I have participated actively in the strategy contest for the last 25 months, and I have been unable to win a cash prize. I have carefully examined the performance of all the strategies I have used over this period, and I believe I have been able to narrow down the reasons for my unsuccessful months;
It may not be surprising to note that this is one of the reasons several traders are also unsuccessful; not sticking to one particular strategy in the strategy contest. I have used a different strategy for almost every month out of the 25 months of my participation; this has greatly narrowed the probability of me winning any prize.
Looking at this from a mathematical perspective, if we were looking for “tails” from a coin toss, and we tossed the coin 25 times; there is a possibility, no matter how slim it is that we would get a “tail” from one of those 25 tosses.
Not getting a tail after 25 coin tosses would mean the coin is either not well-balanced, or the person tossing the coin is extremely unlucky.
So a well-thought-out strategy would also be successful as long as that strategy is employed consistently in the strategy contest. It does not mean the strategy would win the contest, but the probability of it finishing in a prize-place would increase as it is used every month. That was my first mistake.
My second mistake was that I tried to be very creative with the strategies, often times employing different indicators in a bid to have a profitable month.
This is also another basic trading flaw; a complex trading strategy does not always guarantee positive trading results. The best way to go is to keep things as simple as possible. Ironically, my best performing strategy in the strategy contest was a very simple cross-over trading strategy; it was the first strategy I ever used in the contest. I am fairly certain that if I had continued with that strategy, I would not be writing this article.
In the spirit of keeping trading simple and going for a prize-position in the coming months of the strategy contest, I have cooked up a strategy that meets the above requirements.
Look at the EURUSD 60-minute chart.
Two exponential moving averages have been added to the chart, with values of 200 and 800.
The first thing one realizes while looking at this chart is that the pair has been under both moving averages for all of November 2015.
So imagine I had a strategy in the strategy contest that had simply been selling the EURUSD, it would have made a bag-full of pips by now. This is the simple logic behind my strategy idea; short positions as soon as the market price is below both moving averages, and long positions above both moving averages.
As simple as it sounds, we all know creating a good and profitable strategy does not depend solely on the trading idea. The strategy also requires functions to calculate the volume size of the positions to be opened, and most importantly the exit approach is also crucial to the success of the setup.
To tackle this, I added two more exponential moving averages with values of 12 and 20, and the famous Relative Strength Index (RSI) indicator. These indicators were added to refine the entry and take care of the exit strategy.
Conditions for long positions:
- Price is above the 200 and 800 exponential moving averages on 60-minute chart
- The 12 Exponential MA is greater than the 20 Exponential MA
- RSI indicator is above 55
- Exit long positions when 12 Exponential MA is less than 20 Exponential MA
Conditions for short positions:
- Price is below the 200 and 800 MAs
- The 12 Exponential MA is less than the 20 Exponential MAs
- RSI indicator is below 45
- Exit Short positions when 12 Exponential MA is greater than 20 Exponential MA
That is the general summary of the trading rules for the strategy. The test environment is going to be the strategy contest, starting from December 2015. I am a bit curious to see how the strategy will fare during the Christmas month.
The design of the strategy was very straight-forward, especially when using the visual jforex strategy editor.
I have added screenshots from the Jforex strategy builder to show the building blocks behind the creation of the strategy.
The first shows all the indicators used:
The logic for short positions:
I added a volume size control that is tied to the account equity; if the equity goes below 75,000USD:
the volume size = 6M
Above 100,000USD, volume size = default trading size =3M
The reason increasing the volume size is to help the account recover quickly after a 25% loss, else the trading volume is constant at 3M.
Exit logic for short positions:
Exit logic from long positions:
This is obviously a trend strategy, and there is a possibility that it will not do so well when volatility is low, but I am certain this approach is worth a try. You are all welcome to watch its performance during the month of December 2015 in the strategy contest.