While checking the list of expert advisors (EA) reviewed so far, I stumbled upon the fact that we have not explored any forex robots that use a breakout trading strategy. That is why today we'll be dealing with the Quant Strategy EA
– the automated system that currently ranks 6th among all of the trading systems that one can copy on Myfxbook's AutoTrade
and that uses the breakout trading strategy.
You can purchase this EA via RegNow as a standalone software for $395, or opt for subscription in exchange of a $57 monthly fee. By the way, these prices will be in force only until March 31, afterwards the subscription fee will be $77 and the one-time payment for the software will be $495.
Although there is a 30-day money-back guarantee, it is not unconditional – you can request a full refund only if you have run the robot with the recommended settings for a month and it has not generated any profit. This is a slippery slope, hence be careful!
Breakout Trading Strategy
The developers of the Quant Strategy EA say the basic strategy the robot is using is trading breakouts: a breakout is a price that goes through a support or resistance level. An EA that is a breakout trader would enter a long position when price breaks above the resistance level and will enter a short position after the price moves below support. After a breakout, the old resistance levels become the new support and vice versa – the old support levels start acting as new resistance.
This method relies on the simple assumption that a market can’t keep its trend without the formation of new highs or new lows.
The breakout strategy delivers most solid results in a market with strong trends and performs worst in a non-trending market. Among the pros of the strategy is the possibility of making fast gains.
However, this trading method can lead to painful experiences during the so-called re-tests: they happen when traders want to make sure that a breakout is really the start of a new trend and some traders seek to profit just in case the move won't last.
This process may push the prices back to the support or resistance level that was broken. It may take several days for the price to restart the trend that began with the initial breakout. This means that breakout traders should have: money to cover losses in case a retest does not happen; patience to wait for a retest to occur. Regarding the latter, an EA is the best solution as its patience is limitless in contrast to manual traders.
Backtests: Good Job! Sort of.
I'm glad to inform you that the Quant Strategy EA developers have performed some pretty decent work when it comes to backtests – lots of statistical information is available, including various ratios, as well as detailed trade history.
There are two backtests for the period from January 3, 2000 to March 1, 2013, both with the EURUSD pair and the one-hour (H1) timeframe. The single difference between them is that the first simulation is run without compounding and the second with compounding. Some of you may have heard something about compounding as a way of money management, perhaps from the books of Warren Buffett. Putting it simply, compounding means generating profits from previous profits.
And, when it comes to forex trading, compounding usually means that the trade contract size will rise in tune with the rise of the account balance.
The backtest with compounding shows variable trade contract size, changing from 0.03 lots to 2.06 lots, while the other test shows fixed trade contract size of 0.01 lots.
Both tests show a profit of $28,147 (or 7,657 pips), which is strange given the different money management strategies used. May be I was too hasty to conclude that the quality of the backtests is high.
But let's focus on other parameters: the drawdown of the test with compounding is 17%, while that of the test without compounding is 7%. Both readings are solid and indicate low risk of losses for such a long period, it is not by a mere chance that the DD in the test with compounding is higher – the risk for large losses due to higher contract size is bigger.
Another interesting point of comparison is the return to drawdown ratio – it is somewhat higher in the test with compounding at 7.3 than the 6.8 in the test without compounding. Putting it bluntly, the test with compounding shows that for every increase in drawdown, there will be a 7.3 times bigger increase in returns. By the way, both ratio readings are very solid, the only trouble is that the data come from backtests.
Live Trading Results: Patience Required!
To dig deeper into the performance of the Quant Strategy EA we'll check a real account
on Myfxbook.com, registered with Alpari UK
and trading three currency pairs: EURUSD, GBPUSD and USDCHF.
Since the account's activation on Aug 14, 2012, the robot has generated absolute gains of 34%, but unfortunately we don't know how much this is in USD, because the data are hidden. By comparison, for the same period another automated strategy, which is higher in the AutoTrade ranking – the Forex Growth Bot (FGB
) made gains of 59%.
The 34% gain of Quant Strategy EA goes together with a drawdown of 21%, which is very high reading given the short period of account activity.
The return to drawdown ratio for Quant Strategy EA stands somewhat low at 1.6, and continuing the comparison with the FGB, let's note that the return to drawdown ratio for FGB for the same period is a bit better at 2.
The Quant Strategy EA keeps the account balance afloat thanks to a higher proportion of trades won (69%) than of trades lost (31%). This comes in the face of the fact that the average win (40 pips) lags behind the average loss (-72.40 pips) – not everything is so rosy in here.
The trade with various currency pairs is with various frequency and success – the trading with EURUSD is most frequent and has generated profits of 910 pips, while the trading with GBPUSD is less frequent, leading to a loss of 535 pips. There is only one trade with the USDCHF pair and it is a winning one.
The history of trades provides some valuable insight into how a breakout trader works: some of the trades are kept open for a very long time, which indicates that the market was either non-trending or retesting, as we explained earlier. An example of what a period of frightening calm can do to an account relying on a breakout robot is a GBPUSD trade opened on Nov 21, 2012 and kept open for 25 days – the loss was massive at -263 pips.
Unfortunately, we cannot determine the money management strategy applied since the lot information is hidden. Seriously, what's wrong with developers nowadays – hiding information seems to be the latest fashion twist!
You Can't Hurry Profit
Quant Strategy EA is a good choice for traders who have the money to support their accounts in case retests fail and instead of a breakout a fake-out occurs. I do not recommend this EA to people who are in a hurry to make gains – it will trade rarely, keep trades open for a long time and often cancel orders. If you have the nerves to handle all this, then go for Quant Strategy!
Know your Keywords
Expert advisor (EA) – An algorithmic trading system for the MetaTrader platform; a trading robot. EA’s can either be downloaded free of charge or for a fee, or can be programmed in the MQL programming language.
Backtesting – Testing a trading strategy on past time periods through a simulation.
Drawdown - A trader's biggest loss for a certain period of time, expressed either in pips or as a percentage of the trader's profit. The lower the drawdown percentage, the less riskier the trading strategy. Let's say you start with a balance of $1,000, then make a profit of $1,000, and after that lose $500. Your drawdown will be 25% ($500/ $1000 + $1000 = 0.25 = 25%).
Live account - A trading account where broker customers invest actual money. Most brokers offer traders the possibility to trade with a demo account before or along with creating a real one.
Lot - The standardized contract size of a trading instrument. A standard lot consists of 100,000 currency units, a mini lot – of 10,000; a micro lot – of 1,000 units, and a nano lot – of 100 units. If you are buying 1 lot EURUSD at 1.3000 for example, you are buying 100,000 Euro for 130,000 US Dollars.
Pip - The fourth digit after the decimal sign of a price quote. For example: if the EUR/USD moves from 1.3350 to 1.3351, that is one pip. Pips are used to measure price movement, profit and slippage.