A Super Simple System Tested – AUDJPY Daily Pin Bars

by Hugh Kimura on February 5, 2013 · 10 comments · My Trading


A few months ago, I wrote about why even simple trading systems do not end up actually being that that simple.  This is mostly due to the fact that they need to be tested, retested and continually evaluated.

But let’s forget semantics for a minute and take a detailed look at a system that has no indicators and very defined entry, exit and stop loss points.  By most people’s accounts, this is probably the definition of a simple Forex trading system.

What I will show you

In this post, I will tell you how I got the idea for the strategy to test and the exact parameters for my testing.  I will also allow you to download the spreadsheet with all of my backtesting results, so you can follow along at home, if you so desire.

What I’m going to show you is the first two steps in the Strategy Development Framework and I hope that it will get you excited enough to come up with some ideas of your own to go test out and have fun with.

Ze Idea

01 (272)The first step in the Strategy Development Framework is Ze Idea.  Not rocket science, but it can be a daunting task, given all of the possibilities out there.  Yeah…if you read the Forex forums, there is no shortage of Lamborghini manifesting, private island buying, lingerie model dating, trading ideas in the world.

Of course, the trick is to figure out which ones actually do what they say and which ones are a Titanic-sized crock of shit.  Obviously, you won’t really know which ones are legit until you test them out, but there are a couple of different ways that you can go about finding an idea to start you off.

First, you can just pick any random ass system that looks good to you.  This may seem like a terrible idea, but it can have it’s pluses.  On the bright side, you will probably figure out something that doesn’t work.  But you may also get other ideas on how you can get the method to work and that may lead you to something that actually does work.

The second (and preferable method) is to find someone who actually knows what the hell they are talking about and test what they are recommending.

In my case, I got the idea from two sources.  In my interview with Walter Peters, he talked about one of his breakthrough moments coming when he tested a simple Kangaroo Tail method on the daily chart that made about a 80% return.  In case you are wondering, Kangaroo Tails are just another name for Yo Yo’s, Unicorn Horns and Pin Bars.

In addition, after purchasing the Chris Lori AUDJPY Trading Course, one of the many things that I learned was to only trade that pair long.  That is just Chris’ opinion of course, but I found that to be a good idea (more on that in the Backtesting Results section).  I also talked about it a little in a November post that you can read here.

Anyway…so I combined the two and decided to test Pin Bars, trading long only.

But that’s not all…

Defining The Idea

Before we move on to the second step on the Strategy Development Framework, which is Ze Backtesting, we have to define our idea so we don’t go changing shit in the middle of testing.  That is actually very easy to do and will not give us an accurate picture of how our system might perform.

We also don’t want people to think that you are a crazy person when you tell them that you have a trading system that is profitable.

Predicting the future

No, my system works…it really does!

So I broke out my handy-dandy Strategy Template and wrote down the parameters to my system.

Here is how I filled out the Template:

  • Strategy Name: AUDJPY Pin Bars
  • Indicators Used: Price action only, Daily chart
  • Entry Signal: Pin bar at previous support level. Only look for horizontal support for this test. Enter on open of next bar after current pin bar. Only take long trades.
  • Stop Loss/Risk: 5 pips below current pin bar. Risk 2% per trade, round lots down.
  • Profit Target: 95% of next daily swing.
  • Move Stop: When profit is equal to the stop loss, move stop to +5 pips.
  • Add to position: NA
  • Take partial profit: NA
  • Exit Signal: Hit profit target, stop loss or breakeven.

Here is a picture of what a typical setup would look like:

pin-bar-aussie-1

Before we go any further…a couple of notes on this Idea.  This was all done Backtesting, so no real money was risked.  Also, risking 2% is considered risky (at least for me), but I just wanted to see how it would turn out.

And of course, past performance does not equal future results.

OK, moving on to…

Ze Results

Here is what the final results looked like from testing it on the Daily chart from January 2001 to September 2012.

AUDJPY Pin Bar System Results

If you would like to see all of the results, you can download the zip file with all my trades here.  Note that there are only trades until June 2012, but that is only because there were no more trades after that.

As I mentioned above, I did test this trading strategy both long and short on this pair and the results where not nearly as good.  Therefore, I decided to go long only…just for this pair.

Conclusions

As you can see, it was a pretty decent result.  161.81% over 11 years isn’t fantastic, but it does show that this super simple method could work.  My primary concern at this point is the drawdown amount, since this test risked 2% on every trade.  Unfortunately, Forex Tester sometimes drops the ball on drawdown, as it did in this case, showing a big fat zero.

I’ll have to run it through Excel to manually to figure out the drawdown.

There are other ways that this system could be tweaked to try to improve the performance.  Just a few thoughts off the top of my head…

  • I could also use trendline support/resistance to enter trades, instead of just horizontal.
  • I could try to pyramid at a certain point to maximize the winners.
  • I could look for ways to eliminate losers by only taking trades that meet a 2:1 reward to risk ratio.

