Staying Single How to Avoid Falling in Love with Trades ~ forex trading income

8:11 PM in a, avoid, falling, five, Forex, how, in, love, not, reasons, single, staying, system, to, trades, trading, use, with

When we embark ourselves in the incredible adventure that is trading, we quickly find that the worst obstacle to achieve our goals is nothing but ourselves. In all the years I have been trading I could tell you that most of the problems I have had have been caused by my own actions which have been a consequence of my - sometimes - irrational thinking. One of the worst ways in which I affected my own trading in the beginning was what I would call my "love affairs" with trades. When we start to trade we tend to make every position we enter too important because in the beginning we all generally lack focus and perspective regarding trading as a business. On todays post I will talk about this great problem I had when I started trading and I will share with you some of the things I did to "stay single" and avoid this disastrous experiences with my trades.

It was a sunny afternoon several years ago when I decided that everything was set. The stars had aligned, my setup had come true and I finally had a perfect EUR/JPY trade ready for entry. I entered the trade, entered my stop loss and take profit levels and waited for a few hundred dollars to go into my account. However, the market decided that the odds were against me and I was facing a position very close to my stoploss in a few hours. Then I remember that the EUR/JPY had done this to me before and I exit my trade only to find out I would have hit my TP after a few hours. My decision -based on this irrational thinking - was to give my trade "more room", I moved my stoploss to allow the trade to continue. Then it moved even MORE against me and it wiped my trade. I ended up losing almost 4 times what I had initially planed to lose and the position never bounced back to the level I had set as a TP.
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This is only one of the several examples of times in which I fell in love with a trade and refused to let it go. The consequence was not only a significant financial loss in my account but a feeling made up of frustration and anger that had a snow ball effect that made me revenge trade the market and end up at an even worse point. When you trade like this you are operating your business like a 5 year old, good things - profitable trades - make you very happy and euphoric while bad things - losing trades - make you absolutely frustrated and angry. It certainly took me a few months but I finally realized that this was a recipe for total disaster.

To change this is no easy thing because the present - the trade on your screen - has an inevitable effect on you psychologically. It is extremely difficult to stay calm and trade your system like you were meant to trade it, to avoid intervention and to avoid feeling like a winner or loser based on some limited trading results. This was the most difficult thing I had to do to become a profitable trader to remove these emotions and become immune to the short term emotional effects trades had on me.

How did I do it (and continue to do it!) ? What worked for me was simply to change my perspective from a short term look to a long term look. I realized that trading wasnt working for me because I was too focused on short term results (turning a profitable trade today) rather than on long term results (obtaining a good average yearly return). My strategies and trading didnt have any long term focus and this was the reason why I wasnt getting anywhere. I decided that if this was going to work for me I needed to have long term targets and I needed to know exactly how my systems would perform in the long term. How long and deep their draw down periods were, how many losing trades I could be expecting, etc.

The change here was from night to day. When I started to have a long term outlook on trading as a business and I had a clear perspective on the way my systems worked, understanding why they were going to be most likely successful in the long term and when exactly I needed to stop trading them if they werent was a blessing to my trading career. Losing trades just became a characteristic of my systems and intervention became a clear thing to avoid since it was obviously detrimental to my systems results. I became a very cold-minded trader and I have successfully managed to avoid "falling in love" with my trades.

To me a trade right now is simply a very small part of what constitutes my long term goals and therefore it simply makes no sense to get happy or sad about the outcome of any single one of them. Certainly if you are a new trader my advice for you is simple, write down a plan that is extremely clear and that has all the detailed characteristics of your trading system laid out (draw down periods, expected loses, expected profits, etc). Know exactly what you are getting into and gain a LONG term perspective into your trading. Treat your trading like a business with long term goals and you will gain an amazing level of control and discipline that will put you on your way to become a profitable trader.

If you would like to learn more about automated trading and how you can use automated trading systems to improve your trading abilities please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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Five Common Mistakes in System Optimization ~ forex trading jobs in new york

2:16 PM in 1, an, common, experiment, fe, five, Forex, in, instrument, intra, mistakes, no, optimization, part, system, watukushay

I believe that one of the most important aspects of system design and use is system optimization. This step in system design is vital since it allows us to adjust a given trading system so that it can more efficiently exploit the market inefficiency it is based on. When done correctly, the optimization of a trading system gives you a more profitable version of your logic with better profit and risk targets in long term performance and a very robust strategy which is not likely to fail even if market conditions change significantly. When done incorrectly, optimization leads to curve-fitted systems which are "fit" to test profitably in the past but fail to profit in the same way in the future. What is the difference between correct and incorrect optimization ? On todays post I will talk to you about this very important aspect of system design and what mistakes system designers and traders usually make that make their optimizations invalid and the resulting trading system useless.

