategy.

Remember not to trade this live, just because backtesting says that this is a good strategy. Backtesting does have its limitations, which I talk about in detail here.

Always do the forward testing step before going live.

The post RSI Strategy for Swing Trading: 27 Pairs on Daily Chart appeared first on Trading Heroes.

Alright, now it's time to see some real results!

Forget the “theories” that you see on other sites. Doing a complete test is the first step to finding out if a strategy actually has an edge.

In the first part of this series, I explained how the RSI indicator works.

Part 2 gave you 3 commonly taught ways to trade the RSI, with complete trading plans. These are methods that can be found on many free websites.

…now it's time to see what happens when you actually test these ideas.

Do these strategies really have an edge, or are they just trading myths?

Let's find out…

Before we get started, remember the Trading Heroes Keys to Backtesting Success:

1. Never trust what you read on the internet about trading strategies. What works for another trader may not work for YOU. So always test strategies for yourself and get hard data.
2. Always test your trading strategies before risking real money. 
3. Past performance does not guarantee future results. But successful trading is based on recognizing repeating patterns, so testing is essential to success. 
4. If your return with one strategy does not meet your goals, remember that you can add: markets, timeframes, pyramiding and/or more strategies. Don't give up on a consistent strategy just because the return is low. 
5. One little tweak in a trading plan can change it from unprofitable to profitable. So test different ideas. 
6. Trading strategies are easy to learn, but hard to master. You need to put in the work: testing, screen time, journaling and reviewing. 
7. Consistently profitable trading is an extremely valuable skill. If you can master trading, there's always the potential to trade other people's money (OPM). Don't give up just because you think that you don't have enough money. 
8. Your live trading results may vary from your testing results. Part of the learning process is to figure out why. 
9. You are 100% responsible for your trading results. These testing results do not guarantee success. 

If you have never backtested, read this blog post.

I tested these strategies with Forex Tester.

But you can also use other programs like MT4, NakedMarkets or TradingView.

RSICross Trading Strategy

The first strategy that I gave you was the simplest way to trade the RSI. This is the version that I learned way back when I was first learning to trade.

You can get the complete RSICross trading plan here. 

From a logical point of view, this strategy makes a lot of sense.

The RSI indicator detects instances where price is at an extreme…over the last X number of candles.

So it makes sense that you could probably catch a few price reversals that way.

But we're interested in data and not theories, so let's get into the numbers…

Backtesting Results

(Screenshot from Forex Tester)

Here are the results from this specific trading plan:

• Currency pair: EURUSD
• Chart timeframe: Daily
• Number of days tested: 6,032
• Number of trades: 102
• Win rate: 44%
• Return: -11.38% 
• Max consecutive winners: 3
• Max consecutive losses: 5

So if you followed this strategy from some random blog post you found on the internet, my testing shows that you would have lost over 11% over 16 years.

Obviously, it's good to know that the strategy doesn't have an edge, before you invest time, energy and money into the strategy.

Thoughts on the RSICross Strategy

This just goes to show that ideas that seem logical don't always work in trading.

It's really important that you test and find out for yourself. 

Even though this specific strategy didn't work, there may be other versions of this strategy could work.

Here are some ideas:

• One idea would be to increase the lookback period so trades are being taken on more extreme moves.
• Dropping down to a lower timeframe could also potentially improve results.
• Targeting a larger profit target can improve the return on some trading strategies.
• Using some sort of pyramiding technique could help this strategy increase the return per winning trade.

Stay tuned for more RSI tests in the future. 

Alright, now let's move on…

RSIDive Trading Strategy

The next commonly taught strategy is RSI divergence. I named this strategy the RSIDive, for my own testing purposes.

You can get the complete RSIDive trading plan here. 

I had done some RSI divergence testing before, so I knew that this strategy would probably show positive expectancy.

But you never know until you actually do the test…

Backtesting Results

(Screenshot from Forex Tester)

Here are the results from this specific trading plan:

• Currency pair: EURUSD
• Chart timeframe: Daily
• Number of days tested: 6,032
• Number of trades: 26
• Win rate: 73%
• Return: +12.8% 
• Max consecutive winners: 7
• Max consecutive losses: 2

Now we're talking! 

There are two things that you probably notice about these results.

First, the average monthly return is pretty low.

However, remember that this was just one currency pair on one chart timeframe.

You can test more pairs on more timeframes to potentially boost the overall return.

Second, this strategy looks quite reliable.

The win rate is high and it never lost more than 2 trades in a row.

That's fantastic.

Now that may not happen exactly in live trading, but the potential is there, based on historical data.

So all-in-all, this is a strategy that is worth testing further. I like this strategy and am currently doing more testing on it.

Thoughts on the RSIDive Strategy

Since this is a fairly high win rate strategy, there are things that could possibly be done to increase the return:

• Add a pyramiding element to the entry
• Increase the profit target
• Add a second position to capture the big runs

Keep an eye out for more RSI divergence tests in future blog posts.

If you want to sign up for the email list and be updated on future test results, click the button below.

You will also get a free book on how to choose the best trading strategy for your personality.

On to the next RSI trading strategy…

RSI50 Trading Strategy

The final RSI strategy is a little different.

This strategy uses the RSI 50 level, instead of the 70/30, like most strategies use.

You can get the complete RSI50 trading plan here. 

I've never done any testing with this flavor of RSI trading, so I didn't know what to expect.

It didn't make logical sense to me, but all that matters is the data.

