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Datamining a profitable trading system is easy these days. Just take any decent platform like MetaTrader or Dukascopy J-Forex, try out some indicators and optimize the stoploss and takeprofit values until you get great results. But a datamined strategy in this manner will rarely work in practice. Traders have to be very careful when creating trading systems to avoid the common pitfalls with this process.
In this article I will present the six questions you have to ask yourself when creating any trading strategy. You will also see how I created and tested one of my profitable trading systems, shown in the picture below.
1. Are your trading rules simple?
The first question that you need to answer is, are your trading rules simple? The more variables you add, the more odds increase that the system will not work in practice. An easy way to think about this is that each new rule, whether it’s entry, exit or stoploss increases the complexity by one. For example, say you have a trading system that enters at a new 40 day high and exits at a new 20 day low. This means that you now have a total of two trading rules. Now if you add a fixed stoploss and takeprofit values, you increase the c…
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khalidamassi avatar

Well written

AAARated avatar
AAARated 14 Oct.

nice article

fx211pips avatar
fx211pips 20 Oct.

very interesting article

BilboFX avatar
BilboFX 22 Oct.

Nice article!!!

chytry_dziad avatar

very good

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In my recent article I’ve introduced R and its basic abilities towards FX trading. In this article I’d like to persuade you, that R is really good tool for manual as well as algorithmic traders and that it’s worthy of your attention.
SIT and R
Let’s assume we have found strategy that looks pretty good on first sight. How would you back test such strategy? By looking on the charts and calculating everything manually or by spending your time with writing some C# or Java quants and algos applying the strategy on historical ticks? I’ve used both these techniques of back testing and I’ve realized I was wasting my time testing that way once I’ve found and learn R and Systematic Investor Toolbox (SIT) [1]. SIT is open source library available on github that can be used for investment research. With R you can test new strategy nearly instantly. With R and SIT together you can back test absolutely instantly.
Strategy for the test
For the sake of simplicity and readability of this article I’ve chose really simple strateg[/1]…
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Nihad avatar
Nihad 20 Jan.

Kaplar's work or SIT on the top of R has one day forecasting feature using GARCH, I would be interested to see a one-day forward tests for any forex instrument of your choice. Its possible for Stocks and Indexes on SIT, but would like to see if it is possible for Currencies using SIT. Thanks for Sharing

Vitalinka_Pavlenko avatar

great job

mcquak avatar
mcquak 26 Jan.

Nihad thank you. Do you mean this Kaplar's article?

isbar avatar
isbar 29 Jan.

very interesting

Legacy avatar
Legacy 31 Jan.

I am new to the Dukascopy platform and have no knowledge of how to load the code. Can you assist please?

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Poseidon is an offspring of famous Donchian Channel and Turtle Trading Strategies. It is a trend following strategy aiming to capture a trend and not letting it go until trend fades. Simple enough? In this article, I will define the Poseidon with entry and exit rules. After defining the strategy, I will be testing the Poseidon in EURUSD, USDCAD, AUDUSD and GBPUSD pairs without any money management. The profits may seem low for 7 year period, however in my next article I will be demonstrating how money management can be used to boost profits and how I use money management to optimize strategies. Furthermore, if I got enough feedback I will be revealing my Metatrader Code of Poseidon in the third article. 1. DEFINING TOOLS OF POSEDION 20 days’ Average True Range (hereinafter “ATR&rdquo value, 55 days’ highest high and 55 days’ lowest low are the only three information we will use to setup this strategy. The motto of the strategy is to buy high to sell higher, sell low to buy lower. 1.A. RULES OF ENTRY* -BUY if Price breaks above 55 days’ highest high. We will buy when the Price gets one tick higher than the 55 days’ highest high. -SELL if Price gets below 55 days’ lowest low. We w…
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Efegen avatar
Efegen 1 Apr.

@Specialforex, I tested every ATR combination. In forex 1.5 and 0.5 perfomes the best overall. Deeper the market it is better. Sometimes 1.3 with 0.3 and 2.4 and 0.4 performs better depending generally depending on the currency pair.
However Turtle's 2.0 and 0.5 ATR values perfom better in commodities.
Money management is in next article;)

SpecialFX avatar

I have to say that i'm not convinced :) In my opinon 2ATR, plus the low/high of 20 bars works better, all things considered (different pairs, all kinds of market states, with low/high volatility, ranging/trending). Of course you will have specific pairs that perform better using other combinations, but 2ATR + 20 bars, would work better if you consider all markets/pairs as a whole. 0.5 ATR for initial stop generates so many unnecessary losses...and those small losses add up. Like I said, add 2005-2006 (or any other range-bound years) to the testing period and everything changes :)

doctortyby avatar

I agree special FX, 0.5 ATR is probably the most used and most dangerous SL

doctortyby avatar

But with a 2ATR +20 Bars what would be the TP?... just trail the stop?

geula4x avatar
geula4x 17 Apr.

Well explained idea + detailed results

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The never ending fight The surviving on market demands knowledge, technique, good traits and avoiding the misfortune. Reaching a satisfying condition demands hard work. All of us need to work on our traits, our strategies needs changing from time to time, or if we developing another method that also needs developing. The destructive effect of greed, what comes from inside of us, media, other people create the need for paying attention to remain loyal to our method. 2 parts of the trading mechanism: First one is the method, the way how we trade, by rules, management, developing it, testing, looking around and so on. Second one is the education, what widen our mind, what controls the way we think, what keeps us developing. The innovation is a treasure, don't drop away such a value. These are the points in that, I am going to post two articles each month, one for trading methods, test and developing them, and a second one for subconscious education for developing. Surviving in the long run! Have you ever heard the phrase that there are as much different way of living as much living soul? Every person have an own personality. How are we linked to one other? By the market! All the pa…
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SpecialFX avatar

Another good article on trading safely and rationally :) I have a question though, what do you mean with news having more weight in weekly charts? Do you mean fundamentals in general or actually some piece of information that comes out in a given day? The reason I ask is because spikes caused by news have a much bigger effect on the market the shorter the time-frame is. I trade longer time-frames and news are irrelevant to me, because stop-losses are placed further away from the current price than in shorter time-frames. If you mean fundamentals then I fully agree.

Lincoln avatar
Lincoln 6 Dec.

Thanks for sharing. Well, yes the news have sharp effect on price action, and since we get the news late, it is better not to trade by them if our strategy doesn't demand them.
I meant fundasmentals, just the way I express myself is not too well yet.

Likerty avatar
Likerty 6 Dec.

I will add another rule that works in trading as well as in any other proffesional activities: ..In order to succeed one needs to konstatnly seek for a new knowledge, never stop the learning process

Lincoln avatar
Lincoln 6 Dec.

Hi! Thanks for reading! And for sharing!
You are absolutely right, I swear I believe that seeking as important as anything else, or even more important. I wrote this one too in order to emphasize its impact.
I wish you all the best!

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