Annoying Backtest Surprise

 

The first backtest results are in from segmenting my price-SMA cross forex strategy. Looking back, I really should have pre-researched this idea before publicly moving ahead. Look before you leap!

I rediscovered the same irritating problem that wasted 2 months of my life back in March 2012. I’m more irritated about finding the same results again than anything. If you were able to trade crosses over the SMA 200 without the spread, the strategy makes gobs and gobs of money.

The idea led to using SMA 200 price crosses to trade with limit orders for free using BBBO (Best Bid Best Offer). That fell flat after orders received an 80% fill rate at multiple brokers. It needed 95%+ fill rates in order to work.

Equity curve EURUSD

The strategy looks deceptively appealing. It’s completely useless.

Real world trading costs including the spread and slippage works out to something like 2 pips on EURUSD. The strategy traded 29,132 times on the M1 chart to earn a profit of $118,970. The problem is that the 2 pip spread cost would have cost $582,640. The pretty equity curve costs $4 for every $1 of profit. Not good.

Trade report for all sma price crosses

The price crossed the 200 period simple moving average more than 29,000 times in 2011.

The SMA distance curve analysis didn’t turn out as I expected. There were far fewer trading opportunities away from the moving average than what I predicted – the SMA is stickier than I previously thought. No matter where I looked, the strategy always spent more money on trading costs than it earned. I posted all of the images here for the sake of thoroughness.

I’ll be moving this up to the M5 chart in the next round of tests. Everyone can say a loud, “I told you so!”

Trades entering at ±0.1% away from the SMA 200.

Trades entering at ±0.1% away from the SMA 200.

M1 price crosses 0.2% over 200 SMA

Trades entering at ±0.2% away from the SMA 200.

M1 price crosses 0.3% over 200 SMA

Trades entering at ±0.3% away from the SMA 200.

M1 price crosses 0.4% over 200 SMA

Trades entering at ±0.4% away from the SMA 200.

M1 price crosses 0.5% over 200 SMA

Trades entering at ±0.5% away from the SMA 200.

M1 price crosses 0.6% over 200 SMA

Trades entering at ±0.6% away from the SMA 200.

The next step is to take a quick look at the M5 charts to see if I can make the basic idea viable there.

After-thoughts

This series eventually led to a profitable trading strategy. If you’d like to read through the journey, then I suggest reading the articles sequentially

The initial strategy idea
Selecting an appropriate time frame
A research plan
An annoying surprise in the initial backtests
An attempt at range trading
Range trading results
The moving average envelope scalper

 
Annoying Backtest Surprise

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About the author

Shaun is a passionate and proud nerd on a wide variety of topics, most of which have absolutely nothing to do with each other. He loves math and systems, which makes him a natural fit for designing trading systems. The most random fact about him is that he speaks fluent Arabic.Shaun's hobbies are running, church and spending as much time as possible with his wife and two young boys.

 
 

2 Comments

  1. Ian says:

    Hi Shaun, I’ve been back testing various ema crossover strategies for some time now, about a year. These settings have worked for me with this ea, double crossover ea, fast ema 8, slow ema 350, 15min chart, Eur/usd, ts 60, TP 500, sl 60. I have found that using ma cross can be profitable but absolute mm is required, also one needs two sets of ma’s one on a slower time frame 4hr or daily to set trend direction, trade condition buy or sell, then the trigger mas on the time frame to trade 15 min. This is work in progress at moment as I have no programming skills. The Ea I’m using was free download at FF if I recall. Back tested over 10 years. Was ok results sure it can be much higher.

 

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