Falling into the trap of trading strategies that only worked for a certain period of time was a danger that we were now well aware of and didn't want to fall prey to yet again. And at the same time we still wanted to keep learning.
We had a long phase of being gold miners, panning every forex river we could find for some nuggets of wisdom, winning strategies or hot tips. At this time we were regularly taking classes or reading about strategies online, following people in chat room forums and pursuing endless threads on how to trade. Each time that we learned and then tested a new strategy, we hoped to be adding valuable information to our knowledge base. Sometimes we would take a class or multi-day seminar and come away from it satisfied, even if it just yielded one little bit of information that we thought could help us. We never knew if one of those tidbits or a combination of them was going to yield the bounty of riches that forex trading promised.
We were steadily building a reputation as great analysts who didn't believe everything being taught because we questioned mentors and their strategies and their foolish money management, if they even bothered to mention that aspect of trading. We were now thoroughly analyzing everything before blindly following the herd. All the while fellow traders were sharing with us their strategies in the hopes that we would do further testing on them and let them know if they were onto something.
The Blue Box was one of those strategies brought to us by a fellow trader living in the UK whom we knew from one of our chat rooms. This strategy entailed drawing a box between the high and the low during the first three hours of the London session. Only those 3 hours would be encompassed by the Blue Box. Once drawn there were certain rules about how small or large this range had to be in order to qualify and be tradable. But basically it was a version of break-out trading.
Our friend told us about this near the end of 2010 and we ran it through the Forex Tester for that year and it worked amazingly well. It had an 81.48% win rate, which was really high. Below you can see the results that we imported into our Trade Log directly from the Tester so that we could analyze it more thoroughly.
Rather than just eyeball this on the candle charts on our broker's platform, we used the Forex Tester and started inputting the trades for each day the set up was valid. It was easy enough to program an indicator that would show us the blue box clearly. And in a short period of time we could simulate the trades for the whole year and run through the year's data in less than a couple of hours.
We were excited about being able to live trade this. But first we had to do more testing to see how it held up in prior years. By now we knew that we weren't going to put live money into anybody's strategy until it had proven to us that it was robust enough to not only work in current time, but also in prior years.
In 2010 the ADR (average daily range) on the EURUSD was 149. In 2009, it was 166 - not that different. If anything, we anticipated that 2009 should be even better because of the slightly higher volatility in the market. (By the way, if you're signed up to our email list, you have access to all of these stats.) But surprise! Below you can see the equity curve for trading this same Blue Box strategy in 2009. It didn't look anything like the equity curve that we had from 2010. The results were shocking. Although this strategy was working well for that year (2010), it had literally bombed the year before. And that was after the financial crisis of 2008, so the failure couldn't be blamed on that. There was no way that we were going to go down this road to possible eventual failure of this strategy.
The Blue Box got tossed into the trash box and off we went again looking for what we would trade next. If it hadn't been for the Forex Tester and the Trade Log, this strategy would have eaten us up in the same way that the Carry Trade, the Correlation Trade and News Trading did because they each worked great for a while, but were not to be counted on for the long term.
Remember… we developed the Forex Smart Tools Trade Log initially for our own use. Even to this day we still enter every trade we take along with screenshots and comments into the Trade Log. The story of the Blue Box strategy is a classic example of its power. With the Trade Log, it was easy to isolate individual periods of time to compare session by session, day by day and year by year how this strategy performed. The Forex Tester is great, but this kind of information is difficult to extract. So in our development of the Smart Tools we made sure that the strategies we ran in the Tester could be quickly and easily imported into the Trade Log.
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