In the end, there is a good way and a bad way to optimize a strategy and definitely all systems can be adequately optimized if certain precautions are taken into account so that the most important "curve-fitting pitfalls" are avoided. I will now describe the five most common and dangerous mistakes made when optimizing and I will attempt to give some solutions to these very usual and sadly lethal blows to long term profitability.

1. Optimization period length. I think that the most common mistake when doing optimization is -without a doubt- the length of the testing period used to optimize. Strictly speaking, optimizations are not bound to be meaningful fit they are done within periods of less than 5 years given that smaller periods of time are not statistically relevant according to long term changes in market volatility. So if you want to optimize your system and avoid curve fitting, use a period of at least five years. Using a smaller period will most likely "fit" your strategy to very specific market conditions and will make it unable to perform correctly as the market changes.

2. Reliability of the simulations. It is very important to note that in order for optimizations to be valid, simulations need to be valid. Optimizing a scalper or a similar strategy which cannot be simulated accurately does not make any sense since the trading results - and thus the optimization results - are not going to represent live testing to any accurate extent. Designing systems that explicitely control one minute bar opening and that use adequate profit and risk targets - large enough to avoid interpolation errors - is critical for adequate optimization.

3. Ignoring the results surroundings. One of the most important aspects of system optimization is to take into account the results "around" the most profitable result you found. For example, if the optimal value for an indicator period for your strategy is 20 when doing a 5 year optimization what happens when the indicator value is changes to 19 or 21, what about 18 or 22 ? It is very important to consider the surrounding since they give you an idea of the possible changes of profitability you will get if the market changes enough so that your "optimal" settings are no longer that good. If your system is very profitable with 20 and then loses 70% of its profitability with 19, then the strategy is not robust enough and it IS bound to fail in the future as market conditions may drift - even if only slightly - from your set results.

4. Fine grid optimizations. Another common problem with optimizations is the use of very fine grids when optimizting. In general, the coarser the optimization the less risk there is to curve fit a strategy since the fitting is done in a "lose way" and results that may over estimate profits and underestimate future draw downs are also avoided to a good extent. In general you should not optimize to any grid lower than 2% and better 5% so if you are doing an optimization of a strategys SL from 20 to 200 do not use steps smaller than 4 to accomplish this.
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5. Reoptimizing after Optimizing. When you optimize a parameter for given strategy, then optimize another one and then reoptimize the first one to the new profitable results you are most likely doing a sort of "fine grid" optimization in the sense that you are "fine tuning" the first variable to the seconds "best results". This is similar to doing a fully correlated optimization (although less computationally intensive) but it has similar dangers in the sense that increased correlation and probably further curve fitting is introduced. My advice here is to only optimize variables from a first set of parameters in order and avoid reoptimization of a variable after it has been optimized once.

As you see, these common mistakes in optimization are made by most people who want to improve their automated trading systems and all of them are bound to generate very good results using optimizations that are possibly going to be an over estimation of profit and underestimation of draw down in the long term. In a future post I will give you a diagram for optimizations explaining a little bit how I optimize my systems and what "general procedures" I follow so that my systems end up being robust, profitable and with a high like hood of maintaining their risk and draw down characteristics in the long term.

If you would like to learn more about my journey in automated trading and how you too can start to design and program your own likely long term profitable strategies please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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Getting the Right Mind Set Distinguishing Between Expenses and Failures ~ forex trading hours today

9:55 PM in and, between, chart, daily, distinguishing, expenses, failures, five, Forex, frame, getting, love, mind, reason, right, set, the, this, time, to

Certainly when people start to get into forex trading every little trade that doesnt go their way seems like a gigantic failure. Definitely the reasons why this is the case are many but perhaps the most important one is that new traders do not have an approach to trading that lets them make the distinction between what is a failure and what is a normal trade that simply went wrong when everything was done "by the book". On todays post I will be talking about the distinction between trades that fail and trades that lose, I will define each one and I will attempt to give you some guidelines so that you can change your mindset and start approaching trading from a more business like perspective. Hopefully after reading this post you will apply this to your trading and you will find out that most of your so called "failures" are just business expenses while many of your profitable trades, are just failures.

