Good reward/risk ratio experiment

hello guys

Yesterday when i was looking at the charts, i found something interesting about price action. The approach is like trial-and-error method to catch a trend. So i spent the whole day backtesting it for the last year only. According the test results, the number of winning trades (break even trades included) is more or less the same as that of losing trades, especially 9-12 for cad/jpy. However, the ROI is quite good, roughly 10% for each pair if i risk only 1% every trade. This sounds like too good to be true, at least for me. So i decided to forward test it and keep the results here.

In this experiment, the risk for every trade is always 2%.
Ok, here are the trades for today:

#01 Short AUD/JPY at 94.05, SL 94.67
#02 Short EUR/JPY at 157.14, SL 158.06
#03 Short EUR/CHF at 1.6224, SL 1.6266

Pending orders:
Short CAD/JPY at 102.92, SL 103.53
Short EUR/AUD at 1.6747, SL 1.6815
Long EUR/CAD at 1.5255, SL 1.5174
Short GBP/USD at 1.9574, SL 1.9674

Quick update:

Open trades:
#01 Short AUD/JPY at 94.05, SL 94.67
#02 Short EUR/JPY at 157.14, SL 158.06
#03 Short EUR/CHF at 1.6224, SL 1.6266
#04 Short CAD/JPY at 102.93, SL 103.58
#05 Short EUR/AUD at 1.6741, SL 1.6820
#06 Short GBP/USD at 1.9541, SL 1.9658

Pending orders:
Long EUR/CAD at 1.5255, SL 1.5174

After extensive backtest, i am now resuming my experiment..

Here is a typical setup of my trades:

1. Price crossed above the channel.
2. Buy limit 2 lots at line E, SL at line 0 below E. Close 1 lot at the other line 0.
3. Wait for reversal signal to close the other lot.

Hey richy, Could you clarify your backtesting results please? The ratio of reward to risk, if I understand you correctly, is roughly 10 to 1, correct? And the ratio of winning plus break even trades to losing trades is roughly 1 to 1. Is that correct?

Note: The break even trades should not be factored into your net performance statistics, as they have no effect one way or the other, except to waste time. The important number is the ratio of wins to winning plus losing trades, or the ratio of wins to losses. Would you clarify these numbers for us please, as if I understand you correctly you have found an excellent trading protocol. Congratulations.

Which currencies does it work best on, and which ones perform the worst? What is the average number of system compliant trades per year that are available?

hello itme,

thanks for your interest.

during backtesting, the method i used for trailing stop loss is that, the trailing distance is twice the stop loss. For instance, assume the stop loss is 50 pips, i only move it to break even if that position is in profit of at least 100 pips. So there may be a case where a position is in profit of 90 pips then the market reverses and hits the stop loss for a -50 pip loss.

so you're right, i consider a break even as a winning trade. In other words, the ratio of winning plus break even trades to losing trades is roughly 1 to 1. Thanks for correcting me, i'll make that amendment to the performance statistics.

My approach is very simple. I wait for a reversal signal of an exhausted trend and jump in on a pull back. This way i increase the reward/risk ratio by at least 4 times.

Therefore it could be easily seen that my approach is best for trending pairs such as eur/gbp gbp/chf aud/nzd nzd/jpy.

If used for daily charts, the average number of trades per year is 10 - 15. Now i am experimenting with 4h charts so that i can reduce the time required to verify the profitability.

Hi, richy, & greetings from Amsterdam.

I've been enjoying your Fozzy posts - it's good to see others doing well.

This thread is also interesting reading and I appreciate your sharing : could you please clarify the method you are using for this experiment ?

J.

PS. Where does your "black hole" quote come from, please ?

hello jtrader,

thx.

as i explained in the previous post, it's a reversal approach. That is, i wait for a trend to be exhausted, then a reversal signal and jump in on a pullback. A reversal sign could be anything of your preference, such as divergence, candlestick formation, etc. For me after a reversal sign, i wait fora confirmation which is when price closes above/below the channel (see pic in post 3).

First trade:

eur/cad, short at 1.5482, SL 1.5540, close half at 1.5424

risk 1% on every trade.

about my 'black hole' quote, it's from the best tv show ever titled 'prison break'. A little warning: it's really addictive

TP1 at 1.5424 hit. Current risk on that trade is 0.5%

Realized P/L: 0.5%

Price dropped to tp2 at 1.5366. Move SL to BE at 1.5482

Thanks for the response, Richy - I'm on the same page now.

J.

PS. I saw a few great episodes of PB during visits to London last year - but when I was over there very recently, I noticed they (the prisoners) were (a) out & (b) being pursued by God-knows-who...

update:

trade #1: still in progress +90

new pending orders:

pair, direction, price, stop loss

aud/jpy, s, 92.18, 92.72
aud/nzd, l, 1.1285, 1.1241
cad/jpy, s, 100.62, 101.09
eur/aud, l, 1.6805, 1.6754
eur/chf, s, 1.6168, 1.6193
eur/gbp, l, 0.6792, 0.6768
gbp/chf, s, 2.3792, 2.3905
gbp/jpy, s, 228.13, 229.65
usd/jpy, s, 117.91, 118.48

risk 1% each trade

Not a wonderful start.

aud/nzd, eur/aud stopped out, resulting -2% loss.

Current trades:
aud/jpy, s: -15
cad/jpy, s: +25
eur/cad, s: +43

canceled orders:
eur/chf, s

new orders:
eur/jpy, s, 154.94, 155.70

current trades:
aud/jpy, s +25
cad/jpy, s +28
eur/acd, s +77

orders canceled:
gbp/chf, s
gbp/jpy, s
usd/jpy, s

current trades:
aud/jpy, s: +60, closed half at tp1 +0.5%
cad/jpy, s: +70, closed half at tp1 +0.5%
eur/cad, s: +70

new orders:
chf/jpy, s, 95.83, 96.22
aud/nzd, l, 1.1284, 1.1237

current trades
aud/jpy +20
cad/jpy +75
eur/cad +25

orders canceled
eur/gbp, l

trades closed
eur/cad, s, stopped out at 1.5484. P/L +0.5%

current trades
aud/jpy, s, +103, TP 2 hit, SL moved to 92.18, +0.5% guaranteed
aud/nzd, s, +50, closed half at TP 1, +0% guaranteed
cad/jpy, s, +145, TP 3 hit, SL moved to 100.15, +1% guaranteed
chf/jpy, s, +33

new orders
aud/usd, s, 0.7845, 0.7885
eur/aud, l, 1.6826, 1.6739
nzd/usd, s, 0.6930, 0.6992
usd/cad, l, 1.1721, 1.1678

current trades
aud/jpy, s, +138
aud/nzd, l, +76
cad/jpy, s, +164
chf/jpy, s, +41, closed half at TP1

aud/jpy, s stopped out at 91.64. Total P/L for this pair +1%

current trades:
aud/nzd, l +93
aud/usd, s -26
cad/jpy, s +130
chf/jpy, s -3
eur/aud, l -33
nzd/usd, s +14

update:
nzd/usd, s: closed half at TP1, +0.5%

current trades:
aud/nzd, l: +125
aud/usd, s: -1
cad/jpy, s: +194
chf/jpy, s: -8
eur/aud, l: +51
nzd/usd, s: +55

update
chf/jpy s: stopped out for 0%
cad/jpy s: stopped out for 1.5%

new orders
gbp/chf, l, 2.3458, 2.3348
eur/chf, l, 1.6062, 1.6030

current trades
aud/nzd l: +58
aud/usd s: -28
eur/aud l: -41
nzd/usd s: -10

stats so far profitable but not really encouraging