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iExpertAdvisor iBulletin 39: Is
Trading FOREX a 50-50 Proposition?
information and ideas about MetaTrader ExpertAdvisors
You’ve heard it before:
“Trading FOREX is easy. The market either goes up
or down – you just have to be right more than half the
time and you make money.”
Ah – if only it was that easy.
So is it true? Is trading FOREX a simple 50-50
proposition?
“I mean, if I have an Expert Advisor that performs
just horribly, can I just change all the buy orders to
sell orders, all the sell orders to buy orders, and have
a terrific system?”
Let’s use a simple MetaTrader Expert Advisor to find
the answer to these questions.
The 50-50 Expert Advisor
enters a trade each time the 8-period Exponential Moving
Average (EMA) crosses through the 13-period EMA. The
Expert Advisor has two inputs, OrderFlag and Xbars.
The input value OrderFlag instructs the 50-50
Expert Advisor to swap the order type between Buy
and Sell. The input value Xbars is
optional and can be used to exit a trade after any
number of periods (or bars).
The market condition that causes an order to be created
is consistent: when the 8-period EMA crosses through the
13-period EMA.
The following table summarizes the possible combinations
and the resulting order type.
|
Input: OrderFlag
|
Market: 8 crosses up
through 13 |
Market: 8 crosses down
through 13 |
Output: OrderType |
|
0 |
TRUE |
FALSE |
BUY |
|
1 |
TRUE |
FALSE |
SELL |
|
0 |
FALSE |
TRUE |
SELL |
|
1 |
FALSE |
TRUE |
BUY |
This
handy Expert Advisor will allow us to test some theories
regarding the 50-50 proposition.
Test #1 is a benchmark test.
-
It will buy each time the 8-period EMA crosses up through the 13-period EMA.
-
It will sell each time 8-period EMA crosses down through the 13-period EMA.
The stoploss is set at 50 points, the takeprofit is set at 75 points.
The
following table summarizes the test input and the test
results for Test #1.
|
iExpertAdvisor TestTable
|
|||
|
Test
Information
|
|||
ExpertAdvisor Name |
50-50 ExpertAdvisor
|
||
|
ExpertAdvisor
Version
|
1.0 |
||
|
Test Number
|
1 |
||
|
Test Period
|
11/2003 – 8/2005 |
||
|
Currency Pair |
GBP/USD |
||
|
Chart Period |
1 hour |
||
|
|
|
||
|
Test Input |
Test Results
|
||
|
Spread/Commission |
5 |
Total Trades |
305 |
|
StopLoss |
50 |
Winning Trades |
146 |
|
TakeProfit |
75 |
Losing Trades |
|
ExpertAdvisor Input
|
Winning Percentage |
|
|
|
OrderFlag |
0 |
|
|
|
Xbars |
0 |
Total Net Profit |
- $9,130 |
For Test #2, we will change the input value OrderType from 0 to 1. This will cause each trade’s order type to be reversed.
The Buys become Sells, and the Sells become Buys.
The
following table summarizes the test input and the test
results for Test #2.
|
iExpertAdvisor TestTable |
|||
|
Test
Information
|
|||
ExpertAdvisor Name |
50-50 ExpertAdvisor
|
||
|
ExpertAdvisor
Version
|
1.0 |
||
|
Test Number
|
2 |
||
|
Test Period
|
11/2003 – 8/2005 |
||
|
Currency Pair |
GBP/USD |
||
|
Chart Period |
1 hour |
||
|
|
|
||
|
Test Input |
Test Results
|
||
|
Spread/Commission |
5 |
Total Trades |
304 |
|
StopLoss |
50 |
Winning Trades |
133 |
|
TakeProfit |
75 |
Losing Trades |
|
ExpertAdvisor Input
|
Winning Percentage |
|
|
|
OrderFlag |
1 |
|
|
|
Xbars |
0 |
Total Net Profit |
- $28,210 |
Not what you would expect if trading FOREX is 50-50?
If trading FOREX is a simple 50-50 proposition, you would expect the following two conditions to be true:
- The number of Test #1 wins would equal the number of Test #2 losses.
- The number of Test #1 losses would equal the number of Test #2 wins.
Well,
the spread is set to 5 points. Perhaps the spread is
obscuring the test results. Let’s rerun tests #1
and #2, with the spread set to 0. These are tests #3 and
#4.
The following table summarizes the test input and the
test results for Test #3.
|
iExpertAdvisor TestTable |
|||
|
|
|||
ExpertAdvisor Name |
50-50 ExpertAdvisor
|
||
|
ExpertAdvisor
Version
|
1.0 |
||
|
Test Number
|
3 |
||
|
Test Period
|
11/2003 – 8/2005 |
||
|
Currency Pair |
GBP/USD |
||
|
Chart Period |
1 hour |
||
|
|
|
||
|
Test Input |
Test Results
|
||
|
Spread/Commission |
0 |
Total Trades |
74 |
|
StopLoss |
50 |
Winning Trades |
202 |
|
TakeProfit |
75 |
Losing Trades |
|
ExpertAdvisor Input
|
Winning Percentage |
|
|
|
OrderFlag |
0 |
|
|
|
Xbars |
0 |
Total Net Profit |
- $4,370 |
Now let’s reverse each order type (by setting OrderFlag=1) and retest.