So let's get into it…

Backtesting Results

(Screenshot from Forex Tester)

Here are the results from this specific trading plan:

• Currency pair: EURUSD
• Chart timeframe: Daily
• Number of days tested: 6,032
• Number of trades: 55
• Win rate: 71%
• Return: +26.05% 
• Max consecutive winners: 7
• Max consecutive losses: 3

OK, I was totally not expecting that!

I was almost sure that this strategy would not work.

It just goes to show that you can't make any judgements about trading strategies until you see some actual data. 

Thoughts on the RSI50 Strategy

Like with the other strategies, this one has a fairly low average return per month.

However, the return can potentially be increased by trading it on more pairs or more timeframes. You can also consider adding a pyramiding element to increase the return per trade.

Even though it was profitable, I'm personally not a huge fan of this strategy. I can see the potential to get whipsawed a lot because you really have to be in tune with the prevailing trend.

So I'm not going to develop this strategy further. 

This is just my own personal preference, at this time. I may choose to work on this strategy in the future. 

It's a perfect example of not trading every strategy out there. Only develop the ones that work with your trading personality.

If you're a trend trading personality and want to do more testing, fire up your favorite backtesting software and work on it yourself.

Conclusion

So two out of the three methods where profitable in backtesting on the EURUSD daily chart.

I wasn't expecting that.

It goes to show that backtesting is the most efficient way to find out if a strategy has an edge. Imagine if you invested hundreds of hours in a demo account to come to the same conclusion.

Backtesting speeds up the process dramatically. There are limitations to backtesting, however it is the best first step in your trading journey.

I'll keep on testing and share my results.

But remember…

My results don't matter. They are simply a starting point for your own exploration.

All that matters are the results that YOU get. After all, you will be the one trading your money…not me.

So take responsibility for your results and start testing for yourself. 

The post RSI Trading Strategy Results: 3 RSI Strategies Backtested appeared first on Trading Heroes.

There are a lot of opinions on the internet regarding what works in Forex trading and what doesn't.

But when you peel back the covers, one simple fact remains…

They are almost all opinions. 

My mission is to help you to stop relying on internet opinions and give you actionable processes that you can use to start to collecting hard data on what works for you. 

So in this post, I'm going to share with you my backtesting results from testing the Trending Pin Bar v2 strategy.

As with all Backtesting results, remember to be mindful of the limitations of backtesting.

This is a key step in the process of learning a trading strategy, but it cannot be used on its own.

Results Summary

This test turned out quite well.

Here's the breakdown:

• Historical data tested: Jan. 2001 to Aug. 2018
• Currency Pair: EURUSD
• Timeframe: 4-hour chart
• Win Rate: 78%
• Total Compounded Return: 446.13%

All backtesting was done with Forex Tester.

Keep in mind that this is just one currency pair. If this works for other pairs (which it may not), the total return could give me a very viable trading strategy.

The Rules of this Backtest

Pin Bars are touted by some online educators as simple trading signals that almost guarantee profits.

But nothing could be further from the truth.

They need to appear in the right place to be effective. Even then, your results will vary by how good you are at picking the right setups. This means that you need to get a feel for the price action before the Pin Bar and use your discretion before you enter a trade.

That said, I've tried to make my entry criteria as concrete as possible.

Here are the rules for version 2 of my trading strategy.

• 1% risk on each trade
• Looking for strong momentum in direction of trend before pin bar
• Tail of pin bar has to be at about 2/3 of total body
• Enter as soon as candle closes
• Set and forget, no moving stops
• Stop loss about 5 pips above/below pin bar
• Take profit at next major support/resistance level
• Pin bar should print on previous S/R level or poke out of consolidation area.
• 1 position per trade, no stacking
• Must have minimum 1R available
• If there are no reference points to set take profit, set it at 1R + 5 pips

Here's an example of a good short.

Results Breakdown

Once I have a good overall win rate and return, it's time to dive into some simple optimizations. An easy way to get this data is to throw it into Naked-Markets. But you can also use Excel.

Here what I discovered…

Day of the Week

The first thing I look for is if there is any correlation between day of the week and losses.

This graph shows that I should avoid Mondays because the return vs risk is very low. Every other weekday looks good, so I'm going to take trades on those days.

I'll monitor my live trading results to see if this actually lines up in live trading, but this is a good starting point.

Hour of Day

Next, let's see if there are any times of the day that I need to avoid.

As you can see, the time between 1900 GMT and 2300 GMT are times when I shouldn't enter trades. This equates to between 12:00 pm and 4:00 pm Pacific Time.

This makes sense because this is when New York is winding down and Asia is gearing up.

Max R Analysis

Finally, I want to find out how much profit I'm potentially leaving on the table. In order to figure this out, I'm going to do a Max R Analysis to see the maximum R that I could have got out of every winning trade.

Here are the results:

This graph shows me that I'm actually leaving a lot of potential profit on the table. The average maximum profit on all my winning trades was 6.7R.

I can use this information to potentially increase my profit targets and make more per trade. Instead of targeting a minimum of 1R, I will consider targeting a minimum of 2R.

I'll also have to look at the screenshots of these trades and figure out if there's a good way to trail a stop loss on these trades. I could use a support/resistance trailing stop or an indicator like the Parabolic SAR.

Conclusion

I'm sharing these results to show you the process of it takes to truly understand your trading strategy and develop rock-solid confidence in it.

All too many times, websites or courses show you one video on how to trade a strategy and expect you to trade it successfully.

That's impossible.

