Proven! Secrets of Trend Following Using the 20-Period Moving Average

Hello everyone, this is Pip, your FX trader (〃 ˆᴗˆ 〃 )

Here is the article presenting the test results of the simple trend-following strategy using just one moving average line that I introduced last time.

I’ll be sharing the results of my backtesting based on this trading method, along with the additional rules and reasons for their inclusion that were added to enhance the strategy.

If you check out the previous analysis article, you’ll gain a better understanding of the theory and rationale behind this method, so please refer to it as well.

Recommended for Beginners: Establishing a Simple Trend-Following Method Using a Single Moving Average (Set to 20)

2024年7月15日

Alright, let’s get started!

Simple Trend-Following Strategy Using the 20-Period Moving Average: Currency Pairs and Time Frame Settings

Simple Trend Following Trading Rule Using Only One Moving Average

Let me introduce the rules of the trading strategy we will backtest.

We will backtest the above trading rules for now, and finally, we will summarize additional rules based on the test results to stabilize the win rate.

Results and Analysis of the Trading Strategy Using the 20-Period Moving Average

Let’s dive straight into the backtesting results.

Although it might seem sudden, the actual backtesting took around 2 to 3 hours, followed by roughly an hour of re-analysis.

What do you think?

The win rate and maximum profit are outstanding, aren’t they? (◦ˉ ˘ ˉ◦)

Even the average RR exceeds 3, and the ratio of maximum profit to loss is about 9 times.

While the “Strong Rate Zone Targeting Method” I introduced previously had an incredible win rate, I personally wanted a bit more trading frequency. This time, I’m very satisfied in that regard as well.

[New Trading Strategy] The Backtesting Results of the “Strong Rate Zone Targeting Method” are Astounding!

2024年7月13日

In forex trading, the basic principle is to buy at a low price and sell at a high price (and vice versa). However, aiming for the bottom too much won’t always hit the mark. As a result, many people start entering trades around the average of the current price movement.

Trading strategies using moving averages are based on the market psychology of many traders, so these backtesting results are quite convincing (˶ᵔ ᵕ ᵔ˶).

The Truth About the 20-Period Moving Average Strategy Revealed Through Backtesting

I am satisfied with this simple trend-following strategy using only one moving average (set at 20), and the backtesting results are also very satisfying. However, after trading in a live market, I’ve discovered a few insights. I’d like to summarize these findings as a final note.

Fewer Trading Opportunities Than During Analysis

During the analysis phase of this strategy, I found 138 trading opportunities over two years, which should translate to about 69 opportunities per year.

While I understand that changing the target period for analysis and backtesting means results won’t be identical, the actual backtest revealed only 37 trades in a year—significantly fewer than expected.

The reason for this discrepancy lies in the fact that this strategy uses a moving indicator like the moving average, which fluctuates with price movements.

During the analysis phase, both the moving average and candlesticks were already settled, so even minor movements were considered. However, in a live market, it was not possible to achieve such perfect entries.

One might think that waiting for both the hourly candlestick and the moving average to settle before entering a trade would help, but this results in delayed entries, increasing the stop-loss distance and worsening the RR.

While the trading frequency is lower than during the analysis phase, I believe it is still sufficient and does not require adjusting the strategy to allow for larger stop losses.

After Entry, Monitor Price Movements Using the 5-Minute Chart

This method addresses the issue of widening the stop-loss. The basic approach is to use the 1-hour moving average, but when the trading conditions are about to be met, you draw a horizontal line at the moving average price level on the 1-hour chart. You then enter the trade when the 5-minute chart breaks this horizontal line.

After entering, continue monitoring the price movements using the 5-minute chart and adjust the stop-loss level accordingly.

In strategies like this, which use moving averages, it’s inherently difficult to set a definitive take-profit level. Therefore, the final take-profit decision is made by adjusting the stop-loss level according to the price movement, or by adding another rule for taking profit.

To minimize the stop-loss width while maximizing potential profit, we choose to follow the price movement using the 5-minute chart.

Here’s an example of a chart where the stop-loss level is adjusted using the 5-minute chart after entry.

Simple Trend Following Strategy Using the 20-Period Moving Average: Comprehensive Summary of Backtesting Results

It was truly beneficial to test this strategy in a live market, as I discovered various insights that weren’t apparent from analyzing settled charts alone.

I’ve added trading rules that can further improve the win rate and profitability, and I believe the strategy has now reached a level where it can be effectively used in real trading.

Now, let’s wrap up by summarizing the trading rules for the simple trend-following strategy, including the additional rules.

I encourage everyone to test the trading strategies they discover through their own analysis or those they hear about from others. By doing so, you can establish a truly personalized trading strategy that suits you best.