What long term forex really means?

long term forex

I have the feeling that this sentence “long term” is not well understood and since many traders lost their money by trading unprofitable EAs or simply dropped them due to lack of patience, this article is more than welcome. First of all, take a look at the featured image at the beginning of the article. 🙂 Funny, isn’t it? Well, long term profitability is not about waiting until you grow old and die penniless. It’s not about chasing ghosts, dreams and illusions. It’s not about waiting for recovery. It’s all about proper research and money management. My personal goal is 2-5% monthly. This is a realistic goal.

Let’s take, for example one hyped EA I coded under contract and supported on a well known forex trading forum, donnaforex. It’s currently in drawdown, Monte Carlo Worst Case Scenario has not been touched and everything is running as expected. This sentence will make most of my readers angry, this really should be expected?! I say yes, and statistic is on my side. What does it shows?

FFB Stagnation

FFB Stagnation

According to the past, it can have 158 days ~ 6 months of drawdown. According to live trading results, this is the 5th month of drawdown. And please remember, past performance is not a guarantee for future performance so we can expect a longer drawdown period in the past. Backtests are useful just to notice that this particular EA can have a minimum longer drawdown period of 6 months. As for maximum, sky is the limit, it should be stopped it it exceeds its Monte Carlo Worst Case Scenario. FFB trades 2 strategies and slippage is quite high on my broker (pepperstone), for the last trades the slippage was more than 3-4 pips! Because of that MCWCS which is 800 pips should be raised to 900 pips, but no more.

However, there is more than one way to trade with an EA. Walk Forward is one solution, I have previously talked about it, it consists in periodically optimizing the robot to adapt to the new market conditions, and in that case Monte Carlo analysis is no longer available!

Currently, this EA has no important coding issues (an update is on its way at the end of this month, September), the external parameters will be available for tweaking, all timeframes and currencies will also be available for those willing to experiment with them. The problem is the strategy itself: breakout strategies are not working under current market conditions, none of breakout volatility EA is profitable. Too many fakeouts. Will this EA be profitable again? I’d say yes although I have no idea how the next market face will look like. My belief is based on the following clues: the EA is profitable on almost all EURUSD timeframes without a single parameter tweaking, meaning that there is no curve fitting involved here. This EA is profitable on USDCHF without a single tweaking. Of course, the drawdown is much higher than on supported timeframe/pair, but the fact that it survives in profit says much about the robustness of the strategy. I can’t simply give up on volatility breakout just because it doesn’t work right now!

Keeping all the eggs in one basket is not healthy. This is an important principle of long term forex profitability: do not keep all the eggs in the same basket!

What if I use FFB with other EAs based on different strategies? If one doesn’t work, the other does and on the long run all of them are profitable. If one fails (WCS is touched) I simply remove the EA or try to improve its logic. Here is a preview of my portfolio:

Forex Portfolio Details

Forex Portfolio Details

Forex Portfolio Stagnation

Forex Portfolio Stagnation

Forex Portfolio Yearly Profits

Forex Portfolio Yearly Profits

There are still 120 days of stagnation (4 months), but drawdown simply can’t be avoided, it’s against market principles, if it could be avoided this means that the market is predictable 100%. But forex market is not a deterministic system therefore its movements can’t be predicted 100%, it;s like being able to predict the future! Get used to this idea: drawdown can’t be avoided.

What conclusion can we draw?

1. All years are profitable.2. No more than 3 losing months.
3. Even if we could lose more than 1000 pips in one month, this DD is recovered pretty quick the next month, to have a clear picture of how this works, please take a look at 3rd picture.
4. Without FFB (which is currently in drawdown) this portfolio suffers : the overall drawdown raises with 300 pips, the stagnation period raises to more than 6 months, the overall profit drops with ~14,000 pips.

The average  gain is 7,000 pips per year with a maximum drawdown of 1,500 pips. But backtest is one thing, real live trading is another. Let’s just double the drawdown (it becomes 3,000 pips) and lower the profit with the same amount, 1,500 pips (it becomes 5,500 pips). Even so, we end up with 2,500 pips in profit per year. With proper risk settings, this means a profit of 16% for a 20% yearly drawdown. And remember, this is the worst case! It’s up to you how much you are willing to risk, you set the drawdown. The best case if, of course, 70% per year with a drawdown of 15%. I’ve seen traders doing better than this but trades can be manually closed right after high impact news and profit ratio can be highly improved without having to spend days and nights in front of computer. It’s up to you how you use such systems. It can be fully automated or semi-automated. Sometimes, I manually close the trades myself, an EA or a herd of EAs is/are brainless.

I have just sent an application request to fund a live account, you’ll be able to see my portfolio at work next week I hope. FFB will be available for existing customers at the end of this month.

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Enjoy 🙂