Cataloging trades that go "wrong" and end up in losing territory as failures is easy because when we lose money we tend to feel like losers. It is therefore very normal to consider losing trades failures in the beginning. However after you have been trading for a while it becomes obvious that losing is an inherent part of long term profitable trading and that learning to catalogue losing trades differently is important to approach trading with the right mindset. In reality, when every trade is placed there is a natural probability that it may turn out to be a loser (the trades market exposure) and therefore when you execute everything as planned and you lose, it is just a temporary consequence of your strategy.

When you approach trading like a business, this becomes a business expense and the trade become a triumph since you planned you trade and traded your plan. This in turn makes it easier to deal with losing trades since you approach them in a very non-emotional way, simply as some temporary events that will lead to some future profitability. Therefore losing trades that are a consequence of a well laid out plan with accurate long term profit and draw down targets are not failures, they are just part of your business model.
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Failures - on the other hand - are all the trades you take that deviate from your business plan. When you intervene with your plan and make emotional changes to your trading methodology or system you are indeed failing at trading because you are moving away from your "business model". If you made a trade in which you took a decision that generated a lot of profit but that decision led to a road where the long term probability of success was unknown then you have failed because what you obtained was some profit out of some luck. Long term survival in forex trading is about having a plan and executing the plan to get to where you want to be, any deviations from the plan are failures since they lead you a road of unpredictability and uncertainty that will end up with failure.

In order to trade forex successfully I focus on trading as a business and on the trades taken by my systems as a business plan. Any losing trades that happen are merely "business expenses" and all of them are triumphs in the sense that they represent my confidence in the strategy and the business plan. I now understand that any action I take that may intervene with my strategies will deviate me from my long term profitability objective and this for me has become unacceptable since these changes constitute failures of what I want to achieve.

So in the end, loses are a natural part of trading and they will always be there. Dealing with loses is something which is naturally hard to do but you should be able to make the distinction and take loses that are part of a well laid out plan as business expenses while those trades that get you to uncharted territory should be regarded as failures. This mindset will get you on a track of long term thinking and understanding that will ultimately lead to long term profitable trading.

If you would like to learn more about automated trading systems and how you too could use them to succeed in forex trading by building your own systems with reliable trading tactics and accurate risk and profit targets please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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The Indicator Series Understanding Bollinger Bands ~ forex trading jobs from home

8:36 PM in and, bands, best, bollinger, brokers, deposit, five, for, Forex, indicator, nfa, non, reliable, safety, series, the, trading, understanding

If you have been involved with almost any form of technical trading you may have heard and probably used Bollinger Bands. This technical indicator named after its creator - John Bollinger- became one of the most popular tools used by traders during the 20th century. Today I am going to dedicate this post to a description and analysis of this indicator and how it can be used to create successful mechanical trading strategies. I am going to talk about the calculation of the indicator, what it tells us about price action and how we can analyze it to find different types of market inefficiencies. As always the objective of this post will be to teach you how to understand this indicator better and how to design effective systems that tie its logical relationship with price in a rational manner.

So how is the Bollinger Bands indicator calculated ? This is one of the simplest technical indicators available to modern traders. It is formed by two parallel lines plotted around an X period moving average. These lines are distanced from the MA by a certain number of standard deviations. The value of the standard deviation is calculated at the same number of periods as the X period MA. To sum it up the indicator is formed by the following line :

upper band = X period MA + Y times the standard deviation
lower band = X period MA - Y times the standard deviation
central line = X period MA

But what does it tell us ? The standard deviation is simply a measure of how much price moved away from its average. A high standard deviation implies that price moved further away from the central average while a low standard deviation implies that price remained more rangebound and close to its average. When this value is low, volatility is low, when it is high, volatility is high. The plotting of the traditional Bollinger Band indicator with the moving average and standard deviation calculated on close prices over 20 periods is shown below. The upper and lower bands are placed 2 standard deviation measures away from the central line.
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The problem now seems to be to find an exploitable ineffiency using the above indicator. We must therefore find a behavior related to the standard deviation that will produce a forecast of future market movements with a positive mathematical expectancy over a long period of time. However when you attempt to do this you will find that most of your attempts will be frustrated by the fact that volatility related behavior - which is what the standard deviation of price tells us - does not appear to have a relationship with any particular inefficiency. In particular, attempting to capture volatility breakouts using Bollinger Bands is very difficult in forex trading and such a strategy does not hold a positive mathematical expectancy on most currency pairs.

Contrary to popular belief, there is also no clear statistical tendency when evaluating price "touching" the Bollinger Bands. If you attempt to create a strategy to profit from bounces from one side of the band to another you will find that profitable periods will exist but unprofitable periods in which the market will not bounce, but follow a particular band will happen. The same happens if you attempt to do the opposite. None of these approaches seems to give you a positive mathematical expectancy and in the end they do not lend themselves to the creation of mechanical strategies.

