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To backtest this strategy I used daily Forex data from 1986 to 2016 for the EUR/USD, USD/CHF, USD/JPY, EUR/JPY, GBP/JPY and GBP/USD. The spread costs per symbol were constantly held at 3 pips per trade for the EUR/USD, USD/JPY, USD/CHF and GBP/USD and 5 pips per trade for the EUR/JPY and the GBP/JPY. In all simulations the deposit is assumed to be in USD and conversions are used when needed to convert trade profits into USD using the proper historical rate reference. Swap costs are also included in the simulations using historical central bank interest rates, these charges are credited/debited everyday at 17 GMT+1/+2, triple debit/credit is taken into account on Wednesdays.

Broad based optimizations using the following values were carried out on all symbols:

N : [10, 20, 30, 40, 50, 60, 80, 90, 100, 110, 120]

SL: [0.5, 1.0, 1.5, 2.0]

The optimum values – best Sharpe ratio – for the different pairs are showed in Table 1. As you can see the values for the parameters are exactly the same for all the JPY containing symbols while they are significantly different for the EUR/USD, GBP/USD and the USD/CHF. In general the SL value is much smaller in these instruments, mainly because volatility expansions are more common in the JPY containing symbols, especially symbols like the EUR/JPY and the GBP/JPY. The shift periods also vary significantly with shorted periods being more common in the case of the EUR/USD and the GBP/USD. Surprisingly the optimum lookback period on the USD/CHF is very high, coupled with a very tight SL meaning that in this symbol the behavior that is rewarded most is following very long term trends with a very small tolerance for reversals.

Pair

N

SL

EURUSD

40

100

GBPUSD

10

100

USDCHF

110

50

USDJPY

60

200

EURJPY

60

200

GBPJPY

60

200

Table 1. Optimum parameter values for N and SL for the six symbols evaluated.

We can also examine the balance curves generated by the optimum configurations for each system in Figure 1. As you can see the most profitable setup belongs to the EUR/USD while the GBP/JPY has the least profitable result. The result for the USD/CHF is also the most volatile – in large part due to the comparatively small SL – while the JPY symbol results tend to be much less volatile thanks to the larger SL and overall smaller trading frequency.

Simple, Mechanical, Trend, Following, Forex Market, Trading Systems, fx trader, forex Figure1Figure 1

The most interesting aspect about these results is the significant lack of correlation between several of these instruments within many drawdown periods. For example in 2016 the EUR/USD, GBP/USD and USD/CHF instances went into drawdown while the GBP/JPY and EUR/JPY instances went into profit. This means we can potentially improve the results of the entire setup by trading a portfolio built using all instances.

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