Figure 2 shows the results of doing an equally weight portfolio building exercise, meaning that in this portfolio each trading system would be trading at a 0.16% risk per trade. Results are smoothed out significantly thanks to the hedging effect and we can see that the maximum drawdown has become a compromise between all strategies with a value slightly above 15.55% in 2008. The balance curve has also become significantly more linear, meaning that results have become significantly more stable.

Simple, Mechanical, Trend, Following, Forex Market, Trading Systems, fx trader, forex Figure2Figure 2

The main disadvantages of this portfolio is the low annualized return value of 4.3% but the maximum drawdown length – at 576 days – is surprisingly low for a long term trend following portfolio for which maximum drawdown lengths can usually be thousands of days long. The method is also surprisingly resilient through time, given its very simple construction.

The above system demonstrates a very simple mechanical trend following system that has only two parameters, is historically profitable across many different Forex symbols and is historically profitable across a span of almost 30 years. This shows how trend following does not need to be complicated but can be successfully applied using very simple concepts provided that the strategy is properly designed.

The above system can definitely be improved further by adding other Forex pairs, adding non-Forex symbols and by improving the exit mechanisms. Of course the idea is not to increase complexity – by adding more free parameters – as this would negate the advantages obtained by the simplicity of the above methodology.

Daniel Fernández
Founder of Asirikuy.com
and Mechanicalforex.com