Find the Weakness in this Forex System
Hello, I'm a student at Columbia. Been studying forex for a couple years. A while back while I brainstormed a trading strategy and so far I can't find its weakness. However I don't have the time to create a program to test it. So at the risk of giving away a winner, I'd like to describe it here so that someone else can point out its weakness, and then I can forget about it and refocus on school. Thanks.
The system is a simple multi-timeframe swing-trading system which religiously follows the principle of cutting losses short and letting profits run.
1) System figures out the dominant trend over the last 15 hours on the 1hr timeframe. When the price retraces back to the trend line, opens a position.
2) Every hour as the trend lengthens, the system recalculates the dominant trend line, but only if the new dominant trend has a trend length greater than the previous dominant trend.
3) Once the trend is 30 hours long, the system shifts to the 2hr time frame and recalculates the trend on this new timeframe. The new trend line is now 15 bars long.
4) As long as the price doesn't cross the trend line, the trend line continues shift to higher and higher time frames, requiring a more and more decisive trend line cross to end the trade.
4) Once the price does cross the trend line, the systems resets to the 1 hr time frame and the process begins again.
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As near as I can figure it, the net effect of this system would be that losing trades on short-lived trends get closed out with relatively little loss while profitable trades on longer trends last days or even weeks.
Yes there could be some problems with the win/loss ration but the weight of the losses could be mitigated by starting on an even shorter timeframe.
What sort of a response do you expect, precisely?
way are you asking us? run a simulation and see
What you are describing is technical analysis and sounds like the technique of a day trader trading penny stocks. A fully automatic system such as yours will become more susceptible to shocks the longer it runs.
Also, what the hell do you mean by dominant trend line? You may know more about this than me, but from what I know there can be many ways to calculate a best fit line over any series of data points.
This is a very rudimentary technical analysis and there's no "winner" here. You're making several risky assumptions:
1) You assume that you can find the proper market trend line/curve/formula. 2) You assume that trends will be repeated consistently within an every decreasing timeframe. 3) You assume that losses won't be repeated.
You're severely underestimating the volatility of the forex market. You need to run an extensive simulation on historical data to find the win/loss ratio. It will be low.
You should have a better understanding of forex markets and trading risks if you've been "studying" it for several years.
I'm not really one for technical analysis so I can't spot your system's weakness, except that it looks like it is built on so e hefty assumptions. But if you honestly believe your system has NO weakness then you are the naivest person I've ever met.
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