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

 

                                                              Test Information  

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

50

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