I could go on for awhile on what I could do.  But I just wanted to give you some ideas on how to test a very simple trading strategy and I hope that you will be inspired to test this method or another system that you have been thinking about.

If you tried testing this strategy, what where your results?  If not, what can you test right now that might move you forward?  It doesn’t have to be perfect, just define it and test it.  I would love to hear your results in the comments below…

 

 

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Photo: Victor1558, xJason.Rogersx

About The Author: Hugh Kimura
Hi, I'm Hugh Kimura and my mission is provide you with the very best information about trading and living better through research and my own personal experience. You can also follow me on Twitter and Google+. Note: All information is for entertainment and education only and is not investment or trading advice.


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What Do You Think?

David February 10, 2013 at 4:48 pm

Hey Hugh,

Actually this strategy has been mention in Dr Alexander Elder book known as the kangaroo tail as well as with Walter Peter’s naked forex book. However the first caution about taking losses after price starts eating 50% of the tail so I believe placing stops 5 pips below the tail is too much of a risk.

As for me, I love to trade this of GU and GJ as their volatility are very high and normally if I see this of the 4 hr I would scroll down to the 15 min and place my position of the previous high or low to avoid getting whiplash. And let price takes my position. Of course if the trend is strong that the stop hunts start coming in and my position will get compromised.

But overall one of your interviewees has this strategy mention and it was his consistent winner??

All the best.
David

Reply

Hugh Kimura February 10, 2013 at 6:11 pm

Hey David,

Yup, that is where Walter mentioned he got it from. Appreciate the thoughts on how you trade it. No one mentioned trading this strategy consistently except for Adam, who has some great notes about how he trades it above.

Thanks,
Hugh

Reply

Andrew February 6, 2013 at 4:06 pm

Nice post Hugh, does the fx tester give you results at to when the setups occurred? I noted that it showed 0.01 trades per day? One of my criteria I use for testing systems is if they’re practical (enough opportunity, occurring during your trading time zone etc.

Still nice to see you’ve put in the work to test.

Reply

Hugh Kimura February 6, 2013 at 10:54 pm

Thanks Andrew, not too sure what you mean…but I did forget to post the spreadsheet when you read it, but it is posted now. It will show when the setups happened. Also, when you double click the trades in Forex Tester, it will take you to where the trade occurred on the chart.

Yeah, trading on the daily chart doesn’t really generate enough trades to make it a real income generator, but the idea could be carried down to the 4 hour or 1 hour charts (see Adam’s comment) and might work just as well.

Hugh

Reply

Andrew February 6, 2013 at 11:14 pm

Hey Hugh,

What I was getting at there, is do the signals/entries occur when you’re awake (ie: dependant on your timezone).

I’ve recently been through the ringer with back-testing, I think we should start a support group for fellow back-testers!

Reply

Hugh Kimura February 6, 2013 at 11:53 pm

Ahhh, I see. Yeah, that is a second level review and would become more apparent in forward testing. With Daily charts though, it wouldn’t matter as much.

I hear ya…coming soon.

Reply

Adam February 6, 2013 at 12:49 pm

Hey Hugh,

Some nice testing there mate, and I can confirm that in the wild this method works well also, as I have traded something along the same lines off hourlies and 4H charts for over 7 years. Never my sole method, but a part of the arsenal certainly.

My main difference is I trade it in both directions, and I aim beyond the previous pivot as a target. I apply basic wave theory here, working off the theory that if price has pivoted off a pin bar, it will at least make a 3 wave move, with the 3rd, being the impulse, pushing it through the previous pivot, running some stops and adding a little icing to what is already a tasty cake.

At time it turns a winner into a break even or small gain, but others that impulse can go like the clappers as well. I believe it gives reduced win/loss for greater profits, but I really should run some tests on it again.

I an a long long long way from being elliot wave guy, all those rules just seem like complications for an already complicated profession, but the basic 3 wave theory holds most of the time.

Happy trading
Adam (@IamAdamJowett)

Reply

Hugh Kimura February 6, 2013 at 10:51 pm

Hey Adam,

Very cool, thanks for the tips! Yeah, since trading on the daily chart didn’t yield too many trades, going down to the 4 hour chart would be a great next test.

Interesting that you bring up Elliot Wave. I’ve never really put too much thought into it but I could see where going for the 3rd wave would be a lot safer than waiting around for the 5th. Yet another thing to test…

Cheers,
Hugh

Reply

Micah February 6, 2013 at 12:13 pm

One thing to consider that really helped with my trading, as well as backtesting, on daily charts was to make sure the time is what you want it to me. I could do a test on Forex Tester’s default settings and get one result, and move it to where the close is in line with the New York close and get completely different looking bars.

The New York close may/may not be the best time for the AUD/JPY but it has worked very well for me.

Reply

Hugh Kimura February 6, 2013 at 10:37 pm

Good point Micah, thanks for the tip. I’ve seen differences between platforms such as Metatrader and TradeInterceptor.

Reply

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