Just like any other skill, you need to start small and practice it, in order to become proficient. You can either do that by losing money in the live markets, or build a solid foundation through backtesting and forward testing.

If your Trading Personality matches a trending, swing trading strategy, then this strategy could be for you.

But don't take my word for it.

Backtest it for yourself and get your own data. 

You can use Forex Tester, TradingView, Metatrader or good ol' pen and paper. It doesn't matter which tool you use, just get started.

To get step-by-step tutorials that show you the entire process of backtesting and forward testing, join TraderEvo.

Disclaimer: Some links on this page are affiliate links. We do make a commission if you purchase through these links, but it does not cost you anything extra and we only promote products and services that we wholeheartedly believe in. TradingHeroes.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

The post Backtesting Results: Trending Pin Bar (TPB) on $EURUSD H4 Chart appeared first on Trading Heroes.

In a previous backtesting post, I revealed the results from a backtest of Trending Outside Bars.

That strategy yielded an average 75% win rate and an average 18% return on seven pairs, over about 16 years.

Yeah, those results won't buy you a Ferrari any time soon.

But I presented the data that way to make a point:

It can be easy to give up on a trading strategy in backtesting when you don't make huge return every year.

That can be a big mistake, as I'll demonstrate in this post.

Reminder: Backtesting has its limitations, but it is a great start for building a trading system.

Most of the successful traders I know attribute their success to backtesting, but there are different ways to learn to trade. Past performance does not guarantee future results.

The Leverage of Compounding Forex Profits

You have probably read a lot about the magic of compounding Forex profits with a bunch of theoretical numbers thrown into a spreadsheet.

That's a great start, but let's look at a real life example from a round of testing that I did.

As I mentioned in the beginning, the results I presented only included seven pairs. Many traders test one pair, then they get discouraged that they only made 18% over 16 years.

So they give up and move on to the next system. Welcome to the Trading Silodrome.

But they miss two important leverage points:

1. Compounding
2. Trading more pairs/timeframes

Here's how that 18% can turn into 2,381%…

Test Results with Compounding

After I did the test with seven pairs, I expanded the test to all 27 currency pairs that I want to trade live. This can potentially multiply the advantage of the system over several currency pairs. The results were quite good, but still not impressive without compounding.

This is a screenshot from my backtesting journal spreadsheet.

Again, averages can kill your motivation. The average return for all the pairs dropped to 12.81%. On the bright side, the average win rate increased to 77.33%.

If you added the returns, as I did above in the spreadsheet, you would get a sum of 324.32%. That could cause you to give up right now. 324.32% divided by 16 years is 20.27% per year.

Pretty good, but probably not what most traders are looking for.

However, that only shows you part of the potential of the system. You need to take compounding into consideration. 

Before we move on, some of you will argue that this next result isn't accurate either because most traders will have to withdraw money for living expenses, taxes, etc. Yes, that is true and you will need to build this into your calculations later. At this point, I simply want to demonstrate the full potential of the system. This can be the key realizing that you have a viable trading system, instead of giving up too soon.

Combine All Results

The key to getting your compounded return is to put all of your trades into one spreadsheet, so you can create your own calculations. Doing this will also show you your maximum number of losing trades, max drawdown, etc. That can be tough to visualize when you are only testing one Forex pair at a time.

In Forex Tester, you can simply export your backtesting results to a CSV file, then import it into your favorite analysis software, like Excel.

Then sort your file by trade open date.

Now you can set variables for your percent risk per trade and your starting balance. Then you can change those settings to see how that would affect your end result.

If you need help setting this up, here's how to do it:

• Calculate the R value for each trade: (stop loss – entry price) / (close price – entry price). I wouldn't worry about the figuring out the decimal points for JPY pairs and buy vs sell. You can use the absolute value of that calculation and use another result field to add a plus or minus. For example, if you have a 3R absolute calculation, you could look at the $ amount profit/loss to determine if it should be a +3R or a -3R.
• Multiply the R calculation above by a percent risk per trade field that you create. So if you are risking 1% per trade and a trade makes 3R, then you would make 3%.
• Then add or subtract the percentage lost/gained on each trade from a running balance column that you create. I usually start with a $10,000 starting balance.

The Compounded Return

Then you will have a total compounded return at the bottom of your spreadsheet. This is the number that you should be interested in. 

When I compounded this system, taking 1% risk on each trade, the final result was 2,381.48%. That works out to be 11.97% per month, on average.

Now that's more like it!

When I change the risk per trade to 2%, the total return changes to 53,465.93%.

That is some serious compounding.

Remember, you cannot simply risk more to make more.

You have to find the balance between a good return and being able to handle the drawdowns.

With more reward comes more risk.

Conclusion

This is just the first step in the Trading System Launch process.

Remember that it goes:

Backtesting > Forward Testing > Live Trading

The actual results you get in live trading will probably be a little different from your backtesting.

But it is very important to start with backtesting so you know if your system has positive expectancy or not.

Before you give up on a trading system, remember to factor compounding into your calculations.

It could make all the difference. 

The post Compounding Forex Profits: A 2,381 Percent Example appeared first on Trading Heroes.

The results are in!

There are a lot of trading systems available on the internet. But most of the blog posts and YouTube videos out there only show you a few well-chosen examples and stop there.

Those resources are fantastic for education, but they are just the tip of the iceberg. 

What you do after you learn a trading system, will determine if you will succeed or not.

That is why I'm showing you the actual testing results of a very specific trading plan.

You can get the complete trading plan for this backtest here. This is the TOB strategy, version 1.

