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Professionals tested for over a year... interested?

JohanVIA · 15 · 3423

JohanVIA

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In the recent past, I have been testing every conceivable forex trading strategy together with 2 friends (professional forex traders) and 2 software developers working for a forex broker. we tested the 20 most traded CP's (currency pairs) on a historic price database.
for every strategy - cp combination we used a whole range of variables: e.g. EURUSD, break outs, entry point if 0,5,10,20, etc points above, SL 10,20,30 etc pips. So we tested literally thousands of combinations.
The results were quite shocking: there are almost no CONSISTENTLY working strategies (where i define consistent as profitable over a one year period). Most Forex books with strategie advices: in the garbage bin is the best advice.
Authors use many times examples to show how it worked out. But if your historical database is large enough you can always find examples "that it worked" for even the most crazy strategies.
A strategy that works this week but causes big losses next week.... yes there are hundreds. But it is useless.

I can elaborate, but only if people are interested.


TSO

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Reply #1 on: Jul 18, 2014, 02:17 AM
Quote
Authors use many times examples to show how it worked out. But if your historical database is large enough you can always find examples "that it worked" for even the most crazy strategies.

This is called data mining bias :) Plain English: if there's a will [to lie with statistics], there's a way.

Quote
there are almost no CONSISTENTLY working strategies (where i define consistent as profitable over a one year period)

Of course. In the capital markets, there's no such thing as a strategy that is profitable every single year on year. It's the same as doing business isn't it? You can't always be doing the same thing and expect to maintain a certain level of profitability forever. You need to adapt, right?

Value Investing doesn't "work" all the time either, in the strict sense that it outperforms every strategy year-on-year, quarter-on-quarter.


JohanVIA

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Reply #2 on: Jul 18, 2014, 04:21 AM
TSO, regarding your second point:

yes change is always needed in every business. but the point is not that a strategy is after a year not performing optimally, the point is that  there is almost no strategy that performs well in HalfYear 1 and at least not losing in the second half year. That makes in my eyes such a strategy useless, since by the time you have found out it works well, it has become obsolete already.

Thanks for your remarks.


Prospera

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Reply #3 on: Jul 18, 2014, 08:43 AM
In the recent past, I have been testing every conceivable forex trading strategy together with 2 friends (professional forex traders) and 2 software developers working for a forex broker. we tested the 20 most traded CP's (currency pairs) on a historic price database.
for every strategy - cp combination we used a whole range of variables: e.g. EURUSD, break outs, entry point if 0,5,10,20, etc points above, SL 10,20,30 etc pips. So we tested literally thousands of combinations.
The results were quite shocking: there are almost no CONSISTENTLY working strategies (where i define consistent as profitable over a one year period). Most Forex books with strategie advices: in the garbage bin is the best advice.
Authors use many times examples to show how it worked out. But if your historical database is large enough you can always find examples "that it worked" for even the most crazy strategies.
A strategy that works this week but causes big losses next week.... yes there are hundreds. But it is useless.

I can elaborate, but only if people are interested.

Please do elaborate, Johan. I'm all ears. Thanks!

(Why forex, though?)


yllor

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Reply #4 on: Jul 18, 2014, 04:15 PM
it is interesting, indeed!

hope we will read more on about the experimental study

hope we can learn more and apply to our day to day life's decision making


TSO

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Reply #5 on: Jul 18, 2014, 10:56 PM
the point is that  there is almost no strategy that performs well in HalfYear 1 and at least not losing in the second half year. That makes in my eyes such a strategy useless, since by the time you have found out it works well, it has become obsolete already.

Very good point you have there. But have any of those strategies become valid again after a certain number of years? Perhaps their effectivity depends on the macroeconomic circumstances.

Did your independent variables include economic indicators, too?


JohanVIA

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Reply #6 on: Jul 19, 2014, 07:08 AM
Prospera, Yllo, I will prepare something this weekend. Little patience please.


JohanVIA

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Reply #7 on: Jul 19, 2014, 07:10 AM
TSO: economic indicators - no not directly but indirectly: we looked at behavior around interest rate decisions.
Will post more this weekend.


TSO

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Reply #8 on: Jul 19, 2014, 02:40 PM
Certainly looking forward to your methodology. That's what I'm curious about most of all :P


JohanVIA

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Reply #9 on: Jul 19, 2014, 08:24 PM
OK guys here some more about the testing.


CP = Currency Pair
TC= a test combination (see later)

Introduction (extensive so also newbies understand)
A strategy is a consistently applied method of trading.
An example of a strategy is a Channel Break Out: if a CP breaks out of the “normal” trading range of the last period, then buy/sell.
But a strategy can be applied to different time frames (1H, 1D etc). Maybe it works in one, but not in the other.
Since CPs behave differently from each other (compare e.g. EURUSD with USDJPY with AUDUSD), you also need to test every CP for a given strategy.
Then you need to test all kind of other variables: what is my entry trigger; the moment the price goes 1 pip out of the range or maybe 10 pips or 20, 30 ?
The SL you use, 10 pips, 20 etc
What or when is my exit?
Time allowed for trade to work out? (if not result excited then close trade).
And even more variables depending on the strategy, like “always enter unless…”, special exit situations etc

A TC is one of all the possible combinations mentioned above, so e,g.
Strategy:      Channel Break Out
CP:      EURUSD
Time:    1D
Entry:      20 pips above/below
SL:      40 pips
TSL:      No
Pyramiding: No
Exit always if:  …
Etc

If you change from the list above only the entry point from 20 to 30 pips, that is a new TC

The only variable that doesn’t matter is the number of lots (it changes the amounts but not the conclusions). We always tested trading with one lot.


