Playing with Bollinger Bands A Likely Long Term Profitable Strategy

Last week I wrote a post about the Bollinger Bands indicator and how I thought it could be exploited to achieve good profitability levels in forex trading. After doing a full analysis going through a visual 5-6 year backtest, a mathematical expectancy analysis and the final coding and testing of the strategy I can tell you that I have come up with a likely long term profitable system based exclusively on Bollinger Bands. Asirikuy members would definitely want to checkout last weeks video in which I explain the whole development process in detail showing you all the steps necessary to go from an idea to an actual, coded expert with great possibilities of long term success. On todays post I want to give my regular readers a look into this strategy and the results it finally achieves.

My first idea for coding this Bollinger Band system was taken from the thoughts I had a week ago regarding this strategy. I based the making of this strategy in the fact that when a bar closes above a certain number of volatility adjusted steps outside 2 standard deviations an important "signal" is given that predicts long term movements in that direction to a good extent. As I pointed last week, this strategy also signals a retracement in conjunction with the trend following aspect but definitely I wanted to explore the trend following aspects of the strategy first.

The mathematical expectancy analysis of this strategy wasnt disappointing at all with positive results for almost all period perspectives on the one hour charts. However - interestingly enough - long periods of time revealed a great characteristic of this system which is the predictive power over a singificantly long amount of time with almost no moves into unprofitable territory. This means that the strategy would definitely lend itself to the making of a system that could use an extremely favorable risk to reward ratio. Designing my systems money management around the conclusions of the mathematical expectancy analysis results I came up with a strategy that held a risk to reward ratio of exactly 1 : 4 meaning that the system can take four loses for each winning trade. For me this is quite unprecedented sine most strategies I coded have a risk to reward ratio oscillating from 2 : 1 to 1 : 3 but I had never been able to achieve such a high expectancy for winning trades with success. The results I achieved for a 10 year backtest (2000-2010) on the EUR/USD one hour chart are shown below.
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I have to say that I was very impressed to see that such a simple strategy with absolutely no internal closing criteria besides the TP and SL could achieve such an incredible performance. This strategy definitely shows that it is not complexity what determines the success of a trading strategy but true understanding of the underlying price action. Once you have some idea of how the market behaves and how indicators can be used to exploit an inefficiency a likely long term profitable system from a very simple set of logic can arise. It is important here to say that the above shown results are unoptimized and simply the variable settngs are the result of the mathematical expectancy analysis (for those who are wondering, yes, I tried a trailing stop but a solid TP works much better)

Simulations of this system are also bound to be quite accurate since the average value of the TP is well above 200 pips, meaning that this EA has an incredibly large take profit value that could not be faked by any type of simulation interference. Moreover, the EA only enters trades based on last bars close and therefore explicitely controls bar opening, something that is bound to make trading systems more reliable and back/live testing consistent. Of course, we would need to test this expert to find out but I believe that this system can be improved a lot more before actually releasing it as a Watukushay EA. It is however important to say that GREAT part of this straegys success is based on its volatility adjusted money management that allows it to adjust to changes in market conditions. Using a fixed SL or TP leads to incredible loses showing how adaptive money management is VITAL to achieve profitability.
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As you see on the above image, the success of the strategy is based in the fact that trades are taken almost always after a successful bollinger band breakout. However the fact that we are not focusing on the actual contraction/expansion of the bands but on the statistical meaning of a highly deviated price result makes us enter only meaningful breakouts while others that might have been entered on a contraction/expansion criteria (which is also hard to define) are avoided. The strategy does take a lot of loses (strategies with high reward to risk ratios are often very hard to trade psychologically because of this) however the great thing is that losing trades become evident after only a small move against us, allowing us to preserve the great 1:4 risk to reward ratio.

Currently I have created a forum post within the asirikuy community forum so that we can start improving this strategy and making it become a solid Asirikuy contribution. Of course, the system lacks any internal closing criteria and coming up with relevant ways to improve the systems closing of positions should be vital if this system is to be released for use in the future. If you would like to learn more about automated trading and how you too can come up with and design systems with long term profitability in mind please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Why Megadroid will Likely Wipe Your Account I am NOT Kidding

I have been becoming more and more worried about the large number of people who seem to be buying and using the megadroid expert advisor with seemingly successful results without realising the very large market exposure and risk they are putting their accounts into. Today I want to dedicate this post to the discussion of megadroids evidence for long term profitability and why its trading tactics will lead to an account wipeout in the future with a very high probability. I want to write this post to know that I did my best to warn current Megadroid users about the potential hazards of this trading system. I want to make clear before I start that I do not write this post because I am "jelous" or "offended" by the profitability of other forex traders or because I want to sell my own systems. On the absolute contrary, I write this post out of genuine concern for peoples capital safety and NOT to try to sell you anything. In fact, anyone looking for long term profitability can use one of my systems, Watukushay For Everyone, which I make available for absolutely NO charge.

I have to say that I understand the reasons why so many people may seem interested in trading the megadroid trading system. The system seems to have a wealth of both backtesting and live testing information provided by the author with a significant amount of third party tests which shows the expert to be profitable amongst time periods of at least 6 months on different brokers on live accounts. What is so wrong with megadroid then that compelled me to write this post ? Several things.