Remember: Backtesting is super valuable, but it does have limitations.

Here we go…

Currency Pairs Tested

I actually backtested 27 pairs in Forex Tester, but analyzing the results of every pair would make this blog post way too long.

So I'm going to show you the results for the major currency pairs.

• AUDUSD
• EURUSD
• GBPUSD
• NZDUSD
• USDCAD
• USDCHF
• USDJPY

The results of these pairs is a good indicator of if the trading system will work or not, since these are they most liquid pairs. These pairs were tested from January 2001 until present.

Remember, there are limitations to Backtesting, but it is the essential first step to developing your trading system. It is also important to test a pair multiple times. These are the results of only one manual test.

We will get into optimizations in future blog posts.

This will give you a good idea of the entire process behind developing a solid trading system.

To get the complete roadmap for free, download this PDF.

Overall Results

Here is what we get when we combine all of these tests into a portfolio. 

The initial results of this system are promising.

Yes, I know what you are saying right now…

18% return over 16-ish years sucks!

Yeah, I agree.

However, remember that the profit target on this version is only 1R.

Therefore, there can be much more profit potential, if I tweak the exit. But the key result here is the super low drawdown and high win rate.

Also, these results are only from 7 currency pairs. What happens if you trade 27 currency pairs?

Only more testing will tell us the answer. More on that in future posts.

However, a 0.62% drawdown and 75% win rate is a fantastic start.

According to the risk analysis, the biggest drawdown that you could expect to see is 2%.

That is excellent.

So there is potential to increase the return on this strategy and make more money by trading more pairs.

That's enough for me to move forward with more testing.

Onward!

Now let's break down the results from each currency pair in the test. This will show us if there are pairs that we need to exclude from our live trading.

Charts and metrics are from the TradingStats website.

AUDUSD Backtesting Results

There weren't too many trades with this pair, but the win rate was really high.

At a combined 85% win rate, this pair certainly deserves consideration for the final cut. The win rate was about the same for both longs and shorts, so no bias there.

EURUSD Backtesting Results

The overall return on this pair was much higher than the average. However, the drawdown was much higher too.

So we should keep an eye on this pair in future tests, when we increase the profit target. This might turn out to be a rockstar pair for this strategy.

Win rate was a little higher than average, so that's a good sign too.

GBPUSD Backtesting Results

The return on this pair was about average. It struggled a little in the beginning, but it turned out to be net profitable.

The win rate was above average, with shorts winning a little more than longs. It's not enough of a difference to only trade shorts however.

NZDUSD Backtesting Results

This pair had a low return and traded flat for most of the end of the test. I would want to retest this pair to see if I missed some trades after 2014.

But if the results are similar in future tests, then this is a pair that I might exclude from live trading.

The win rate wasn't too bad, just a little below average.

USDCAD Backtesting Results

If there is a currency pair on this list that we might want to leave out, it is USDCAD. While most pairs show pretty consistent results through the 2007 to 2017 period, this pair has losses.

The win rate is below average on this pair.

Another reason to possibly exclude it.

USDCHF Backtesting Results

Wow, the results on this pair are great. I'll have to test it a couple more times, but this looks very promising.

The win rate is on par with the average, so no issues here.

USDJPY Backtesting Results

Look at the drawdown on this sucker!

Really low.

The biggest issue was the lack of trades.

I may have been tired when I was testing this, so it's certainly worth another couple of backtests.

The win rate is phenomenal, so it is certainly worth putting this on the short list. Again, I would like to see more trades.

Conclusion

I hope that this shows you the power of backtesting.

This is just the first step, more to come in future posts. One of the things that would need to be considered in future analysis is the time of day that these trades are taken.

If we need more trades, we can possibly drop down to the 4-hour chart.

Some people think that backtesting is only for automated trading strategies.

Not true.

It is essential for manual/discretionary traders too. Backtesting also works if you use multiple timeframes for your analysis. 

To see the complete backtesting results of TOB version 1 (Aardvark), join the FTSD Program. It is available in Level 5, along with the results from other trading systems.

But don't take my word for it.

Test it for yourself! Download Forex Tester or use a free platform and start testing.

Disclaimer: Some links on this page are affiliate links. We do make a commission if you purchase through these links, but it does not cost you anything extra and we only promote products and services that we wholeheartedly believe in. TradingHeroes.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

The post Backtesting Results: Trending Outside Bar (TOB) on Major Pairs Daily Chart appeared first on Trading Heroes.

Before we get start digging into this simple pin bar system, be sure that you understand the limitations of backtesting.

Past performance does not guarantee future results and all testing is theoretical.

…but it does give you a higher probability of being right, when real money is on the line.

That being said, I wanted to share some results of my latest test.

As I always say, don't take what I'm saying for granted, test it for yourself. This is also not the final version, so this is a work in progress.

You may remember that I tested a simple system before. But that was a very rudimentary test. This test will go deeper.

This method is easy enough to test on almost any manual backtesting software, or even scrolling backwards (then forwards) on MT4.

Alright, here we go…

The Entry to the Simple Pin Bar System

I'm looking for a Pin Bar that has a tail of 61% and a 14-period RSI in the corresponding overbought or oversold territory (default 70/30 settings), at the close of the candle.

I'm also looking for a countertrend move before the Pin Bar (examples below). The Pin Bar also has to be the highest/lowest point in the move. The idea is to find an area where price has been stretched in one direction and will hopefully snap back.

Finally, I'm entering the trade on the close of the Pin Bar and setting a 1R take profit. That may be a little hard to picture (I know it is for me), so let's see a couple of examples.

