Forex Trading

We want to present you here a simple trading system that we developed following the steps of our eBook "How to develop a profitable trading system".

Step 1: Selecting a market and timeframe
One of the most popular markets these days is the e-mini S&P, and that's not without a reason: It's a 500 company index. One of the largest in the world and that means you have excellent and consistent liquidity, superb volatility, tremendous leverage and no uptick rule. It's a truly bi-directional market that shorts just as easily and safely as going long. It's a fully electronic market, offering all the advantages of electronic contracts.
We decide to trade the market intraday, i.e. we will enter and exit a trade on the same day, because we do not want to expose our position to the risk of holding it overnight.

Step 2: Define entry rules
In my opinion swing trading is actually one of the best trading styles for the beginning trader to get his or her feet wet. That's why we decided to use a swing trading approach in this example.
Many traders are familiar with the concept of "Bollinger Bands": Bollinger Bands consist of a centerline and two price channels, one above the centerline and one below. The important thing to know about Bollinger Bands is that they contain up to 95% of the closing prices, depending on the settings.

In the chart above you see the red centerline and the blue price channels. There are only 2 days in the beginning of November when prices close outside the Bollinger Bands.
We are using this knowledge to create a very simple entry rule:
·Sell when prices move above the Bollinger Bands and
·Buy when prices move below the Bollinger Bands.
The idea is that prices will move back into the Bollinger Bands by the end of the day.

Step 3: Define exit rules
Let's start with a very simple exit rule:
· Exit the trade at the close of the same day.
Below is the equity curve of the last 2 years. The first results are encouraging.

Step 4: Evaluate your system
The Net Profit of this simple trading system is $13,525.
The Average Profit per trade is $149. Even if we deduct $20 for commissions and slippage we still have a net profit of $129 per trade.
The Profit Factor is 2.20.
The Winning Percentage is 66% and the Maximum Drawdown at the end of the day is only $2,775, though we have to suffer an Intraday Drawdown of $5,250.
The next step is to test the robustness of the system. Therefore we will vary the parameters we are using for the Bollinger Bands to make sure that we haven't curve-fitted the system. If the system produces similar results when we vary the original parameters by 15%, we haven a quite robust trading system.
Originally we tested the system with a setting of 34 for the Moving Average and 2.5 for the Standard Deviation. The table below shows the results of the system when using a Moving Average between 29 and 39:

Mvg. Avg.	Win%	Net Profit	Profit Factor	Avg Trade	Max Drawdown
29	55.60%	$11,875	1.97	$120	($3,325)
30	52.20%	$10,138	1.84	$120	($3,350)
31	55.10%	$9,575	1.8	$108	($3,363)
32	56.40%	$11,575	1.99	$123	($3,438)
33	54.30%	$10,975	1.96	$119	($3,425)
34	59.30%	$13,525	2.2	$149	($3,350)
35	59.30%	$14,288	2.24	$157	($3,325)
36	54.70%	$12,288	2.06	$143	($3,313)
37	55.20%	$11,200	1.96	$129	($3,275)
38	54.10%	$11,113	1.94	$131	($3,225)
39	54.70%	$12,438	2.04	$145	($3,150)

As you can see, none of these figures change dramatically when varying the parameters.
In the next step we run the system on different markets to make sure that we haven't optimized the system for a single market.

We test the system on 5 different markets:

Symbol	Net Profit	Profit Factor	Avg Trade	Max Drawdown
DAX	$34,013	1.63	$279	($6,350)
e-mini Nasdaq	$10,930	2.08	$107	($1,490)
e-mini S&P	$15,488	1.91	$134	($3,350)
EuroStoxx	$6,010	1.43	$49	($2,180)
FTSE	$8,900	1.55	$65	($4,010)

The net profit, average trade and max drawdown are substantially different, but the Profit Factor seems to be quite stable. The reason for this distorted picture is the different value of these five markets. In the next table we look at the Average Profit and the Max Drawdown as a percentage of the net profit:

Symbol	Net Profit	Profit Factor	Avg Trade	Max Drawdown
DAX	$34,013	1.63	0.82%	-19%
e-mini Nasdaq	$10,930	2.08	0.98%	-14%
e-mini S&P	$15,488	1.91	0.87%	-22%
EuroStoxx	$6,010	1.43	0.82%	-36%
FTSE	$8,900	1.55	0.73%	-45%

Now we see a different picture: Only the Max Drawdown differs quite a bit depending on the market, but the remaining figures are rather stable.
It seems that we developed a robust trading system that will perform well in real market conditions and on several markets.

For more information visit http://forextrading3.tk