To start from the beginning, the information provided by the author is not confirmed by any third party and there have always been rumors about the author omitting loses from the statements, clearly we cannot trust the live account results of an EA seller without investor access or true third party confirmation such as that provided by myfxbook. There also seems to be significant discrepancies between simulations and live trading results (over longer periods of testing) which are definitely a result of one minute interpolation errors. Periods of 6 months of live testing compared to simulations show disparity related to the number of profitable and losing trades and great broker dependency between different tests, it then becomes evident that megadroid may be exposed to a much higher draw down than that predicted by backtesting results.

However the thing that worries me the most is the fact that the Megadroid expert advisor is a hidden Martingale. The EA loses with little frequency (which is needed even for break even results due to the very unfavorable risk to reward ratio of the trading system) but it doubles its lot size when it hits its big stoploss. The fact is that if you hit a series of consecutive loses of even as little as 3 or 4 loses, you could lose your entire account. Megadroid is a very risky trading system and it always exposes a VERY significant amount of capital 10-20% on every trade. Add a martingale to that and you have a time bomb.

To me, the current state of the megadroid expert advisor is like that of a Ponzi scheme when it gains popularity. Everyone is happy, many people are making money and finally the cash flow is so huge that the Ponzi scheme becomes unsustainable and the inevitable total loses of capital happen. Megadroid may remain profitable for more time, but the truth is that the systems market exposure is simply absurd, its a hidden martingale, a wolf in sheep clothing andI have absolutely no doubt that it WILL show its true colors as time passes by.

I hope that my arguments have been strong enough to convince those willing to listen to third party arguments to NOT trade this trading system as its trading tactics are simply unsound and its money management is simply against everything experienced traders would ever do. As I said on the beginning of this post, for those looking for long term profitability there is always Wautukushay FE. If you are however interested in a true understanding of the development of long term profitable system with sound trading tactics so that you can design and trade your own long term profitable systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

A New Day for Watukushay FE A Free Likely Long Term Profitable EA

On December 2009 I released a free expert advisor to provide my fellow traders with a likely long term profitable alternative from commercial expert advisors. My idea was to give everyone out there the chance to be long term profitable in automated trading by using a system which was built upon sound trading principles which they could use without having to pay a single dime. I named this system Watukushay For Everyone. Another objective of developing this EA was to document the whole development process and make it available within my Watukushay project, reason why the EA has the name of the project as part of its name. A month after its release and after a lot of work and research on the trading logic of Watukushay FE today I can say that I have achieved an improvement of the experts original setup in such a way that makes it, in my mind, one of the best free expert advisors available on the internet today.

I released Watukushay FE on December 25th with what I believed was a good profit to risk profile. The EA was able to make (according to simulations) approximately a 20% yearly profit with a 40% maximum draw down using an approximate risk of 5% per trade on the EUR/USD one hour chart. The only thing that I certainly did not like very much about the Watukushay FE expert advisor was the fact that the equity curve seemed to be overly centered over the years 2007 and 2008. The EA was able to adequately preserve capital on 2000-2007 with a very low profitability and then the profitability skyrocketed as we reached the years 2007-2008 something which made me believe that the EA may be in some way "curve fitted" to the "crisis type" market behavior which was characterized by very clear trends on very high volatility.

I however published the EA because I believed that the EA was able to adequately preserve capital on unfavorable market conditions so if it was indeed curve fitted to 2007-2008 market conditions then the EA would not be as profitable until a similar period arrived but it would also be able to preserve capital like it did between 2004-2007 on unfavorable market conditions (for the EA).

Nontheless, I am sort of a perfectionist and I knew that there was a lot more potential to the logic of watukushay FE. I had already done a careful analysis of the mathematics of the RSI indicator to develop the expert advisor but I knew that there was something else I could do to improve profitability. Then I realized that I had tied some variables on the expert together such that they depended on each other and tied the exit and entry criteria together. I decided to make the variables independent and redo all my analysis and coarse optimization process for the expert advisor. The results - which have been described in great detail on the ebook update released yesterday - show you how the Watukushay FE trading system was developed, analyzed and improved.

What came out of this process was an incredibly improved version of Watukushay FE. The new version is able to achieve an average yearly profit of 36% (calculated over initial equity) over 10 years with a maximum draw down of about 16% for a Risk 5 setting. The EA also achieves new equity highs every year, removing my fears of curve-fitting for the previous released version. As you see on the backtesting image shown below, Watukushay FE now has a much better risk/profit profile with a much higher quality equity curve (backtesting showed for Risk=1). Also note that Watukushay FE is still as hard to trade as all other long term profitable systems with draw down/break even periods that can last for several months.
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If you would like to trade watukushay FE on your live account, feel free to leave a comment here or on the Watukushay FE website (watukushayfe.blogspot.com) and join the 2 year live testing challenge of the EA ! Challenge yourself to achieve long term profitability :o). If you would like to learn more about the coding of Watukushay FE and how I designed, programmed and improved its profitability or if you would like to learn about other Watukushay experts I have programmed and how they too are likely long term profitable systems please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !