There are a lot of opinions on the internet regarding what works in Forex trading and what doesn't.
But when you peel back the covers, one simple fact remains…
They are almost all opinions.
My mission is to help you to stop relying on internet opinions and give you actionable processes that you can use to start to collecting hard data on what works for you.
As with all Backtesting results, remember to be mindful of the limitations of backtesting. This is a key step in the process of learning a trading strategy, but it cannot be used on its own.
Table of Contents
This test turned out quite well.
Here's the breakdown:
- Historical data tested: Jan. 2001 to Aug. 2018
- Currency Pair: EURUSD
- Timeframe: 4-hour chart
- Win Rate: 78%
- Total Compounded Return: 446.13%
All backtesting was done with Forex Tester.
Keep in mind that this is just one currency pair. If this works for other pairs (which it may not), the total return could give me a very viable trading strategy.
The Rules of this Backtest
Pin Bars are touted by some online educators as simple trading signals that almost guarantee profits.
But nothing could be further from the truth.
They need to appear in the right place to be effective. Even then, your results will vary by how good you are at picking the right setups. This means that you need to get a feel for the price action before the Pin Bar and use your discretion before you enter a trade.
That said, I've tried to make my entry criteria as concrete as possible.
Here are the rules for version 2 of my trading strategy.
The complete backtesting results for all the pairs I tested are available in Level 2 of the TraderEvo Program.
- 1% risk on each trade
- Looking for strong momentum in direction of trend before pin bar
- Tail of pin bar has to be at about 2/3 of total body
- Enter as soon as candle closes
- Set and forget, no moving stops
- Stop loss about 5 pips above/below pin bar
- Take profit at next major support/resistance level
- Pin bar should print on previous S/R level or poke out of consolidation area.
- 1 position per trade, no stacking
- Must have minimum 1R available
- If there are no reference points to set take profit, set it at 1R + 5 pips
Here's an example of a good short.
Once I have a good overall win rate and return, it's time to dive into some simple optimizations. An easy way to get this data is to throw it into TradingStats. But you can also use Excel.
Here what I discovered…
Day of the Week
The first thing I look for is if there is any correlation between day of the week and losses.
This graph shows that I should avoid Mondays because the return vs risk is very low. Every other weekday looks good, so I'm going to take trades on those days.
I'll monitor my live trading results to see if this actually lines up in live trading, but this is a good starting point.
Hour of Day
Next, let's see if there are any times of the day that I need to avoid.
As you can see, the time between 1900 GMT and 2300 GMT are times when I shouldn't enter trades. This equates to between 12:00 pm and 4:00 pm Pacific Time.
This makes sense because this is when New York is winding down and Asia is gearing up.
Max R Analysis
Finally, I want to find out how much profit I'm potentially leaving on the table. In order to figure this out, I'm going to do a Max R Analysis to see the maximum R that I could have got out of every winning trade.
Here are the results:
This graph shows me that I'm actually leaving a lot of potential profit on the table. The average maximum profit on all my winning trades was 6.7R.
I can use this information to potentially increase my profit targets and make more per trade. Instead of targeting a minimum of 1R, I will consider targeting a minimum of 2R.
I'll also have to look at the screenshots of these trades and figure out if there's a good way to trail a stop loss on these trades. I could use a support/resistance trailing stop or an indicator like the Parabolic SAR.
I'm sharing these results to show you the process of it takes to truly understand your trading strategy and develop rock-solid confidence in it.
All too many times, websites or courses show you one video on how to trade a strategy and expect you to trade it successfully.
Just like any other skill, you need to start small and practice it, in order to become proficient. You can either do that by losing money in the live markets, or build a solid foundation through backtesting and forward testing.
If your Trading Personality matches a trending, swing trading strategy, then this strategy could be for you.
But don't take my word for it.
Backtest it for yourself and get your own data.
To get step-by-step tutorials that show you the entire process of backtesting and forward testing, join TraderEvo.
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