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Developing Forex strategy - your thoughts?

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I think the reason is that in the period we all backtest stocks tend to go up so any reasonable system will tend to show profits. Forex is not so of course as it deals with the difference between two countries. So systems that backtest well are more difficult to find, similar to trying to find a mechanical system for shorting stocks. NOT impossible but difficult.

MIT
 
Ive been devoping a formula and it seems to work extremely well. My question is of the practicality of it. It uses a trailing stop of maximum 3% or 2 x ATR. I only have EOD data at the moment though so I cant tell if the trades will be executed at that price. I am assuming there are automatic trailing stop facilities available and no guaranteed stops (as with CFD's). How much slippage am I likely to encounter, on average, between the stop and the next quoted price down?
 
There are forex brokers that will guarantee your stops. So if you are long AUD/USD (for example) and set your stop at 0.7498 then that's exactly what you will get. It won't slip to 0.7495 or something like that. The broker I use guarantees stops although there is a limit on the value of the trade where they will guarantee the stop ($2 million I think?).

If you trade longer term (as opposed to day trading) and are trading forwards (futures) then there will be slight movement between your spot data and the forward contract but it shouldn't be enough to cause a problem under normal circumstances.

I always set my stops 4 pips above/below the support/resistance level or whatever other trigger point I am using. So if I was short AUD/USD (example only, this is not a present trade) and the previous high (on whatever timeframe I am looking at) was 0.7600 then I would set the stop at 0.7604 to overcome any movement between the forward contract price and my spot price data. Of course the actual price you enter would differ from the calculated stop due to the spot/forwards spread. Doing this stops a lot of false triggering of the stop too but of course it doesn't suit short term trading systems where you are trying to gain 10 pips per trade.

Yes, I took account of this when doing back testing and also I assume a "worst case" buy and sell scenario. So when going long I assumed that I opened the trade at the highest price on that day and closed it at the lowest. Vice versa when shorting. And remember to take into account the changing spread between the forward and spot price over time since that is effectively a cost to you while the trade is running. Doing it this way means that your actual results should exceed those of your testing since you tested under worst case conditions with entry and exits. :)
 
Milk Man said:
Thanks heaps smurf.
:bier:
You trade currency futures instead of forex? If so why?
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In short, I trade forwards (as opposed to day trading) using a forex broker. The reason being quite simply cost - holding open a day trade for an extended period means paying fees each day (with this broker at least) whereas the only such cost with forwards is the slowly narrowing gap between the forward and the spot price.

For example, the spot price of pair xyz/abc might be .9900 and the six month forward for a long position might be .9960. Over six months that gap will slowly disappear which represents a cost to the trader but it is less of a cost (and doesn't involve any cash flow issues) than paying the daily fee for a rolling day trade. That said, I typically close my positions well before six months although the occasional one runs for quite a while.

The other reason is simplicity in the accounts. If the only thing I have to worry about is whether each trade made a profit or not and don't have to worry about paying any fees to keep positions open etc. then it makes the book work a lot easier. And making that easier gives me more time to spend on the actual trading rather than accounting for it.

I have never traded commodity futures etc. so I really couldn't say if what I'm doing with forex works the same way or not.
 
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