Forex Strategy reviewed #1: Simple balanced system

Backtest case 1

Hey guys, today I will do a Forex strategy review on a popular strategy found on the internet. It’s called the “Simple Balanced System” posted in one of the more popular Forex strategy website. Is it really that simple? Is the strategy profitable? I’ll get you the answer soon!

Before we start, let me explain how I evaluate a trading strategy. I back test strategies for as far back as 10 years of data, starting from year 2005. However, only successful strategies that are consistently profitable for all 10 years can make it into my books.

If a strategy that I back-tested cannot even survive past the first year, then I will not waste any more time to continue testing it.

At the end of my review below, you will find a link to download the detailed equity report generated by the testing software Forex Tester 2. If you are interested in discovering how I became a profitable trader, I highly recommend you to read my review on Forex Tester 2. Alright, let’s get started!

Forex Strategy Review: The Entry and Exit Rules

Time frame: Any. We will use 4 hour time frame.

Currency: Any. We will use the most common pair EUR/USD.

Indicators: 5 EMA, 10 EMA, Stochastic (14,3,3), RSI (14,70,30)

Buy Entry rules: Buy when 5 EMA crosses above 10 EMA, Stochastics heading up and not above 80, and RSI above 50.

Sell Entry rules: Sell when 5 EMA crosses below 10 EMA, Stochastics heading down and not below 20, and RSI below 50.

Exit rules: When EMA crosses back in the opposite direction, or if RSI crosses the 50 mark again.

This is an example of a good entry (@1.3125) and take profit exit (@1.3051).

Forex Strategy Review: Entry and Exit examples
Forex Strategy Review: Entry and Exit examples

 

Forex Strategy Review: Back Test Results

Number of years tested: Exactly 1 year

Data period back-tested: 01 Jan 2005 to 31 Dec 2005

Size per trade: USD 10,000

Number of trades done: 77

Profitable trades: 25

Non profitable trades: 52

Account starting balance: USD 10,000.00

Account ending balance: USD 9,844.00

Overall profit & loss: -USD 116.00

Biggest draw down: -USD 652.00

 

Forex Strategy Review: Analysis of Strategy Performance

Forex Strategy Review: account balance
Forex Strategy Review: account balance

The above chart shows the fluctuation of equity balance during the back test period.

The test started on Jan 2005 with an account balance of USD 10,000. For the next 7 months, the profit and loss fluctuated within the range of USD 200.

Then on 27 July 2005, 2 good trades happened and sent the account balance up to USD 10,535. This happened because market was trending heavily and the strategy was able to capture the profit. This was a good result although the account balance continued to range between USD 10,535 and USD 10,312 for the next 3 months.

On 25 Oct 2005, after the 62nd trade, the account balance began to slide back down quickly to below USD 10,000. This was obviously due to the ranging Forex market that created many false signals for this strategy. The total draw down from this move was -USD 652.00.

You can download a copy of my detailed transaction log for this project here.

Why did I disqualify this strategy after 1 year?

There are a few reasons why I decided to terminate this project after just 1 year of testing, even though there were still money in the account.

No real edge in this strategy. The account balance made small fluctuations at first, and then followed by bigger fluctuations before returning to the starting balance of USD 10,000 after one full year of trading. There was no equity growth, and just waste of time.

Huge draw down greater than gains. The draw down of -USD 652.00 can be dangerous as it erased all profit collected by earlier good trades. Now, try to imagine that this draw down happens straight at the beginning of your trading journey. You would have started with a big hole in your account before making any money.

Unreliable profit potential. Although account balance once went up by USD 535.00, I see this as unreliable profit potential because those 2 trades are the only saving grace in this testing project. How can my account balance just depend on these 2 trades? And now comes the golden question: What if you missed those 2 good trades?

Final Words

Dear traders, the purpose of this Forex strategy review is not to put down anybody or any website. This is to prove to you, that you cannot just plug-and-play any strategies that you read from the internet without proper testing and tweaking.

Although the exact trading rules of this strategy failed our test, it does not mean that it cannot be fine-tuned. All you need to do is to back test and modify it into a model that suits your trading style, and you’re good to go!

I am using Forex Tester 2 for my back testing, and only the best strategies that survived my abuse can make it into my books. I have also written a review on Forex Tester 2 and I highly recommend you to read it at your free time.

If you like my post, please don’t forget to share it with your friends. Do contact me if you come across any interesting strategy and would like me to help to back test it. I will try to help you with everything.

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