Live Trades – Clarifying Our Parameters

Filed under: Live Trades |

Okay – I have gone through an entire year of trades that I have made, and I have analysed this data and made a few adjustments, which will also be relevant for our live trades.

 

To begin with, I started with the hypothesis that the most liquid and therefore the most traded currency pairs may be the most reliable for the kind of price action trading techniques that we employ. These pairs were as follows:

 

EUR/USD

GBP/USD

AUD/USD

NZD/USD

USD/JPY

EUR/JPY

GBP/JPY

AUD/JPY

GOLD

SILVER

USD/CHF

 

The only one of the major pairs that begun on my list but was cut is the USD/CAD pair. Now, while this is a major pair, my data showed that this pair carried a significant loss during the past year. This may be due to the fact that this pair is very much fuelled by news on oil. For this reason, I am taking it off my trading radar.

 

Now, I have not simply analyzed my data and gone with the pairs that have been most profitable. This is not a good way to create a system, as past results are not predictive of the future. By having a hypothesis first and testing that hypothesis, we can create a much more robust system.

 

When I was trading all pairs, I made a 33% rise on my capital in the past year. By using the most liquid pairs above, I would have made a 46% rise on my capital, and I would have made fewer trades and done less work. This included only three losing months out of nine, with the biggest losing month being just -2.34%. However, the maximum drawdown was 13%. While this is acceptable, we must be aware of it. Figure 1 shows the equity curve for June 2011-June 2012 (with a bank of 10,000 GBP).

 

Figure 1.

If we had been compounding our bank every time we had a winning month (i.e. risking 1% of our bank on each trade, but not lowering this after a losing month), we would have made gains of 61.5% from just 126 trades. This is only 2-3 trades per week.

 

I am also going to have a rigid risk-reward of 1:2 for all of the live trades going forward. This is so that we get a higher winning percentage (probably around 50-50), which I think is easier and less painful for followers of the system. I know I have made one or two changes for the live trades already, but this will be the last one. We will discard the trailing stops as they have not been as profitable, and we will go with a risk-reward of 1:2 with the above pairs.


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