Long Example

For a long, you look for a Pin Bar (marked by my Forex Tester 2 indicator) and the trend, in the bearish direction. There is also an oversold condition on the RSI.

Short Example

A short trade is just the opposite, of course. Here is an example:

The Stop Loss

Stop is set 15 pips above/below the Pin Bar. This might be too tight of a stop, but let's give it a try.

For this test, I'm risking 2% of the account on each trade.

The Take Profit

I'm looking for a 1R profit target on this round of testing. So if I'm risking 30 pips, I'm targeting 30 pips. For simplicity, I'm not taking the spread into account.

There is probably a better TP, but I'm starting simple.

The Results

Alright, now let's get down to the results. I did 8 rounds of testing on the AUDJPY daily chart, from January 2001 to present. Here are the results:

Not bad. But 20% over 14 years?

That probably isn't going to be profitable enough, especially when risking 2% per trade. This means that I have to come up with a way to get more out of each trade.

But the good news is that a 74% average winners is a great place to start. However, there is another thing to consider.

In testing, there were only about 20 trades per test. This is an example from one test.

So 20 trades over 14 years, probably isn't a big enough sample size to get a really good idea of if this is a viable system or not.

You might also notice that there is some difference between the tests.

This is why we test.

Just like with real trading, you will miss some trades. You might be sleeping, on vacation or just not completely focused. Multiple tests helps us simulate these conditions.

This also shows how concrete your trading rules are. If there is a large variance in the results, this shows that your rules might not be easy to follow in real trading.

Possible Improvements to the Simple Pin Bar System

Given these results, I could test four things next:

1. Setting two profit targets, one at 1R and one at the next S/R level
2. Test on more pairs and on the H4 timeframe
3. Looking for a minimum 2R on the first profit target
4. Only look for fake pin bars

Conclusion

I really like Pin Bars and I'm going to show you the entire testing process for this system. My goal is to figure out a system that works for me and I will track the method all the way from testing to tracking live trading results.

I haven't seen anyone do this before, so I hope that this will be a first and will ultimately help you understand the guts of a trading system.

Remember that no technical pattern exists in a vacuum. You always have to watch news and previous price action. But basic testing like this establishes a baseline of probability.

The post Backtesting Results: Simple Pin Bar System on AUDJPY appeared first on Trading Heroes.

In a previous post, I took a look at the weekly chart of the EURUSD and identified all of the Outside Bars, from 2001 to 2015.

I just have to make a quick correction to that post…I called the chart formation Engulfing Bars, when they are really Outside Bars.

Outside Bars only take into account the high and low of the candles, while the body of an Engulfing Bar must engulf the body of the previous candle AND have a higher high and a lower low. Also remember that Backtesting data is valuable, but it does have limitations.

Now that we have that out of the way, let's get to my Backtesting.

First, we need a method to test…

The Trading System

In my previous post, I only looked at Outside Bars that were in breakout and continuation (trending) situations. Based on a purely visual review, my hypothesis was that only trading this pattern in these situations would make it profitable.

I put in an order to buy or sell on a break of the Outside Bar in the direction of the trade. The stop loss was above/below the Outside bar. Once the trade was up 100 pips, I moved the trade to +5 pips.

Then I moved the stop up when a support/resistance level formed. I risked 2% on each trade. Here is an example trade on the chart.

Then I would let the trade get stopped out. That should work, right?

Let's see…

Results of Backtesting

The first test yielded a 356% return over the entire testing period of 170 months. This means it would have averaged 2.09% per month, over that period. Pretty great right?

But hold on…

As a result of working on the previous blog post, I got to know the EURUSD weekly chart really well. Was I doing well because I already knew what the charts looked like?

I decided to wait a few days, before doing another test. The second test yielded 142% over the same time period.

…yes, I was influenced by my previous work on the charts. But the results were promising.

So I tried the trading strategy on other currency pairs. The results were not as good.

They ranged from +20% to being overall net losses.  

The Debrief

Does that mean that Outside Bars are useless? No, not at all.

They can be powerful trading signals. But they need to be used in the right context. In this case, the EURUSD trends well, so a strategy that moves the stop up with each new level, looks like a good strategy.

But other pairs are much choppier, so using this method would not work well on those pairs.

Another thing to consider is that I may be trying to go for too much on each trade. What if I stuck to a 1R or 2R profit target?

That is a test for next time…

Bonus Backtesting Results

As I mentioned above, I also tested this method on other pairs. I filmed one of my sessions to help me see what I miss when I backtest. Here is my test on the GBPJPY.

There are a couple of things to take note of in this video. Sometimes I noticed that there was a look-back bias when I went too far and had to backtrack.

Since I already kind of knew what was going to happen, the results of the test were affected. But it didn't affect things too much because the results were still negative.

Conclusion

So this is a great example of a trading method that doesn't work. I think it is important to look at what doesn't work, as much as what does work.

There are so many sites out there that show fantastic gains, but they also hide the equally fantastic losses.

Remember that this doesn't mean that Outside Bars aren't useful in trading. They can be, it's just that this particular method wasn't profitable. Stay tuned for more tests, as I look for something that does work.

The post Backtesting Results: $EURUSD Weekly Outside Bars appeared first on Trading Heroes.

Alright, I've been talking about this for a couple of weeks and here it is!

This is the first in a series of studies that I'm going to be doing on building trading systems. It is a little different than what you are used to on other sites.

