Let’s talk about a commonly known trading strategy – trend following!
The trade setup:
Fast Moving Signal – 30 Day EMA Slow Moving Signal – 90 Day EMA
Go Long – When 30D EMA rises above 90D EMA Exit Long – When 30D EMA falls below 90D EMA
Lets look at the backtested result: Here’s the Equity Curve from the above trade setup
And here’s the Drawdown from the trade setup
Thanks to back-testing reports, we know that the trend following strategy needs improvement. In order to further optimize the strategy, let’s add a stop loss and look at the results, shall we?
We’ve added an ATR based stop loss to the trend following strategy. As a result, the strategy is further improved.
Do you think we can better optimize this? Drop your two cents in the comments section.
After adding a percentage-based stop loss to our basic strategy, we’ve been able to reduce the drawdown by more than 45%!
Let’s try adding a target profit and see what back-testing results that generates!
A quick glance at the Portfolio Equity Curve & Drawdown Curve from the strategy tells you that we’ve improved by a lot. Adding a stop loss and a target profit mechanism to the basic trend following strategy has helped.
Having seen the optimized results of this basic a strategy, we know that back-testing has made us come out of the better end of the tunnel. Hence, remember that backtesting is an important feature while developing a profitable strategy.
Disclosure: Interactive Brokers
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