TRADING SYSTEMS
FX
the CAGR is increased to 3.12%. Te Sharpe ratio achieved is a compromise between the three systems, with a final value of 0.64.
Table 1. Summary for some relevant trading system statistics for the three AUD symbols plus an equally weight portfolio.
carried out using 1986-2017 daily data. A constant spread of 3 pips was used for all traded symbols. Note that the current average spread for these symbols on many retail brokers is now significantly below this point so the larger spread is used to account for larger historical spreads through the simulations. Since the trading frequency of these systems is rather low the influence of the spread is also limited.
Tis trading system achieves profitable results on all tested symbols through the back-testing period. Results are best for the EUR/AUD where the Sharpe ratio and CAGR are highest. In contrast to other symbols the reward to risk ratio is significantly higher than for the other symbols while the winning ratio is roughly the same, leading to a much
higher expectancy per trade. Results are poorest for the GBP/AUD where the Sharpe ratio is much lower than for the AUD/JPY or for the EUR/AUD.
Behavior is also significantly different across the three pairs as drawdown periods and profitable periods happen at different times. For example the strategy on the EUR/AUD has a long drawdown between 2008 and 2014 while on the GBP/AUD it trades basically flat through this period and reaches a new equity high before the EUR/AUD instance does. Tis helps when building a portfolio as the results are hedged between the different symbols. By using the three pairs in an equally weight portfolio (0.33% risk per trade) the maximum drawdown for the strategy can be reduced to 8.8% while
It is also worth noting that this is not a trend following system, as it lacks some of the typical characteristics of this strategy type. For example the winning ratio is significantly high (>50%) and the reward to risk ratio is in fact close to 1 for all pairs traded by the strategy. Tis makes this system easier to trade since the psychological punishment received by the trader in the form of trading losses is less frequent and when such losses happen they are about the same magnitude as winning trades. Te fact that we are not trading a trend follower also makes this strategy valuable as a way to compliment a trend following approach trading across the most liquid Forex pairs.
Te above shows that you can indeed
create trading strategies that give positive long term historical testing results on at least some baskets of low-spread
lower-liquidity Forex
crosses. Tese strategies are rarely trend followers since these currencies do not tend to trend as strongly as pairs like the EUR/USD or the USD/JPY. Tis type of trading strategies can also be developed for baskets of crosses using the JPY, GBP and EUR currencies. It is important however to avoid including USD pairs within these baskets as USD containing instrument generally have much stronger trending elements that are not shared by the other pairs.
Daniel Fernández
Founder of
Asirikuy.com and
Mechanicalforex.com
FX TRADER MAGAZINE April - June 2017 23
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