In my search for excellent trading strategies, I keep an open mind and review as many methods as I can. This strategy caught my eye, so I thought that I would document the testing process here on the blog.
This will be a multi part series. In this first part, I will explain the trading method and show you how to setup the forward and back test. The second part of the series will show my results from the testing. Finally, the third part of the series will evaluate how to possibly improve on the results.
I'm not sure if this method will work or not, but that is why we test. The great thing about this method is that it is available publicly, so I can show it to everyone and you can do your own tests. I've tried to make this post as detailed as possible so you feel comfortable doing it yourself and so you can apply the process to other strategies that you come across.
But before we get started, here are a few things that you have to understand…
Why I Am Writing These Posts
- My goal is NOT to discredit any of these trading methods that I feature. I'm done trying to expose scams. I strongly believe that it is a much better use of my time to uncover excellence. The methods I feature are strategies that I feel have a good chance of being profitable systems.
- I feel that there is a huge gap between free trading strategies that are presented on forums/blogs and what is required to figure out if the trading method is viable and if it fits a trader's personality. I want to bridge that gap with these posts. Instead of jumping in with real money in the beginning, these posts will show you the safe way to get started.
- To stimulate meaningful discussion from people who trade these methods with real money.
- I want to uncover the best trading methods in the world. Deconstructing and writing about trading methods helps me understand them much better.
Keep These Things In Mind
- Of course, past performance does not guarantee future results
- I don't have any affiliation to this strategy. The only things I know, I have read from their website.
- Backesting and demo trading is much different than trading real money
- Even if you give the exact same trading system to 10 traders, you will get 10 different results. That is the nature of trading.
- Not all trading methods are testable. Very discretionary systems are difficult to test and some are downright impossible. If a trading method is more discretionary, testing might not be an accurate measure of its profit potential.
- I only test methods that are provided for free on blogs and forums. I do not take strategies out of paid courses.
- All information is for educational purposes only. It is not trading or investment advice.
Now that we have that out of the way, let's get down to it.
Presenting The Urban Forex CCI Divergence Breakout Strategy
The CCI Divergence Breakout Strategy is courtesy of Urban Forex. It is a trading community created by Navin Prithyani that is based on a core set of Forex trading strategies. Their trading methods are provided for free as a lead for their Forex Watchers training website.
First, we need a plan. Here are is the testing plan for this strategy.
Testing Plan
The first thing you need is a testing plan. Here are the parameters for my first test. You can test on any pair or any time frame above the 15 minute (according to the Urban Forex website), but I want to provide a concrete place to start, so I have picked a specific time and pair.
- Currency Pair: EURUSD
- Indicators: Commodity Channel Index (CCI), 14 period
- Time Period: Daily
- Entry: Conservative
Entry
As the name suggests, this is a strategy that looks for divergence between price and the CCI indicator. For a long entry, price must be trending upwards and CCI must also trend upwards, then bounce. After a CCI bounce, connect the lows in price with a trendline. Once price breaks the trendline, wait for a retest of the trendline from the underside. Look for a closed candle that bounces to enter the trade.
Do the opposite for a short trade. I will provide chart examples of both long and short trades at the end of the testing plan.
Stops
The Urban Forex site says to set the stop, depending on how steep the trendline is. The steepness of the trendline can really depend of how your chart is setup. Since I'm not a big fan of subjective rules like this (at least not on the first test), so I'm going to set a rule that is going to use the more conservative stop.
Therefore the stop will go one pip above the nearest swing low, for a long. At the close of each candle, move the stop to one pip below the low of the last candle, for a long.
Do the opposite for a short trade.
Profit Target
Use two lots. The longer term target for the second lot should be the next 00 or 50 level. This should be at least a 1:1 reward to risk ratio. The first profit target should be at 1:1 reward to risk, if it is less than the 00 or 50 target. If there is less than a 1:1 ratio on this first profit target, do not take the trade.
Exit
If the first profit target is hit, then exit at the nearest 00 for 50. Otherwise, stay in the trade until the stop is hit.
Examples
Here is what a long trade would look like.
This is a short trade example.
How To Setup A Backtest
Since this trading method is so simple, it is easy to setup a backtest. Open your favorite backtesting software. I use Forex Tester, so I'll use that as the example.
If you want to see how to setup your first Forex Tester backtest, read this tutorial. Once you setup your backtest, come back to this post to see how to test this strategy specifically.
Next click on the List of indicators icon to add an indicator.
Then add the CCI indicator to the EURUSD chart.
Make sure that it is set to 14 periods.
When you see a trade setup, first calculate your stop loss. Then make sure that your 00/50 target is at least equal to the number of pips in your stop loss. If it is not, don't take the trade. Follow the rest of the rules outlined above for each trade.
Use a risk spreadsheet to calculate the number of lots to trade. You can create one yourself, or you can download one below for free.
If you want to create one yourself, here is the calculation. First, figure out your maximum dollar loss, based on a percentage of your account. For example, if you have a $5,000 account and you only want to risk 1% per trade, that would be $50 of risk.
$5,000 x 0.01 = $50
Then calculate the cost per pip, based on the lot size that you set up above. If you are using my settings, then the cost per pip will be $0.10.
This is based on a lot size of 1,000 currency units. If this is confusing, just follow my settings and do a test. You will start to get a feel for the numbers.
Also compare your results in backtesting to the results in your demo account. That will help you adjust your backtesting settings, if necessary.
Multiply your cost per pip by the number of pips of risk. So if your stop loss is 100 pips, your total dollar risk by your cost per pip. In this example, that means the following.
100 pips x $0.10/pip = $10 risk per lot
Then divide the total risk by the risk per lot to get the number of lots.
$50 / $10 = 5 lots
So you should trade 5 lots in this example. That would allow you to only take 1% risk of your total account on the trade. The calculator spreadsheet in the download section will help you do this easily or you can create one yourself.
How to Setup A Forward Test
Now do that same thing in your broker's trading platform. Since most people use Metatrader, I'll use that as an example. The CCI is a default indicator in Metatrader. Add it to the Daily chart of the pair you backtested and monitor the signals.
Next, setup a free account with MyFxBook. This website will connect to your demo account and collect your trading results. Follow their documentation to connect your account.
It will give you reports that tell you things about your trading results that would otherwise take a long time to do manually. To learn how to use MyFxBook, watch this video.
Downloads
Click on the button below to download the Risk Calculator Spreadsheet and Strategy Template for backtesting. It will make it easier for you to do your tests.
- Risk calculator spreadsheet – Calculate the proper lot size for each trade
- Backtesting worksheet – Write down your plan so you don't deviate from it.
Conclusion
Once you have everything setup, you are ready to start testing. Keep in mind that you should test this method on as much data as possible. The more data you have, the more likely the strategy will work in different market conditions.
So if this strategy interests you, get started right now! Don't hesitate. Regardless if you have backtesting software or not, everyone with a computer can start forward testing right now. Everything you need is in this post, you have no excuses.
In the next part of this series, I will show you the results of my testing. Stay tuned to find out what happens. If you want to subscribe to blog posts via email, you can subscribe at the bottom of this page.
If you would like to take a publicly available trading strategy from a forum or blog, test it, then write about it, feel free to contact me. I may feature your test here on Trading Heroes.
What were your testing results? Share them in the comments below.
Disclosure: I do get a commission if you buy through some of the links on this page. But it does NOT cost you anything extra, it helps pay for my hosting costs and a portion of the proceeds go to my charity partner.
