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Wednesday, December 28, 2011

Forex Cash Cow. Review and Expert Advisor

This is another let's say popular system that Forex retail traders read about at least once in their lifes. I had the chance to know it and being a programmer myself, of course I went ahead and implemented it to see what it really gave before risking a dime of my real money account.

The idea of the system is to ride price momentum right after a price "explosion" has occurred in one direction. This puts the strategy in the group of "Break out" strategies if you will. And it is best suited for the GBPUSD pair.

Entry rules:

  1. If The pair moves 140 pips in one direction during a day, wait for the second day to evaluate a possible entry. The move is not counted from the Opening price of the day but from the Highest high of the day to the Close (if the movement was downward) or from the Low of the day to the Close (if the bias was upwards).
  2. The second day, If there is a 70 pip move in the same direction as the first day , then an order in that direction is entered. Stop loss set at 60 pips and target profit at 100 pips. If neither TP nor SL have been hit by 11:30AM Eastern Time (4:30pm GMT Time), the trade is closed.
For a thorough explanation of the system visit this link.

The first thing I didn't like about the system is that it measures price explosions in a hard number of pips. I also dislike the fact that take profit levels and stop losses are based on hard numbers of pips. Chances are very slim that a 140 pip move on a day will have the same meaning 10 years from now. That alone makes the system rigid and un-flexible for the future when market conditions are not the same. That is why I prefer or at least tend to believe a little bit more in systems that analyze movement ranges based on relative measurements, such as the Average True Range (ATR), that allow you to compare previous move ranges with the current one regardless of numbers of pips.

But anyways, that is the Forex Cash Cow system. Now in pseudo code for programmers:

The logic to enter a Long order:

if (Close_Yesterday - Low_Yesterday >= 140 pips)
    if (Price_Now - Low_Today >= 70 pips)
        then Enter Long Order

Logic to enter a Short order:

if (High_Yesterday - Close_Yesterday >= 140 pips)
    if (High_Today - Price_Now >= 70 pips)
        then Enter Short Order

I simulated the year 2009 for GBPUSD. In 2010 and 2011 there are some huge gaps of data in my Metatrader. I still don't know how to fix that. But 2009 is complete and here is the backtesting using the Daily time-frame.

(Click on Images to enlarge)
The position size is dynamically calculated with this expert advisor adjusting the maximum risk to a 2% loss of the portfolio per trade. To get more information on how to risk a fix percentage by dinamically calculating positions sizes visit the article Risk a percent of your account per trade.

As you can see, there was a 50.59% return for the year with a draw-down of 15.38%. Out of 129 trades, 57 were winners for a 44.19% success rate. Winners were on average bigger than losers ($433.64 vs $273.02) and that's where the system was profitable in spite of winning less than half the trades. More importantly, the return is realistic, without any curve-fitting, 50% and not 100000000% a year as most promotions of commercial EAs show in their manipulated profit curves. Whenever you see those crazy profit curves, run for your life! That's probably a scam right there in front of your eyes.


I do see some potential based on the idea of a breakout system like this one, trying to ride momentum for a while and with a time based exit that aims to catch the mood created on a determined time interval. Although this backtesting was profitable, please take into account the expert advisor hasn't been tested for any other year and one profitable year doesn't mean anything at all.

As for my dislikes. I totally dislike the idea of setting entry rules, as well as targets and stop losses based on hard numbers of pips. That's undoubtedly a weak point of the system that basically makes it unable to adapt to the future. Instead of hard numbers of pips, the entry conditions as well as targets and stop losses could be calculated using proportions of the Average True Range (ATR), so that the system reacts to ever changing markets in the future. if 140 pips is considered enough of a movement today, that doesn't mean 140 pips is going to be meaningful 10 years from now. Maybe by then, 300 pip moves per day are entirely normal and then 140 wouldn't mean breakout anymore.

Therefore, using the ATR for all the entry rules and trade management is an idea that I consider worth exploring. Say for example, if the movement for the day is twice the ATR (Instead of 140pips) consider an entry. Setting targets as 1xATR and stop losses as 0.6xATR. I'm totally speculating with these values, just want to give you an idea of what can be done so that the expert advisor sets take profit levels and stop losses dynamically according to the current market volatility, while keeping the same risk/reward ratio as the strategy initially specifies. That would result in a stronger system, able to adapt to future conditions and therefore potentially profitable in the long run.


Released under the Do What The Fuck You Want To Public License. By downloading this code you agree that The Lazy Trader is not responsible for any losses incurred using this software. The Lazy Trader advises to not use this expert until more backtesting is done and some adjustments are made to the strategy (specifically changing the rules currently using hard numbers of pips).
Download ForexCashCow.ex4
Download ForexCashCow.mq4

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