The testing

Let me state beforehand, that we had no bias pro or contra any strategy, indicator, timeframe, CP etc. Everything what makes money is our friend ☺

We collected the most known books about forex trading and listed all the strategies they mentioned: Inside Days, Reversal Days, Flagpoles, Tokyo /London, Channel Break Outs just to name a few.

Our definition for a “working strategy” was any TC, that showed at least a positive result of 5% on capital after one year, regardless of the %% or win/loss trades. Depending on the Max Drawdown (max loss during the trading period) we wanted to be compensated higher than 5% for running the risk.
(If a TC caused only a few trades in a year, we extended the time period tested (multiple years) to be able to draw reliable conclusions.

We started testing with just the basic variables (strategy, CP, time, entry, SL). If we found no hope giving results there, we stopped and went on to the next strategy (since in theory there are millions of TCs you would otherwise need to test.
The testing-programs created for every TC one multi-tab spreadsheet. It showed an overview of the results, “account details” with all the (imaginary) transactions that would have been done (to make it possible to trace exactly what happened) and a screenshot of the graph.
We ran thousands of these spreadsheets during our testing.
Screenshots of one example attached (if I can find out how to upload attachments here).

Technically: we had a program made for every strategy running on ForexTester (a test platform), which automated all the different combinations testing.
Because of the thousands of TCs, this would have been impossible to do by hand.

https://dl.dropboxusercontent.com/u/90920418/CBO1.png

https://dl.dropboxusercontent.com/u/90920418/CBO2.png

https://dl.dropboxusercontent.com/u/90920418/CBO3.png

Conclusions
1. The conclusion was in short: we found almost no CONSISTENTLY working strategies.
We had anticipated, since CP’s behave differently, that some strategies would maybe only work for e.g. USDJPY but not for other pairs.
Also that we did not find.
Yes, we found hundreds of TCs that worked well for a few weeks or times. But failed after and caused losses overall.

Even strategies we had expected a lot from (Channel Break Outs/Turtle Traders) etc turned out to be losers when tested on a large scale. Mind you, I don’t say it has not worked in the past.

2. I believe many people who are enthusiastic about a “great” strategy, are so probably based on a relatively low number of successful trades but their enthusiasm will be most of the time not be scientifically based.
That includes most authors of forex books.
In my opinion, if you pretend to be a professional writing a book teaching others how to trade, you should base your proof of a strategy being profitable not on one graph on a book page, but upload a simulated year of trading that strategy on internet for all readers to check.



Final notes

A.   “So if you say that almost nothing works consistently, then why do all big banks have dealing rooms?”
In short, first they have to, since dealing in currencies is part of their banking activities for their clients (international payments etc). Second, they have an advantage that a retail trader does not have, they don’t pay trading commissions. Now imagine you just make a 5 profit on a huge trade, many traders doing that all day… Third, banks have an information advantage. Fourth, most professional traders are also on losing streaks every now and then. Fifth, ever thought about the strange idea that the party “on the other side” also  has insight in many other retail orders, their SL etc?
Now imagine a bank would place an order just to push the price through a level which causes many trades to close… Wouldn’t that be a nice commission collector?
If you are convinced banks are of an undisputable moral standard, then this is just fantasy.

B.   So if you say that almost nothing works, then what does?
Make me a serious offer and I will tell you. For sure it will be a lot cheaper than losing (more) money in trading.

But in general I want to say this.
The moment you enter the market you run the risk of losing money. So you don’t enter until you have the feeling that now the odds are seriously in your favor. So don’t just open your laptop when you have time and start trading based on the action of the moment. Change your mindset. Before you enter any trade, you must have a clear idea what type of situations you are looking for, when you will enter, with how much, how much risk you can take, when you will exit etc


I have read over the years quite a few interviews with heads of forex retail depts. They have insight of course in thousands of retail trading accounts. And they all say the same: retail traders always wait too long with taking their loss, and get out way too fast when they are making money.

As Jesse Livermore (the famous stock trader) once said:

“Buy right, sit tight.”


Good luck with your trading.


Prospera

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Reply #10 on: Jul 20, 2014, 06:29 PM
Appreciate your taking time out to tell us more about your test- results, Johan.

