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 !

Creating Profitable Forex Trading Systems in Five Easy Steps

One rule of thumb that every aspiring entrepreneur should remember is that to make huge profits, you should know how to do it by yourself�and not rely on other's efforts. Being independent from other people will help you determine what things are best for your business.

Such rule applies on all types of investments, including foreign currency trading, or mostly known as Forex trading. It cannot be denied that Forex is the largest existing market around the world, which is estimated to have an excess of 2 trillion U.S. dollars worth of foreign currencies are traded each day. It is larger than the magnitude of the New York Stock Exchange, which is approximately 50 billion U.S. dollars. Thus, Forex market exceeds all combined equity markets around the world.

With such huge wealth circulating around the Forex market, one of your financial goals is to grab a major slice of that $2 trillion average daily turnover in the market. How you will be able to get a substantial portion of that average turnover if you do not know how you will handle your Forex business? Although you cannot live in the market alone (you need business partners and/or financial advisers to help you along), only you can determine what the best Forex business there is for you.

To get huge profits out of your Forex trading career, you need to build your own profitable system�a trading system that will bring your not just hundreds but thousands of dollars worth of Forex revenues. Such trading system is available on the market, but as previously mentioned, you need to be independent�and you need to have your own Forex trading system that will help you achieve your financial goals.

For new traders, it is difficult for them to device their own trading system since they do not have too much knowledge about the Forex market. However, even a neophyte trader can device a trading system that will fit on his personal preference and needs�in just five easy steps!

Before we discuss the five easy steps towards a profitable Forex trading system, you need to learn first the three main characteristics of a successful Forex trading system. These are as follows:

1. A successful Forex trading system is simple. There is no need for a complicated trading system with too many rules. It is a proven truth that simple systems work better than complicated ones, and they have higher chances of success despite of the �brutal� characteristic of Forex trading.

2. A successful Forex trading system cuts losses and runs profits. Keep in mind that you need a trading system that gets the huge possible profits and eliminates losses quickly, if not instantly.

3. A successful Forex trading system follows long-term trends. You will never cover your losses if you are just generating small profits. Keep in mind that the Forex market is worth $2 trillion U.S. dollars, thus there is no point in trading in exchange for just small profits if you have the opportunity to make trades for larger revenues. Focus on long-term trends and you will be able to see better results.

Now, here are the five easy steps in building a profitable Forex trading system:

1. As previously mentioned, your trading system must be as simple as possible. Integrate few yet essential rules and an extensive investment management system.

2. Always look for long-term trends (preferably on a weekly basis), then shift to daily charts and to time entry. This will help you analyze market trends efficiently.

3. The ideal way of trading foreign currencies is through breakout method.

4. Always watch for any break that you will note on your chart, which is commonly confirmed by stochastic crossed with bearish divergence. This will be your great timing tool whether you will enter a certain deal or not.

5. You must integrate effective time management within your system. Time is gold and is one of your precious resources. Design a trading system that is time efficient�where you can maximize the potential of your time resources to generate huge profits.

Get away with complicated systems; it will just ruin your entire Forex trading career. Build a simpler one and see for yourself how profitable it is.

The 8and8 EA A Hopefully Profitable Expert Advisor

During this past few days, I had been implementing the 8and8 daily trading system into a forex expert advisor. When I finished coding the system and started back testing its daily trading results, I realized that the system is unprofitable as an automated trading system due to the excessively large amount of mixed signals generated from the cross of two indicators. As it usually happens with crossing systems, whipsawing becomes a very hard problem to solve. On this months daily chart, which is shown below, I tried to pinpoint the places that caused heavy loses due to intense crossing of the EMA and the RSI indicators.
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The system does much better manually because trades are taken in a very discretionary manner. For example, you would not take a trade against the main trend when there is an important support/resistance level ithat has to be reached in sight. These things are not visible to automated trading systems (that easily), so it becomes very problematic and the experts fail when they have fixed SL and TP orders.

My first attempt was to try to fix the stoploss and take profit problems by making them ATR adjustable (hey ! its my flavour of the month and it really works !). Sadly, the whipsawing problem absolutely killed the idea as too many bad entires happened due to the intense crossing of the two indicators (still it was much better than the original).

I then started to think about the expert advisors I know that are at least likely profitable, Gods Gift, Simple Daily System, etc. I realized that their logic often involves some sort of volatility/range condition filter so that positions can only be entered when strong trends happen.

After struggling for several days with the idea and doing a ton of optimization with several range and volatility filtering ideas, I came up with the expert advisor I am presenting you now. The result ? A very clean equity curve in backtesting from 1999 to 2008 (EUR/USD). The expert advisor does a great job at filtering range conditions and just trading when the conditions are "right". Although the rules changed a little from the original 8and8 system, you could say that the main idea "daily trend following" is alive inside this modified trading system. The main modification is a simple filter based on the ADX indicator which makes the ea not to trade in raning market conditions. Lot sizing adjusted to volatility was also added.

Below you can see the backtesting image of the expert (from 1999 to 2008, modeling quality is n/a because of several mismatch errors in my 1999 and 2000 data but becomes 90% once you test from 2001 (2001 to 2009 is exactly the same anyway)).
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Now, you may be asking yourselves if I intend to sell or give away this ea for free. Of course, it is available to anyone who buys my automated trading ebook or subscribes to my newsletter but feel free to buy me a cup of coffee and email me if this ea is all you want (a link is available at the bottom left for this). The ea is profitable according to backtesting although its maximum draw down and yearly profits are almost alike, so you could expect a 50% yearly profit with a 40% maximum draw down. It will be forward tested from next week.

Other, expert advisors like Gods Gift (specially my ATR modified version if you read the last post !) and the Simple Daily System are free expert advisors that do make profits and will most likely continue to do so in the future, if you would like to learn more about them and their settings 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 !

Profitable Expert Adviors are Unmarketable

I have spent a good chunk of this and last week analyzing commercial expert advisor systems extensively, trying to assess their profitability and write reviews that can help retail traders out there who dont want to lose their money in something that does not work at all. A very strange thing I have found while doing my research is that most people look for expert advisors that have characteristics that differ a lot from what I would consider the main features of a profitable trading system.

The regular new forex trader who wants to use an automated system usually looks for a system with a given set of properties. I have deduced, from commercial expert advisor sites (including the ones with the cheesy marketing stuff), that people will preferably buy expert advisors that trade a lot and have high percentages of winning trades. Physiologically people like to know they will "lose" less often.

Now, profitable expert advisor, from what I have been able to analyze, have almost exactly opposite characteristics. They have low winning percentages and they trade rather infrequently. Of course, this is almost unmarketable. Most people will utterly reject a system which has a 10% winning percentage and a trading frequency of 1-2 trades per month. Well, that would mean winning 1 trade a year, most people cannot deal with that, they want the constant gratification of winning all the time, even if that means being unprofitable overall.

Of course, people are not brain dead and will take a profitable system once it is proven to them, but they are much more prone to accept evidence (false or true) about a system with the characteristics they desire, rather than a system with the profile shown below.

What they usually forget is that systems with low winning percentages that trade infrequently are often trend followers which try to catch big pip moves, so they may lose 90% of the trades but the trades that profit are almost 20 times larger than the losers, making the expert overall very profitable. The turtle trading system is a very good example of this, it loses very frequently and requires a lot of discipline to trade but it is profitable in the long run.

If you would like to learn more about what expert advisors, both free and commercial, I have tested and found likely profitable, 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 !

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 !