Keep in mind that regardless of what we find in these studies, the following always applies:

• You are 100% responsible for your own trading, win or lose
• These studies are not suggesting that you trade Forex with real money
• Past performance does not guarantee future results
• Even if two traders trade the exact same system, their results will always be different
• This is not an actual trading method, only a study

If you want to find out how I created these studies, read my post on historical Forex data and intro to trading systems development.

In This Study

To kick things off, I'm going to dig into the Engulfing Candle pattern on the EURUSD weekly chart.

First, I will show you how to find all of the Engulfing Candles on the weekly timeframe.

This will help identify possible opportunities, as well as false positives.

Then I will graphically identify all the times when the pattern happens at support and resistance levels.

At this point, we will NOT be formulating an actual trading plan.

We simply want to observe the opportunities without any biases.

In later posts I'll show you possible trading methods that can come out of this research.

But for now, keep your mind open and don't try to trade this because it is not an actual trading method.

We are just getting started.

Indicators

If you want to test this yourself, we have two indicators available:

• Metatrader 4 Alerts Indicator – When you install this indicator in Metatrader 4, it will send you an alert via your choice of audio, screen, text, email or push notification.
• Forex Tester Indicator – Marks all engulfing candles on the current chart. Makes it much easier to spot them during backtesting.

The Trading System Development Process

This may seem kind of boring right now, so let me give you a roadmap of where we are going with this.

1. Study – First we will do a study of the pattern to get a rough idea of the potential of the pattern. That is what this post will show you.
2. Formulate – If our results look good in this study, we will create a very basic trading plan that could possibly be profitable.
3. Backtest – Then we will backtest the strategy several times to find out the potential that our newly formulated strategy has. If it doesn't work in backtesting, then we have to go back to the Formulate stage.
4. Demo – Should several rounds of forward testing in a demo account. Don't risk any real money at this point.
5. Trade It – Finally, you need to make the decision as to if you want to trade the method with real money or not. Only you can make that choice.

All Weekly EURUSD Historical Engulfing Patterns

Here is a spreadsheet with all of the weekly Engulfing Patterns from 2001 until last month.

Click here to download it and follow along at home.

It is an Excel file and the highlighted lines are the engulfing candles. The lines with a “1” at the end are the candles that I will be examining below.

I used Forex Tester to screenshot all the charts. All measurements are not exact, but are close enough for study purposes.

During actual testing I will be more exact.

Alright are you ready? Let's get started…

May 13, 2002

Risk: 165 pips
Possible Reward: 3750 pips
Potential: 22.7R

Weekly

Notes: A lot of potential in this one. There is a possibility that you may have exited early on the first major retracement. Either way, this trade has a lot of potential.

Daily

Notes: There is also an engulfing pattern on the daily chart. This should be a confirmation signal to get into the trade.

December 2, 2002

Risk: 271 pips
Possible Reward: 3567 pips
Potential: 13.2R

Weekly

Notes: Huge risk reward potential here.

Daily

Notes: The pin bar at support would be a good place to get in.

June 16, 2003

Weekly

Risk: 373 pips
Possible Reward:  846 pips
Potential: 2.3R

Notes: This isn't really a great signal because there is not a clear resistance level. But I would thought that I would throw it in because it is a trade that one might take. It is a bad trade because it is against the trend and there is not much separation between the peaks.

Daily

Notes: The trade looks much better on the daily chart, but it probably wasn't a good trade to take. As we have noticed with the other charts, there is also an idea engulfing pattern on this chart too.

September 1, 2003

Weekly

Risk: 340 pips
Possible Reward: 2564 pips
Potential: 7.5R

Notes: Resistance becomes support. Really nice continuation pattern.

Daily

Notes: Not a real strong signal on the daily chart. I supposed you could have used the double bottom as a signal to enter the trade. The only issue with this is the second low is lower than the first.

February 16, 2004

Weekly

Risk: 445 pips
Possible Reward: 750 pips
Potential: 1.7R

Notes: Fighting the trend a little on this one. It is a decent setup though.

Daily

Notes: Again, we see a double top with an Engulfing pattern, just before the drop.

October 11, 2004

Weekly

Risk: 269 pips
Possible Reward: 1177 pips
Potential: 4.4R

Notes: This one might have been tough to enter because it is not that obvious. The pin bar before it is a good sign that price might be moving up soon.

Daily

Notes: We see a nice pin bar at the trend line. That would be ideal place to enter.

October 3, 2005

Weekly

Risk: 259 pips
Possible Reward: 0 pips
Potential: 0R

Notes: The first loser so far. It is a decent potential double bottom on the weekly chart. If we entered with a buy stop above the Engulfing candle, it would have kept us out of this trade.

Daily

Notes: We don't see any of the patterns that we saw in the previous setups. There are no pin bars or engulfing bars at the support level.

February 27, 2006

Weekly

Risk: 383 pips
Possible Reward: 3917 pips
Potential: 10.2R

Notes: Huge potential return on this trade. There is also somewhat of a head and shoulders pattern at the bottom.

Daily

Notes: No good signal on the daily chart. Funny thing is that it looks almost exactly the same as the chart from October 3, 2005.

June 5, 2006

Weekly

Risk: 387 pips
Possible Reward: 125 pips
Potential: 0.32R

Notes: Not the best entry signal, but it is one that one might take. It is important to evaluate these marginal signals too.

Daily

Notes: Nice pin bar Engulfing candle on the daily chart. There would have been a good R multiple if the trade was taken on this timeframe.

September 3, 2007

Weekly

Risk: 238 pips
Possible Reward: 2229 pips
Potential: 9.4R

Notes: This one isn't as pretty as some of the others, but it could get the job done, if you took the trade.

Daily

Notes: There is a pin bar here that could have been a good secondary indication to get into the trade. Trend continuation play here.

October 22, 2007

Weekly

Risk: 286 pips
Possible Reward: 1597 pips
Potential: 5.6R

Notes: This is a trend continuation play. Not sure if it would be a good place to get in, but it would have been very profitable.

Daily

Notes: No good confirming signals here. Not that there has to be, but it is nice to see.

January 14, 2008

Weekly

Risk: 346 pips
Possible Reward: 250 pips
Potential: 0.72R

Notes: This is similar to a couple of the tops that we have seen before, but it did not work out as well. There was some room to profit here however. It just depends on how the trade is setup.

Daily

Notes: Nice bearish engulfing pattern at resistance.

December 29, 2008

Weekly

Risk: 422 pips
Possible Reward: 1506 pips
Potential: 3.6R

Notes: Big spike into support, turned resistance.

Daily

Notes: Nice double top formation with pin bars.

May 18, 2009

Weekly

Risk: 650 pips
Possible Reward: 1097 pips
Potential: 1.7R

Notes: Continuation pattern that may have been hard to enter. Price is heading into a resistance zone.

Daily

Notes: Nice bullish engulfing patter on the daily chart though. Perfect place to enter.

July 27, 2009

Weekly

Risk: 321 pips
Possible Reward: 830 pips
Potential: 2.6R

Notes: Another continuation pattern trade. Really tight setup, but it is a good one.

Daily

Notes: Not much of a signal on the daily chart.

August 17, 2009

Weekly

Risk: 334 pips
Possible Reward: 789 pips
Potential: 2.4R

Notes: Another nice engulfing pattern in congestion. Good continuation pattern.

Daily

Notes: Double bottom on support line, resistance became support.

March 15, 2010

Weekly

Risk: 321 pips
Possible Reward: 1632 pips
Potential: 5.1R

Notes: Another continuation setup, good profit potential.

Daily

Notes: No good confirming pattern on daily chart.

June 28, 2010

Weekly

Risk: 415 pips
Possible Reward: 2382 pips
Potential: 5.7R

Notes: Pretty good setup with deep punch into support level.

Daily

Notes: Strong break of the support line on the daily chart.

January 3, 2011

Weekly

Risk: 536 pips
Possible Reward: 15 pips
Potential: 0.03R

Notes: This would have been a losing trade, nothing wrong with that. Take the loss and move on.

Daily

Notes: Engulfing pattern in the opposite direction. Could be a sign that the trade won't work.

January 10, 2011

Weekly

Risk: 522 pips
Possible Reward: 1632 pips
Potential: 3.1R

Notes: Internal support line, this would be a trade that might easily be missed. Might also be hard to take a trade in the opposite direction after previous loss.

Daily

Notes: Nice engulfing pattern on daily chart.

August 29, 2011

Weekly

Risk: 432 pips
Possible Reward: 2102 pips
Potential: 4.9R

Notes: Pretty nice tip off before the price drop.

Daily

Notes: No good signs of confirmation on the daily chart.

April 30, 2012

Weekly

Risk: 326 pips
Possible Reward: 932 pips
Potential: 2.9R

Notes: Nice downward trend, third touch of the trendline.

Daily

Notes: Dojis with strong confirming candle at the trendline.

July 8, 2013

Weekly

Risk: 314 pips
Possible Reward: 936 pips
Potential: 3.0R

Notes: Strong confirmation of support level.

Daily

Notes: Even stronger confirmation on daily chart.

February 24, 2014

Weekly

Risk: 154 pips
Possible Reward: 211 pips
Potential: 1.3R

Notes: Small continuation pattern.

Daily

Notes: Nice rejection of support line.

May 5, 2014

Weekly

Risk: 216 pips
Possible Reward: 3304 pips
Potential: 15.3R

Notes: Small double top, like we have seen before. Very nice profit potential.

Daily

Notes: Strong rejection with pin bar formation.

September 15, 2014

Weekly

Risk: 182 pips
Possible Reward: 2362 pips
Potential: 13.0R

Notes: Continuation in trend. Nice gap after engulfing pattern.

Daily

Notes: Strong down candle on daily. Good confirming signal.

November 17, 2014

Weekly

Risk: 238 pips
Possible Reward: 1896 pips
Potential: 8.0R

Notes: Good signal in a trend.

Daily

Notes: Ranging pattern, followed by a strong drop.

December 15, 2014

Weekly

Risk: 363 pips
Possible Reward: 1737 pips
Potential: 4.8R

Notes: Another good opportunity to short into the trend. Could really make some money by stacking trades.

Daily

Notes: Strong rejection on daily chart too.

March 2, 2015

Weekly

Risk: 409 pips
Possible Reward: 352 pips
Potential: 0.86R

Notes: Probably too risky to take this trade so late in the trend.

Daily

Notes: No real strong confirming signals on daily.

Conclusion

Again, the goal of this study is simply to examine this pattern on the weekly chart for the EURUSD. In a future post, I will examine potential trading methods, based on this study.

After looking at these results, what kind of trading system do you propose?

Is there anything that I missed? Did I have too much positive or negative bias?

If you would like to help with these studies, please contact me.

Leave a comment below…

Disclosure: I do get a commission if you buy through some of the links on this page. But it does NOT cost you anything extra, it helps pay for my hosting costs and a portion of the proceeds go to my charity partner.

