Our Strategy Test

When we decided to test out some of the most well-known publicly-available and free forex trading strategies on the internet while almost no one was paying attention to them, we were curious about a strategy named "5 Minute Momo" (Momentum) originally publicized by Kathy Lien and Boris Schlossberg.

 

The 5 Min Momo Strategy

When to go long (buy):

1) Look for currency pair to be trading below the 20-period EMA and MACD to be negative.
2) Wait for price to cross above the 20-period EMA, make sure that MACD is either in the process of crossing from negative to positive or have crossed into positive territory no longer than 5 bars ago.
3) Go long 10 pips above the 20-period EMA.
4) For aggressive trade, place stop at swing low on 5 minute chart. For conservative trade, place stop 20 pips below 20-period EMA. (We tested with the swing low rule.)
5) Sell half of position at entry plus amount risked, move stop on second half to breakeven.
6) Trail stop by higher of breakeven or 20-period EMA minus 15 pips.

When to go short (sell):

1) Look for currency pair to be trading above the 20-period EMA and MACD to be positive.
2) Wait for price to cross below the 20-period EMA, make sure that MACD is either in the process of crossing from positive to negative or have crossed into negative territory no longer than 5 bars ago.
3) Go short 10 pips below the 20-period EMA.
4) For aggressive trade, place stop at swing high on 5 minute chart. For conservative trade, place stop 20 pips above 20-period EMA. (We tested with the swing high rule.)
5) Buy back half of position at entry minus amount risked, move stop on second half to breakeven.
6) Trail stop by lower of breakeven or 20-period EMA plus 15 pips.

We take no credit for this strategy, of course. The point of this experiment was for our guest contributor, Aubrey Vogel, to make use of experience with more complex trading systems and code an accurate implementation of such a simple, widely-shared trading strategy just to see how it performed over the past few years.

Backtest Results

GBP/USD (Jan 2011 to Jan 2015)

Starting Balance: 10,000.00

Net Profit: 10,143.60

Max Drawdown in Balance: 41.96%

Max Drawdown in Equity: 44.34%

Win Rate (% of Trades Won): 46.18%

Average Reward / Average Risk: 1.4 to 1

It's not the prettiest equity curve in the world but it does show a bit of an edge, enough of one to call it a strategy that actually works in the grand scheme of things. (To put it in another light, some strategies such as moving average crossovers actually look like a ski slope toward a margin call, so despite that huge-looking drawdown by the end of 2014, it's actually in the green because years like 2012 and 2013 on the Cable provided enough trends within its time frame, apparently.)

It's also worth noting here that this strategy actually demonstrates that, sometimes, the cliches from forex gurus about risk-reward (and being able to make money with a winrate below 50%, which is also demonstrated by our expectancy calculator) are sometimes true.

Our Review

It looks like the basic premise of the 5 Minute Momo trading strategy shows an ability to find opportunities in short-term trending markets. Judging by the way it was constructed, it looks like that's exactly what Boris and Kathy were going for with the original idea.

In reality, many professional traders will find this strategy either overly mechanical or too restrictive. If anything, it may be the sort of strategy that works well as a part of your strategy portfolio for those days or weeks when you don't have much conviction for other entries. Of course, this depends entirely on your own style, approach, and experience.

Either way, we only intended to find out how a simple, freely shared trading strategy actually would've performed over the past few years' forex markets while many traders may have taken it for granted.

As it turns out, some of the classics do carry a little weight. If short-term trend momentum is your cup of tea, it might even be worth building your own strategy with 5 Minute Momo as a starting point, at the very least. Congrats to Kathy and Boris on this one.

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