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End of day Trend Following system rules

This is to present an end-of-day trend following trading system rules

trend following system rules

Here I will provide specific rules for a trend following system I backtested and I believe it can be profitable.

It can be traded at the end-of-day, i.e. once per day, by spending 5-15 minutes per day to go through ~30 major forex and commodities markets, search for setups, place orders, manage existing positions.

It has a potential to be a profitable system moving forward. I know it has been profitable over the last 15 years, based on backtesting. Of course, not at all times and not across all markets, but generally, on a portfolio level, it has been profitable! I coded it as a EA in MT4 and tested. Equity curves look good for most forex and commodity markets, as well as equity indices. Again, this is not a holy grail, 66% of trades are losers, and per market there are 2-3 years drawdowns.  If this discourages your from trading it, I understand. But this system is robust. It is profitable on a wide range of parameters and markets. It is not curve fitted. Winners are a few times larger than losers.

It is a trend following kind of system. Read more about this approach, e.g. Michael Covel books. In short, it will buy when something is going up and it will sell when it starts going down. It will lose money in ranging markets, but it will surely participate in, and profit from, big moves. It will not predict them, it will react and follow. It is similar to the turtle’s system you may have heard about. They used 50 days breakout for entry, I use RSI, and it showed better results in backtests than using channel breakouts for entry.

The rules
Open a long position if RSI(20) is above 65. Note this is contrary to popular use. It opens a long trade if the price is going up. This is a trend following!

Open a short position is RSI is below 35.

Initial and emergency stop loss at 7*ATR(20). This is a very wide stop, trade small positions, e.g. 0.02 lots to make sure losses are small & acceptable, e.g. around 1% of your trading capital loss per trade.

Close a long position if the price prints a 50 days low.
Close a short position if the price prints a 50 days high.

Position entry method: at market on close.

Position closing method: if the price closes below the 50 days low, exit at market.
If it protrudes but rejects the 50 days low, i.e. shows a false break, then place a stop loss below last bar low (i.e. move the initial stop to the new level).

Trade with this system all liquid majors and commodity markets. It can also be traded on equity indices, but I would trade it long only. Although in backtests it made a lot of money in 2008 shorting S&P500, note this is a long term system and long term the equity indices are designed in a way that they go up.  For commodities, of course be careful about gaps, limits, contracts roll-overs and expirations.

Use a trustworthy and low cost broker. Consider spreads and swaps (roll-over cost) as this system holds positions for days or weeks and sometimes months.

Backtest it manually before trading it. Trade it only if it shows positive results on a portfolio level over a sample of at least a few hundred trades.  Yes, a few hundred. Trade it on a separate account, to easily be able to track the results of this specific system. Once you decide to trade it, just follow the rules. It requires almost no thinking.

Trade it only if you accept the drawdown levels and losing streaks, as seen in the backtest, in fact, assume 2x larger ones and 2x longer series of losing trades.

That’s what I do. I trade this as one of my actively traded strategies. For a while I ran a public journal on forex factory with a very similar trend following system (at a time I used channel breakouts) and I made money (luckily there were a few big trends at a time I ran the journal for 3 months).

I hope you will find it helpful. I searched for long time for a “holy grail”, or a system that I could trade end-of-day, on a variety of markets, that I trust has an edge. This is what I found.  This is best what I have found so far.  It is simple and I believe it can be profitable.

Technically, it is easy to trade.

Difficulty in making money trading this system, especially if traded in size, lies in the fact that it has significant expected drawdowns and losing streaks, but they are a natural consequence of using a trend following system.

I am starting to trade this and I may provide an update some time from now. In backtests this system took 30-40 trades per market between 2000 and 2014, so it is just 2-3 trades per year per market. So it will take time to see any statistically significant results of trading this method.

Good things about this method: it is low cost (not many trades), makes money independently from trends in equity markets (in fact, in case of a bear market, likely there will be trends on a few forex and commodity markets, which this system will benefit from), it requires little time (just minutes per day, at the end of the day).

In summary, I presented a trend following system, with specific trading rules, that can be used in a mechanical way, it has been backtested and it has been profitable over 2000-2014 period on most major markets, with the same parameters. I hope you will find this beneficial.  I surely would have appreciated someone showing me this a few years ago.

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