Cable Momentum 10/2: A GBP/USD Momentum Trading System
The Trading System,
Momentum trading is based on the idea that when momentum (price movement) reaches a certain level, the market is likely to continue moving in that direction for sometime, and isn't likely to reverse due to the amount of momentum built up behind the large price move. These sudden price movements often appear as flags or pennants on charts.
When developing any Forex Currency Trading System it is very important that you design a system that is right for you, and suits your personality and trading goals. I designed this system to be as easy for me to trade as possible. This system is designed for the GBP/USD currency pair only, which is my favourite pair to trade, and because I don't have time to watch to many markets at once. The system doesn't trade very often (on average there is one trade every 10 days/2 weeks) which suits my trading philosophy - I don't believe in always being in the market, I only believe in being in the market when the conditions are favourable and the odds are heavily in my favour. This system also uses a relatively short time based exit, which is my favourite way to exit a trade as I find it easiest to stick to, don't like being in any trade for to long, and don't like the low win to loss ratio that one enviably has when using exit strategies like waiting for moving averages to turn against your trade. If your personality and trade goals are nothing like mine, then a momentum trading system like this might be of no use to you.
Rules for the Cable 10/2 Momentum Trading System,
Entries. Entries are taken in the direction of a movement bigger than any other movement in the last X number of days. The direction is defined as up if the price closed higher than it opened, and down if the price closed lower than it opened. If the price closes at exactly the same level it opened at, then there is no direction and can be no trade for that day. The size of the movement depends on the direction: If the direction is up, the movement size is the difference between the closing price and the day's low, if the direction is down, then the movement size is the difference between the day's highest price and the day's closing price.
Exits. Exits are purely time based, taken automatically X number of days after the trade was entered. Trades must be given time to work, but not left on long enough for the edge generated by the momentum to fade away. Time based exits are my favourite type of exits for a number of reasons. Firstly, mechanical trading systems that use time based exits usually have a higher win to lose ratio than systems that wait for a technical signal that the price has turned against the trade. Time based exits are the simplest kind of exits to follow as they can be set to happen automatically. The disadvantage of using time based exits is of course that they don't tend to make the most of the large price movements, but this a momentum trading system, not a trend following one.
Testing With Different Time Frames,
I am going to test this system on Cable data from the beginning of 1996 to the present day (mid October 2009). The system is simple; go long on an up day (close greater than open) immediately after a movement up (close-low) that is bigger than any movement that has happened in the last X number of days, and leave the trade on for X number of days before exiting. And go short on a down day (close less than open) immediately after a movement down (high-close) that is bigger than any movement that has happened in the last X number of days, and leave the trade on for X number of days before exiting. For the time frame I have picked (10 days for the biggest movement, 2 days for the time based exit) I will provide the full results in text format and a year-by-year break down of the results. After that, it's up to you to choose your own stop losses and time frames etc, and make this system your own. I do not recommend trading a system like this on any other currency pair than the GBP/USD as British Pound's behaviour is ideal for a system like this, most other currency pairs will perform a lot worse than the Cable.
| Number of Days For Biggest Movement |
Number of Days For Time Based Exit |
Number of Winning Trades |
Number of Losing Trades |
Win to Loss Ratio (Trades) |
Number of Winning Pips |
Number of Losing Pips |
Win to Loss Ratio (Pips) |
| 5 |
1 |
300 |
297 |
49.7% |
24355 |
-18462.4 |
1.32 to 1 |
| 5 |
2 |
275 |
322 |
53.9% |
34235.6 |
-23780.2 |
1.44 to 1 |
| 5 |
3 |
287 |
310 |
51.9% |
37877.9 |
-30761.5 |
1.23 to 1 |
| 8 |
1 |
191 |
196 |
49.3% |
16468 |
-12570.9 |
1.31 to 1 |
| 8 |
2 |
214 |
173 |
54.3% |
22530.2 |
-13963.4 |
1.61 to 1 |
| 8 |
3 |
205 |
182 |
53.0% |
25393.1 |
-17908.1 |
1.42 to 1 |
| 10 |
1 |
162 |
162 |
50.0% |
14631.5 |
-9941.5 |
1.47 to 1 |
| 10 |
2 |
188 |
136 |
58.0% |
20370.9 |
-10912.2 |
1.87 to 1 |
| 10 |
3 |
184 |
140 |
56.8% |
23319.1 |
-13829.9 |
1.69 to 1 |
Two day's seems to be the optimum amount of time to leave a trade on for with all the time frames I tested, so I will be using two days for my time based exit. The greater the number of days used for the biggest movement entry signal the more significant the movement is and the greater the chance of success, however I am not willing to go above ten days as a figure for a significant movement as the more significant the movement must be the less trading opportunities the system provides. I have therefore decided on using ten days for the biggest movement and two days for the time based exit. To see the full results of the 10/2 Cable Momentum Trading System right click and save target as here.
A year-by-year break down of the winning pips to losing pips ratio for the 10/2 momentum system since 1996 is as a follows –
1996: 1.27 to 1
1997: 1.51 to 1
1998: 1.92 to 1
1999: 0.57 to 1
2000: 5.39 to 1
2001: 2.16 to 1
2002: 1.18 to 1
2003: 1.30 to 1
2004: 0.91 to 1
2005: 5.25 to 1
2006: 2.17 to 1
2007: 1.22 to 1
2008: 2.35 to 1
2009: 5.97 to 1
12 out of the last 14 years were profitable ones for this system, losing years were immediately followed by years of winning pips to losing pip ratios of more than 5 to 1.
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