Simple systems stand what does drawdown in forex meaning best chances of succeeding by not becoming overly curve-fit. However, adding a simple filter to a robust system can be a great way to improve its profitability, provided you also analyze how it may alter any risks or biases built into the system.
The Moving Average Crossover System with RSI Filter is an excellent example of this. 100 Long Only Moving Average Crossover System, it should generate less total trade signals. It will be interesting to see if this leads to a higher win rate. The system also uses the RSI indicator as a filter. This is designed to keep the system out of trades in markets that are not trending, which should also lead to a higher win rate. The system enters a long position when the 30 unit SMA crosses above the 100 unit SMA if the RSI is above 50.
It enters a short position when the 30 unit SMA crosses below the 100 unit SMA if the RSI is below 50. The system exits a long position if the 30 unit SMA crosses back below the 100 unit SMA, or if the RSI drops below 30. It exits a short position if the 30 unit SMA crosses back above the 100 unit SMA, or if the RSI rises above 70. It also implements a trailing stop that is based on the volatility of the market and sets an initial stop at the most recent low for a long position or the most recent high for a short position.
During those seven years, the system only made 14 trades, so it definitely filtered out a large portion of the action. The question is whether or not it filtered out the good trades or the bad ones. Of those 14 trades, eight were winners and six were losers. Backtesting reports for forex systems use a stat called profit factor. This number is calculated by dividing the gross profit by the gross loss.
This gives us the average profit we can expect per unit of risk. The results for this backtesting report gave this system a profit factor of 3. This means that over the long run, this system will provide positive returns. For a comparison point, the Triple Moving Average Crossover System only had a profit factor of 1.