Forex strategy testing

Ok, so after reading "Adventures of a Currency Trader" at Times Bookshop, I started to do some tests to see what's the effectiveness of strategies purely using indicators.

For a start I've completed the Average True Range of GBP/USD for the period of 1st Jan to 9th Jun, 2007, and found that the daily average is around 119 pips and, the weekly is 290 pips.

So that leaves me some sort of way to know how to position my stop losses.

I begin my strategy testing with using the Parabolic SAR dots reversals as signals as my trading strategy, buying on day 1 of reversal and selling on the 1st day of next reversal. SL levels are placed at the level of the dots and are unchanged for the course of the trade.

Data was collected for approximately a year on the daily chart from May 2005 to Jun 2006. Parabolic settings at Acceleration = 0.020 and maximum = 0.20. And guess what I found? This indicator works superbly well only in a strong trending market, otherwise the signals could just result in whipsaws.

Over the period there were 20 trades averaging 17 days each. The best gain was a 1081 pips gain in a 44 days trade and the worst trade resulted in a loss of 422 pips that lasted 17 days.

On average, there were loses of 44.2 pips per trade. And the reward to risk ratio, calculated by taking the quotient of dividing the pips gained by the potential pips loss as dictated by the SL level, found that the potential gain is rarely even 100% of the potential loss. The sole exception is the strong upward trend resulting in the 1081 pips gained. That one has a reward to risk ratio of 2.92 : 1.

So I realised that the Parabolic dots are only useful in strong trending markets which present themselves more frequently towards year 2007. Still they cannot be standalones in deciding trading decisions. And a trailing SL level at each day should be set as indicated by the new period's Parabolic SAR dot.

I've also to device a way to find a better time to exit trades, since I realised that the indicator is good in telling direction but quitting the trade only by the next reversal signal would mean there would already be some downside to the earlier gains.

My next study will be on Stachostics alone to see if they work as reversal signals.

I'm also attending a course by Clarence and I should be able to gain much from there. Did see in an email from him that some of his students are still quite lost though, hope I'll be a good trader who can pick up the right signals as his TNT system dictates.

Hope you guys are doing great trading and having fun yeah!