The results are in!
There are a lot of trading systems available on the internet. But most of the blog posts and YouTube videos out there only show you a few well-chosen examples and stop there.
Those resources are fantastic for education, but they are just the tip of the iceberg.
What you do after you learn a trading system, will determine if you will succeed or not.
That is why I'm showing you the actual testing results of a very specific trading plan.
You can get the complete trading plan for this backtest here. This is the TOB strategy, version 1 (codename: Aardvark).
Remember: You can give 100 traders the exact same trading plan and they will get 100 different results. So it's important to test the plan for yourself and see how YOUR results compare. It will depend on your personality, how you interpret the rules and see the markets. Past performance does not guarantee future results. But certainly prevents you from trading blind.
Here we go…
Currency Pairs Tested
I actually backtested 27 pairs in Forex Tester, but analyzing the results of every pair would make this blog post way too long.
So I'm going to show you the results for the major currency pairs.
- AUDUSD
- EURUSD
- GBPUSD
- NZDUSD
- USDCAD
- USDCHF
- USDJPY
The results of these pairs is a good indicator of if the trading system will work or not, since these are they most liquid pairs. These pairs were tested from January 2001 until present.
Remember, there are limitations to Backtesting, but it is the essential first step to developing your trading system. It is also important to test a pair multiple times. These are the results of only one manual test.
We will get into optimizations in future blog posts.
This will give you a good idea of the entire process behind developing a solid trading system.
To get the complete roadmap for free, download this PDF.
Overall Results
Here is what we get when we combine all of these tests into a portfolio.
The initial results of this system are promising.
Yes, I know what you are saying right now…
18% return over 16-ish years sucks!
Yeah, I agree.
However, remember that the profit target on this version is only 1R.
Therefore, there can be much more profit potential, if I tweak the exit. But the key result here is the super low drawdown and high win rate.
Also, these results are only from 7 currency pairs. What happens if you trade 27 currency pairs?
Only more testing will tell us the answer. More on that in future posts.
However, a 0.62% drawdown and 75% win rate is a fantastic start.
According to the risk analysis, the biggest drawdown that you could expect to see is 2%.
That is excellent.
So there is potential to increase the return on this strategy and make more money by trading more pairs.
That's enough for me to move forward with more testing.
Onward!
Now let's break down the results from each currency pair in the test. This will show us if there are pairs that we need to exclude from our live trading.
Charts and metrics are from the TradingStats website.
AUDUSD Backtesting Results
There weren't too many trades with this pair, but the win rate was really high.
At a combined 85% win rate, this pair certainly deserves consideration for the final cut. The win rate was about the same for both longs and shorts, so no bias there.
EURUSD Backtesting Results
The overall return on this pair was much higher than the average. However, the drawdown was much higher too.
So we should keep an eye on this pair in future tests, when we increase the profit target. This might turn out to be a rockstar pair for this strategy.
Win rate was a little higher than average, so that's a good sign too.
GBPUSD Backtesting Results
The return on this pair was about average. It struggled a little in the beginning, but it turned out to be net profitable.
The win rate was above average, with shorts winning a little more than longs. It's not enough of a difference to only trade shorts however.
NZDUSD Backtesting Results
This pair had a low return and traded flat for most of the end of the test. I would want to retest this pair to see if I missed some trades after 2014.
But if the results are similar in future tests, then this is a pair that I might exclude from live trading.
The win rate wasn't too bad, just a little below average.
USDCAD Backtesting Results
If there is a currency pair on this list that we might want to leave out, it is USDCAD. While most pairs show pretty consistent results through the 2007 to 2017 period, this pair has losses.
The win rate is below average on this pair.
Another reason to possibly exclude it.
USDCHF Backtesting Results
Wow, the results on this pair are great. I'll have to test it a couple more times, but this looks very promising.
The win rate is on par with the average, so no issues here.
USDJPY Backtesting Results
Look at the drawdown on this sucker!
Really low.
The biggest issue was the lack of trades.
I may have been tired when I was testing this, so it's certainly worth another couple of backtests.
The win rate is phenomenal, so it is certainly worth putting this on the short list. Again, I would like to see more trades.
Conclusion
I hope that this shows you the power of backtesting.
This is just the first step, more to come in future posts. One of the things that would need to be considered in future analysis is the time of day that these trades are taken.
If we need more trades, we can possibly drop down to the 4-hour chart.
Some people think that backtesting is only for automated trading strategies.
Not true.
It is essential for manual/discretionary traders too. Backtesting also works if you use multiple timeframes for your analysis.
To see the complete backtesting results of TOB version 1 (Aardvark), join the FTSD Program. It is available in Level 5, along with the results from other trading systems.
But don't take my word for it.
Test it for yourself! Download Forex Tester or use a free platform and start testing.
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