In the markets, there is cause and effect.I have lost all confidence on trend following.
I back-tested the below system over 9 major FX pairs using 4 hour charts over 13 years which consisted of exactly 7,004 trades.
Plot 3 EMAS on chart: 5,21,55
Use a Stop loss od 2ATR(14)
Enter long/short when 5 EMA crosses above/below the 55 EMA
Exit when 5EMA crosses back over ANY of the 21 or 55 EMA (whichever comes first)
And that's it !
As you can see it adheres to all the fundamental rules of a good trading system:
- IT knows what instruments it trades
- Knows entry signal
- Knows exit signal before entering which facilitates both cutting losses and maximising profits
- cuts losses
- lets profits run
- knows risk in advance
It barely broke even before costs (It had an expectancy of 0.01R per trade). Since costs were about 0.02 R it had an expectancy of -0.01R per trade.
I then tweaked it slightly whereby I closed any trades that were not in profit after 24 hours. And for those that were in profit I moved the SL to breakeven.
Again- the overall results were very similar.
I'm not saying trend-following cant assist in trading. But based on my back tests - (which was a significant sample size in anyone's language) it definitely isn't a simple case of cut your losses and let your profits run and you are guaranteed profits in the long run like many sites lead you to believe.
It really needs to be fine tuned a bit better than that. I really don't know where to go from here to be honest.
Ya - you can tweak the parameters - but that should now make any difference in the long run.
Id be curious to get other peoples thoughts on it.
The effect is the price you see on the chart. Something caused the price to move like that.
Your issue is that you are looking at effect (where we traded) and looking for cause. Sadly, cause is not there.
So no matter how you slice and dice it - you need to focus on causes.