NSOFT-Secret trading strategy: a unique step-by-step algorithm for creating a strategy. Part 2
This article will demonstrate not only trading rules, but also a step-by-step algorithm for creating a strategy, starting from testing individual components and finishing with their combining into a ready trading system. The NSOFT-Secret strategy scheme can be useful for traders when creating their own developments.
Testing of RSI indicator signals
The next indicator tested is Relative Strength Index (Relative Strength Index or simply RSI), which is an oscillator that measures the speed of movement and changes in the price chart. RSI fluctuates between 0 and 100 levels.
If the RSI is above the 70 level, the currency is considered to be in the overbought areaIf below level 30 - in oversold area.
Consider the signals used during the tests:
- Buy signal: price crosses level 30 from bottom to top.
- Buy signal: price crosses the 70 level from top to bottom.
Testing results of GBPUSD currency pair for the year without using stop-loss and take-profit.
Conclusion
As a result of the tests it turned out that the greatest percentage of profitable trades on the TF D1, and the greatest profit on the TF M5. However, it is important to note that in combination with MACD indicator remain two profitable timeframes: H1 and H4.
Optimizing
One way to improve the signal's performance is to use stop-loss and take-profit (instead of closing a position when the opposite signal appears, which is often very late).
Test results with stop loss and take profit:
The second improvement is a change in the RSI settings. This time instead of two levels (30 and 70) 50 was used as a guide for buying and selling (if higher - buy, if lower - sell).
Test results with modified settings and using stop loss and take profit:
The results are about the same, except for slightly better performance on lower timeframes. That's why the trading strategy will be guided by the 50 level to open trades.
Testing the Exponential Moving Average (EMA)
As a result of experiments and tests, it turned out that the best performance in moving average with a period of 50.
Consider the signals used during the tests:
- The signal to buy: the candle closed above the EMA 50.
- The signal to buy: the candle closed below the EMA 50.
Test results without using stop loss and take profit:
Conclusion
According to the results of the tests, we can see that the most profitable timeframe is H1 (with a relatively small maximum drawdown). We can quite well increase the lot size (and profit) without exceeding the level of 10%. In addition, we note that the method of trading on a single moving average is profitable even when the share of profitable trades is less than 50% (that is, the average profit on these trades is greater than the average loss on unprofitable trades). Subsequently, using signals from other indicators, we will reduce losses even more.
Adding Stop Loss and Take Profit
With stop-loss and take-profit, the results improved only slightly:
Pivot Points
Pivot Points were originally developed by exchange traders in the trading room and were calculated based on the maximum, minimum and closing prices of the previous trading sessions. Usually Pivot Points are used to determine possible levels support/resistance for the upcoming session.
We will use pivot points when determining possible levels to enter a trade (if price crosses the corresponding level with confirmation by other indicators). In addition, support/resistance levels calculated on the basis of pivot points will be used to set stop-loss and take-profit.
The pivot points used in the system will be calculated using the following formula:
- Pivot Point = (Previous maximum + Previous minimum + Previous closing price) / 3
The pivot point found is used to calculate support/resistance levels:
- Resistance Level 1 = (2 * Pivot Point) - Previous Minimum
- Support level 1 = (2 * Pivot Point) - Previous maximum
- Resistance Level 2 = (Pivot Point - Support Level 1) + Resistance Level 1
- Уровень поддержки 2 = Pivot Point – (Уровень сопротивления 1 — Уровень поддержки 1)
- Resistance Level 3 = (Pivot Point - Support Level 2) + Resistance Level 2
- Уровень поддержки 3 = Pivot Point – (Уровень сопротивления 2 — Уровень поддержки 2)
Naturally, you will not calculate these levels by yourself, but understanding the principles of calculation will be a good help in trading. In addition, it is a good basis for a scientific approach in developing trading strategies.
Combining components into a complete trading strategy
After testing the individual signals, it's time to combine them into a full-fledged profitable strategy. The strategy can be used on any currency pairs, but the best results were obtained with the following symbols: GBPUSD, EURUSD, USDJPY and AUDUSD. Timeframes, again, can be used any kind of currency pairs, but the best results were obtained in TF H1 and H4.
The list of indicators that we will use
- Pivot Points indicator with default settings
- Exponential moving average with a period of 50
- MACD (8, 17, 9)
- RSI with a period of 14
Signals indicating the opening of a long position (buying)
- The price is above 50 EMA.
- The MACD histogram is above the zero level.
- RSI is above the 50 level.
- The price broke the support/resistance level from the bottom to the top.
- A stop loss is placed just below the nearest Pivot Point level (below).
- Take Profit is placed just below the nearest Pivot Point level (above).
Signals indicating the opening of a short position (sale)
- The price is below 50 EMA.
- The MACD histogram is below the zero level.
- RSI is below the 50 level.
- The price broke the support/resistance level from the top down.
- A stop loss is placed just above the nearest Pivot Point level (above).
- Take Profit is placed just above the nearest Pivot Point level (below).
According to ForTrader.org experts, the NSOFT-Secret trading strategy will be a great methodological tool, especially for beginner traders in developing their own trading strategies and optimizing the existing ones.