Will thank you even more if you'd at least give us some clue(s) in reply to the question you posed in B. :-)





JohanVIA

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Reply #11 on: Jul 22, 2014, 02:40 AM
Certainly looking forward to your methodology. That's what I'm curious about most of all :P

Well it's all here for you to read :-)


ferrariEverest

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Reply #12 on: Jul 27, 2014, 02:13 PM
Sir JohanVIA, or Johan M v Z,  to be honest I've expected that there will come a sales pitch after all these posts of yours (especially your first psot above), and indeed there was (offer to high-net worths)... or were:
Quote
B. So if you say that almost nothing works, then what does?
Make me a serious offer and I will tell you. For sure it will be a lot cheaper than losing (more) money in trading.

Anyway, does it mean that your 2 friends (pro forex traders) discontinued Forex trading because of your collective finding? How long have they been trading forex and are they profitable? If they are still doing forex trading, then that would be extremely ironic.

Ma'am Prospera is now a prop forex trader. I know several successful pro forex traders with decades of trading experience and they have inspired me to do forex trading. It's unfair and very unprofessional to generalize and put down forex trading and aggrandize about value investing or whatever secret you have to sell ("make me a serious offer" pitch). Spreadsheet calculations or demo tests do not translate well into live trading. There are various variables that come into play in live trading which you will never get or experience in spreadsheets or demos. Geniuses do not always do well in trading. Often, traders who advocate and use simplicity do much better.

If you can't find profitability in forex, it's fine by us. You can focus on value investing. The trading world can easily accommodate all of us.

In Filipino, wag maging utak talangka at manira sa iba para lang mai-angat ang sarili.


Quote
We collected the most known books about forex trading and listed all the strategies they mentioned
By the way, I agree that some strategies do not always work. That tells us to adapt and modify our strategies according to certain market variables. Traders must understand that trading is part mechanical and part discretionary.

Most books are full of crap and similar content, so basing your tests on these was useless and a waste of time. If strategies mentioned on most books are so successful, do you think the authors would share it? Or are they just after easy money to be acquired from selling those hyped books?

Your professional forex friends, if they are indeed pros, should've known these in the very first place.

Traders gain basic information from books and the internet. They develop strategies through experience.
« Last Edit: Jul 27, 2014, 02:36 PM by ferrariEverest »


JohanVIA

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Reply #13 on: Jul 28, 2014, 05:20 AM
@FerrariEverest:

You say many things, but let me reply to a few.

I am not generalizing nor putting down forex trading. I just state what we have tested, how we did that and what the outcome was.

1. There is no sales pitch. Since if this was supposed to be a sales pitch, it would prove my commercial skills to be on a very low level.
     But you can not expect me to spend a lot of time for free on people I don't know to teach them things that we (my friends and I)
     have invested a whole lot of time and money in and of which we are using the findings until today for ourselves. My testing post was   
     more meant to be a serious warning to newbie forex traders since it is a fact that by far most retail traders lose money and stop   
     within 6 months.
 

2. Of all the strategies we listed, I said "almost nothing worked consistently". I stick to that. I did not say nothing worked; with some
    trading ways you can make very serious returns.

3. You can only test strategies. Not traders market experience (and therefore recognizing of patterns). Not a trader's intuition. Not somebody's economic views. So even if no "fixed" strategy would work at all, that still would not mean you can't make serious money in forex. Think George Soros. He didn't make his fortune with strategies, bollinger bands or trading robots, but with his economic views.

4. My friends all still work in Forex and are pretty successful.

Good luck with your trading.


ferrariEverest

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Reply #14 on: Jul 28, 2014, 11:44 AM
Thank you for your reply, Sir Johan.

1. I viewed it as a sales pitch because of the sequence of your posts. First you offered some data (test results) to catch people's attention, then you mentioned your offer (fund management) and "make me a serious offer" statement, and then you posted links to your blog. Selling a service may not be your forte, but your post still involves some selling nonetheless. I know your business is not my business, I am just posting my observation for newbies who are clueless of this approach.

I did not expect you to hand comprehensive test results for free (I believe traders should walk their own path and not rely largely on others). I also did not expect that you will make that statement ("make me a serious offer") because a precious thing (like a winning strategy) is priceless. I was also expecting that you would mention something like "although these strategies failed, there are ways to tweak them to make them profitable" since several strategies (some of which you've mentioned) just need some tweaking or an addition of a discretionary approach in order for them to become useful. Trading involves the discretionary use of a trading toolbox where each tool is useful for certain circumstances.

2. George Soros is an insider. He is not a trader per se. So he is a useless example for this topic.

3. "You can only test strategies. Not traders market experience (and therefore recognizing of patterns). Not a trader's intuition. Not somebody's economic views." All these can be translated to strategies or a series (a comprehensive sample) of trades which CAN be tested. That is why your test, which may have been laboriously done, is incomprehensive at best. Trading is subjective, therefore I am quite sure that you would arrive at varying results (contrary and similar to your test results) if you repeat your test with a significant number of experienced traders. The hard part is finding traders who are willing to share their winning strategies with strangers.

4. Your friends "work in Forex"? Aren't they retail traders? Do they work for banks or brokers? Non-retail traders have a slightly different trading perspective.

Thank you for being cordial. Good luck with your trading endeavors


 


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