Last month I built two trading systems to exploit edges I have noticed in the markets.

My plan was to build them live with you, so you can see the system development process in action.

But I wanted to trade them live for a month first to make sure that we had something to work off (I never demo trade in-case you are wondering).

One, fell flat on its face (well that is not fair – it was a good system, but it was not manageable to trade).

The other one that you see here – a day trading system designed to trade breakouts around the European open using the 15 minute chart – got off to a good start.

performance

Here is its verified live performance:

 

There are a few notable points about the performance of the system so far:

(If you are not sure how R-multiple work please click here)

  • The initial stop-loss was only hit once (and only with 1/3 of a position)
  • The largest loss was less than 1R
  • Only 1 loss was greater than 0.5R
  • The largest winner was 2.4R
  • There were 5 winners greater than 1R
  • The total sum of all losses was only just greater the single largest winning trade
  • I cost myself 3.3R in mistakes (-13%!!)

I am quite happy with the way the system works so far. It keeps losses small, let’s profits run and has the potential for very large winners every now and again.

System Development Part 1: How I developed the system

It’s pretty obvious that trends often breakout around the European open on some currency pairs.

Traders are asleep, they go to work, bringing a whole lot more volume into the market and it starts to trend.

Because lots of smart people know this, there will be false breakouts where the price reverses.

So I had the choice of either trading the breakout, or fading the breakout. For this system I chose trading with it (due to personal preference).

That means my systems job is to capture the breakout and make the most of it, and to limit any losses if the breakout is false.

I choose a set of rules that were appropriate and put it together in a plan, by back testing on the charts.

I used these components from the Advanced Forex Course for Smart Traders:

  • Lesson 8: Market Types – Sideways Quiet and Sideways Normal
  • Lesson 9: Damn Good Set-up – Consolidations, Support and resistance, Time of Day
  • Lesson 10: Low risk entry – Candle stick patterns, Low vol breakouts.
  • Lesson 11: Stop-losses – Hard to hit stop-loss
  • Lesson 12: Complex exits – intra-trade drawdown, Reversal right after entry, slow moving against you, Fast markets stop, Chart pattern reversal
  • Lesson 13: Trade management – Scale-in, Scale out, re-entry
  • Lesson 18: Advanced position sizing – Bullet day trading positon sizing (with 2 bullets per day)

I then started to trade it live. I wanted to place 20 trades exactly per my rules (about a months’ worth of trading) and then if it showed promise review the performance.

You can see a visual record of all the trades that I placed below at the end of the article.

System Development Part 2: How to improve the system

The next stage of system development is where it gets is interesting. After 20 trades on a discretionary system you start to get an idea about what is working and what is not (if it is a mechanical systems you need a lot more).

To assist in my analysis, I run my systems live results though FX Blue’s free analyser service.

This is quite useful, but also it is not a perfect solution as my scaling in and out approach does not work well with the software (I think I need to tag my trades with a magic number in future to assist here).

Here are some stats on the trades:

returns

Worst of stats

 

MFE MAE

 

Here are a few points to note:

  1. 7 trades were winners, 8 were losers, and 7 were breakeven.
  2. I was most profitable trading the EURUSD and the GBPUSD (all the other pairs I traded were either losing or breakeven). (You can see this information in FX Blue.)
  3. I missed some trends on the EURUSD and the GBPUSD because I had “spent my bullets” trading other pairs.
  4. Most of my mistakes had to do with the re-entry.
  5. I did not make profit on Mondays on average. (Also in FX Blue.)
  6. In general trading in direction of the trend would have produced better results. (I get this by looking at the charts)

So from the data, and from anything else I noticed, I can then decide if I want to make any changes to my system.

Here are the changes I will make for the next 20 trades:

  • I will only trade EURUSD and GBPUSD. ( I will watch USDJPY as I think it still has potential)
  • I will cut my re-entry size to 50%
  • I will only enter in the direction indicated by my daily market type analysis (alternatively I could put a 100 x 5 displaced moving average on the chart and only trade long if the price is above that or short if the price is below that).
  • I am still going to continue to trade on Mondays for now as I don’t think I have a big enough sample size yet.

As you can see it is really just common sense. My job now is to execute my plan exactly per my new rules for the next 20 trades and see what happens.

Trades in detail:

Losses:

-0.13R

-0.31R

-0.15R

-0.28R

-0.30R

-0.49R

-0.25R

-0.83R (when the trailing stop was hit after scaling-in)

Winners:

+0.57R

+0.26R

+1.57R

+1.52R

+2.40R

+1.13R

+1.29R

The rest of the trades came in at roughly breakeven (Plus or minus less than 0.1R).

Here are the charts of the trades. My marking up is not that great now I look back on it, so here are some pointers.

  • An up or down allow indicates an entry at the close of the candle ( where I have drawn the red line)
  • A sideways arrow indicates where I have closed part of the position
  • When I close a trade I am closing a fraction of the remaining position. So if I close 1/3 it means I am closing 1/3 of whatever I have in the market at that time.