The
following table summarizes the test input and the test
results for Test #4.
|
iExpertAdvisor TestTable |
|||
|
Test
Information
|
|||
ExpertAdvisor Name |
50-50 ExpertAdvisor
|
||
|
ExpertAdvisor
Version
|
1.0 |
||
|
Test Number
|
4 |
||
|
Test Period
|
11/2003 – 8/2005 |
||
|
Currency Pair |
GBP/USD |
||
|
Chart Period |
1 hour |
||
|
|
|
||
|
Test Input |
Test Results
|
||
|
Spread/Commission |
0 |
Total Trades |
218 |
|
StopLoss |
5 |
Winning Trades |
79 |
|
TakeProfit |
75 |
Losing Trades |
|
ExpertAdvisor Input
|
Winning Percentage |
|
|
|
OrderFlag |
1 |
|
|
|
Xbars |
0 |
Total Net Profit |
- $6,430 |
Again, not what you would expect if FOREX is a 50-50 proposition.
Each trade entry has definitely been swapped, so perhaps the discrepancy is caused by the trade exit.
Maybe the lack of symmetry between the trade's stoploss and takeprofit is the problem.
Let’s
set the stoploss equal to the takeprofit at 125. These
are tests #5 and #6.
The following table summarizes the test input and the
test results for Test #5.
|
iExpertAdvisor TestTable |
|||
|
Test
Information
|
|||
ExpertAdvisor Name |
50-50 ExpertAdvisor
|
||
|
ExpertAdvisor
Version
|
1.0 |
||
|
Test Number
|
5 |
||
|
Test Period
|
11/2003 – 8/2005 |
||
|
Currency Pair |
GBP/USD |
||
|
Chart Period |
1 hour |
||
|
|
|
||
|
Test Input |
Test Results
|
||
|
Spread/Commission |
0 |
Total Trades |
118 |
|
StopLoss |
125 |
Winning Trades |
50 |
|
TakeProfit |
125 |
Losing Trades |
|
ExpertAdvisor Input
|
Winning Percentage |
|
|
|
OrderFlag |
0 |
|
|
|
Xbars |
0 |
Total Net Profit |
- $23,500 |
Now let’s reverse each order type (by setting OrderFlag=1) and retest.
The
following table summarizes the test input and the test
results for Test #6.
|
iExpertAdvisor TestTable |
|||
|
Test
Information
|
|||
ExpertAdvisor Name |
50-50 ExpertAdvisor
|
||
|
ExpertAdvisor
Version
|
1.0 |
||
|
Test Number
|
6 |
||
|
Test Period
|
11/2003 – 8/2005 |
||
|
Currency Pair |
GBP/USD |
||
|
Chart Period |
1 hour |
||
|
|
|
||
|
Test Input |
Test Results
|
||
|
Spread/Commission |
0 |
Total Trades |
118 |
|
StopLoss |
125 |
Winning Trades |
68 |
|
TakeProfit |
125 |
Losing Trades |
|
ExpertAdvisor Input
|
Winning Percentage |
|
|
|
OrderFlag |
1 |
|
|
|
Xbars |
0 |
Total Net Profit |
+ $23,500 * |
That’s more like it! The symmetry is easy to see in the test results.
- Test #5 number of losses is equal to Test #6 number of wins.
- Test #5 number of wins is equal to Test #6 number of losses.
If the time-based exit is used (by setting Xbars), and the commission is zero, the test results are symmetrical as well (Try it).
We conclude, trading FOREX is a 50-50 proposition, if the following two conditions are true.
- The cost of trading is free: no commission, no spread, no swap fees.
- The trade is symmetrical. Two examples are: the stoploss is equal to the takeprofit; or the exit is time-based.
Since condition #1 is
never true, we can say confidently that trading FOREX
is NOT a 50-50 proposition. (And even if the cost of
trading was free, it’s unlikely a system’s entry and
exit would always be equivalent.)
(Another advantage of backtesting an Expert Advisor is
that you can quickly see the effect of trading costs on
your system’s profitability.*)
It’s valuable to understand the true nature of the FOREX market. In future iBulletins we will address other assumptions commonly made about the FOREX market.
If you have any suggestions drop us a line at www.iExpertAdvisor.com.
*In case you are
wondering, Test #6 is not a profitable system. When the
spread is set to 5 points, the net profit is
-$25,600.
iExpertAdvisor is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. iExpertAdvisor does not purport to tell or suggest which investment securities members or readers should buy or sell for themselves. Site users should always conduct their own research and due diligence and obtain professional advice before making any investment decision. iExpertAdvisor will not be liable for any loss or damage caused by a reader's reliance on information obtained in any of our newsletters, special reports, email correspondence, or on our web site. Our readers are solely responsible for their own investment decisions.
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