The post Study Of Engulfing Candles On The EURUSD Weekly Chart appeared first on Trading Heroes.

A few months ago, I wrote about why even simple trading systems do not end up actually being that that simple. This is mostly due to the fact that they need to be tested, retested and continually evaluated.

But let's forget semantics for a minute and take a detailed look at a system that has no indicators and very defined entry, exit and stop loss points. By most people's accounts, this is probably the definition of a simple Forex trading system.

What I Will Show You

In this post, I will tell you how I got the idea for the strategy to test and the exact parameters for my testing. I will also allow you to download the spreadsheet with all of my backtesting results, so you can follow along at home, if you so desire.

What I'm going to show you is the first two steps in the Strategy Development Framework and I hope that it will get you excited enough to come up with some ideas of your own to go test out and have fun with.

…and before I get started, remember that backtesting does have its limitations.

The Simple Trading Idea

The first step in the Strategy Development Framework is the idea. Not rocket science, but it can be a daunting task, given all of the possibilities out there.

Yeah…if you read the Forex forums, there is no shortage of Lamborghini manifesting, private island buying, lingerie model dating, trading ideas in the world.

Of course, the trick is to figure out which ones actually do what they say and which ones are a Titanic-sized crock of shit. Obviously, you won't really know which ones are legit until you test them out, but there are a couple of different ways that you can go about finding an idea to start you off.

First, you can just pick any random ass system that looks good to you. This may seem like a terrible idea, but it can have it's pluses. On the bright side, you will probably figure out something that doesn't work. But you may also get other ideas on how you can get the method to work and that may lead you to something that actually does work.

The second (and preferable method) is to find someone who actually knows what the hell they are talking about and test what they are recommending.

In my case, I got the idea from two sources. In my interview with Walter Peters, he talked about one of his breakthrough moments coming when he tested a simple Kangaroo Tail method on the daily chart that made about a 80% return. In case you are wondering, Kangaroo Tails are just another name for Yo Yo's, Unicorn Horns and Pin Bars.

In addition, after purchasing the Chris Lori AUDJPY Trading Course, one of the many things that I learned was to only trade that pair long. That is just Chris' opinion of course, but I found that to be a good idea (more on that in the Backtesting Results section). I also talked about it a little in a November post that you can read here.

Anyway…so I combined the two and decided to test Pin Bars, trading long only.

But that's not all…

Defining the Idea For Testing

Before we move on to the second step on the Strategy Development Framework, which is Backtesting, we have to define our idea so we don't go changing shit in the middle of testing.  That is actually very easy to do and will not give us an accurate picture of how our system might perform.

We also don't want people to think that you are a crazy person when you tell them that you have a trading system that is profitable.

So I broke out my handy-dandy Strategy Template and wrote down the parameters to my system.

Here is how I filled out the Template:

• Strategy Name: AUDJPY Pin Bars
• Indicators Used: Price action only, Daily chart
• Entry Signal: Pin bar at previous support level. Only look for horizontal support for this test. Enter on open of next bar after current pin bar. Only take long trades.
• Stop Loss/Risk: 5 pips below current pin bar. Risk 2% per trade, round lots down.
• Profit Target: 95% of next daily swing.
• Move Stop: When profit is equal to the stop loss, move stop to +5 pips.
• Add to position: NA
• Take partial profit: NA
• Exit Signal: Hit profit target, stop loss or breakeven.

Here is a picture of what a typical setup would look like:

Before we go any further…a couple of notes on this Idea. This was all done Backtesting, so no real money was risked. Also, risking 2% is considered risky (at least for me), but I just wanted to see how it would turn out.

And of course, past performance does not equal future results.

OK, moving on to…

The Testing Results

Here is what the final results looked like from testing it on the Daily chart from January 2001 to September 2012.

All testing was done on Forex Tester.

If you would like to see all of the results, you can download the zip file with all my trades here. Note that there are only trades until June 2012, but that is only because there were no more trades after that.

As I mentioned above, I did test this trading strategy both long and short on this pair and the results where not nearly as good. Therefore, I decided to go long only…just for this pair.

Conclusions

As you can see, it was a pretty decent result. 161.81% over 11 years isn't fantastic, but it does show that this super simple method could work. My primary concern at this point is the drawdown amount, since this test risked 2% on every trade. Unfortunately, Forex Tester sometimes drops the ball on drawdown, as it did in this case, showing a big fat zero.

I'll have to run it through Excel to manually to figure out the drawdown.

There are other ways that this system could be tweaked to try to improve the performance. Just a few thoughts off the top of my head…

• I could also use trendline support/resistance to enter trades, instead of just horizontal.
• I could try to pyramid at a certain point to maximize the winners.
• I could look for ways to eliminate losers by only taking trades that meet a 2:1 reward to risk ratio.

I could go on for awhile on what I could do. But I just wanted to give you some ideas on how to test a very simple trading strategy and I hope that you will be inspired to test this method or another system that you have been thinking about.

If you tried testing this strategy, what where your results? If not, what can you test right now that might move you forward? It doesn't have to be perfect, just define it and test it. I would love to hear your results in the comments below…

Disclaimer: Some links on this page are affiliate links. We do make a commission if you purchase through these links, but it does not cost you anything extra and we only promote products and services that we wholeheartedly believe in. TradingHeroes.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

The post A Simple Forex Trading System Tested: Daily Pin Bars on AUDJPY appeared first on Trading Heroes.