Building your own trading strategy from scratch is difficult. It's a lot easier to find a trading strategy that someone else is trading successfully and tailor it to fit your personality.
With that in mind, I always keep my eye out for new trading strategies and test them out to see if they work or not.
I found this strategy in a Kindle book and it looked like it could work, so I gave it a test. In this post, I'll show you how the strategy works, the testing plan that I created and the results of my testing.
At the end of this post, I'll show you potential upgrades to this strategy and where you can see my additional testing results with this method.
The Trading Method Explained
This book was purchased with my own money.
I actually had this book in my Kindle library for about a year before I got around to reading it. Something about it drew me in, but the spammy title also put me off a little.
When I finally opened the book, the trading method made sense and I read the whole book in 1 sitting.
It's an easy read with decent pictures to illustrate the concepts.
Jim is the inventor of this trading strategy and he uses it to trade for a living. Since this is Jim's method, I won't go into all of the details.
You'll have to buy the book to get all of his trading methods, insider tips and download the custom indicators that come with the book. However, I'll show you enough so you can see what I did.
If you like my results, you get the book. If not, you can look for something else.
On the upside, the basics of the trading strategy are simple.
It's made up of 3 moving averages and 2 momentum indicators. The method looks for changes in momentum and marks the chart at points where you can potentially get in at turning points.
As you're looking at a sample chart, you can probably tell that you can use the signals in a couple of different ways. You can either take trending trades or countertrend trades.
I decided to take trend trades only in my test.
The Testing Plan
The great thing about this book is it shows you some excellent entry methods. On the downside, it's light on exit strategies.
In fact, there are no exit strategies.
Jim gives some suggestions on how you can potentially exit a trade, but nothing concrete.
That's one of the biggest downsides of many otherwise useful trading books. They don't give you a complete trading strategy.
There could be many reasons why the author chose not to do this. Maybe his exits are based on reading the market, instead of having set rules.
Nothing wrong with that.
But from the standpoint of someone reading the book and wanting to learn how to trade, it leaves the reader hanging.
That's why I'm sharing my results here.
However, the book does give you a great starting point to create your own strategy.
The other downside is that this book doesn't give you stats on the trading method.
Again, I get why authors do that. They don't want to create expectations or get angry emails from readers who aren't getting the exact same results due to a multitude of reasons that would take a few hours to diagnose.
Therefore, it was up to me to come up with my own exit strategy.
But where to start?
I've found that the easiest way to start testing a trading system that doesn't have set exits is to use a 1X risk profit target. So if the stop loss is 100 pips, then the take profit will also be 100 pips.
This won't work in all cases, but it's a quick and dirty way to help me see if a method has potential or not.
So here's the trading plan that I put together to do my first backtest of the concepts in this book.
- Pair: EURUSD
- Timeframe: Daily
- Risk per trade: 1%
- Entry: Trend trades only. Wait for moving averages to stack up in order. Short to long (top down) in an uptrend, long to short in a downtrend. This is very similar to other trend trading methods that use multiple moving averages. Once the moving averages are stacked in the correct order, I wait for a dot on the chart, while price bounces off one of the moving averages. Red dots are sells and green dots are buys. Open the trade as soon as the candle closes.
- Stop loss: Set the stop loss on the other side of the last swing.
- Take profit: 1X risk
- Trade management: None, set and forget.
In this long example, I entered a trade at the green dot marked by the arrow. It was a trade that hit the profit target easily.
As you can see, this trade made much more after it hit the take profit. I'll get into more about how I was able to take advantage of these “extra” moves and increase the output of this basic strategy, later in this post.
It's a similar idea here. Enter on the close of a red-dot candle, when the moving averages are lined up correctly and price bounces off the short, medium or long moving averages.
So I fired up TradingView and a spreadsheet to start backtesting. This method takes a little longer than using Forex Tester, but it gets the job done.
The data in TradingView goes back to 2003, so it's enough to do a solid test.
- Pair: EURUSD (daily)
- Trades: 84
- Win rate: 75.0%
- Total return: 42%
- Max losing trades in a row: 2
- Max drawdown: -3%
- Testing period: May 7, 2003 to January 19, 2022 (~224.5 months)
- Average return: 0.18% per month
If you want to see the concepts in action, watch this video.
I consider this a good test.
The strategy works.
A max drawdown of 3% is very good.
But this is just the starting point. There might be ways to increase the return of this strategy.
If you want to learn all of the tips and tricks that Jim teaches, get the book here.
To get all of my future updates where I test new and potentially more profitable versions of this strategy, join my private membership group here.