Is it not possible then to create a profitable system using this indicator ? Of course not ! Certainly there are ways in which this indicator might be exploited to give entries with positive mathematical expectancies. For example, statistically we might expect price levels outside the bollinger bands to be quite rare and in fact, significant price moves outside the bands might prove to be signals that price is moving decisively in that given direction. We could therefore use these signals to exploit both a short term retracement and a longer term trending movement, expecting price to return within the bands but to continue to move in that direction. Overall entry rules based on this approach have a positive mathematical expectancy meaning that they do provide us with a way to create Bollinger Band-based long term profitable systems.
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As you see it comes down to understanding the meaning of the standard deviation and how price movements that are statistically rare can be exploited to signal - with positive accuracy over the long term - price movements in a given direction. Bollinger Bands are therefore a simple indicator that may not prove to be as useful as traditional technical analysis wants it to be, but it does lend itself to the creation of profitable strategies both on its own and as a compliment to others indicators as shown by the Gods Gift ATR trading system. I am currently developing a few strategies based solely on Bollinger Bands. Will I succeed to make a long term profitable system out of this ? Stay tuned to check it out :o)

If you would like to learn more about automated trading and how you too can create your own systems to achieve success using expert advisors please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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Introducing Our New and Exclusive Profit and Draw Down Asirikuy Analysis Tool o ~ forex trading journal software

7:29 PM in analysis, and, asirikuy, common, down, draw, exclusive, five, Forex, in, introducing, mistakes, new, o, optimization, our, profit, system, tool

If you have read my posts during the past few months you will notice that I have become increasingly interested in the analysis of trading portfolios and the effect of trading several different systems together. After I was able to implement a solution that made the balance of Asirikuy experts independent it became possible to trade systems without their balance calculation becoming dependant on the other systems trades, something which in turn opened the door towards the merging of backtesting results to accurately evaluate joint performance of the different trading systems. Up until now all this analysis had been made through the use of SQL scripts and VBA macros which were implemented by several Asirikuy members. Thanks to their effort we were able to do accurate calculations on the draw down and profit characteristics of portfolios. However it became evident that these solutions to portfolio analysis were not very comfortable needing backtesting statement manual reorganization in excel followed by loading into an SQL server and then loading onto a separate excel spreadsheet to run VBA macros. For this reason we decided to start a project with an Asirikuy member (named Gábor) who offered some of his free time to do all the coding of this new draw down/profit analysis program. On todays post I have the pleasure to introduce this little Asirikuy-exclusive utility, our own profit and draw down analysis tool :o).

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What is so great about this program, what does it do ? The program has many virtues that make it exceedingly good for backtesting statement analysis. The application allows us to load one or a series of backtesting statements joining them together automatically and calculating a series of very important characteristics which are not calculated on the metatrader backtester (not even the MT5 backtester). The program automatically calculates draw down periods, their length, their depth, yearly profits and monthly profits. Having all this information "a click away" is extremely important since it will allow us to do very fast Asirikuy portfolio analysis without having to through the cumbersome process needed to use SQL scripts for this purpose.
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The image above shows you one of the main characteristics of this software, displaying the equity curve for the loaded backtests (in this case three) plus the addition of their results to show you the "portfolio equity curve". This instant snapshot of the equity curve is important since it allows you to see which systems were losers and which ones winners through the testing period you are evaluating. This in turn allows you to gauge the contributions to the maximum draw down and the overall risk level of the different systems, letting you know which system causes the most loses or profits.
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The above picture shows you perhaps the most useful feature of the software, the ability to display draw down period lengths and depth of a given portfolio with great easyness. This allows you to know the average extent of draw down periods and how long you would have to be prepared to wait if you want to use a given trading strategy. It gives an overall realistic picture of a systems trading characteristics showing you why it is evidently hard to trade and what you should be looking forward to regarding eventual loses and losing periods. This draw down period analysis has become a very important part of system analysis within Asirikuy, letting us evaluate accurately worst-case scenarios and largest draw down period lengths.

Besides the features I have commented here, the software also has the ability to display monthly and yearly profits, important characteristics that are useful for determining the overall trading character of a given system. How profitable is the average month ? How many months are winners vs how many are losers ? What is the average yearly profit ? All these questions are answered by our new Asirikuy tool and its ability to dissect trading results into yearly and monthly statistics.

As time evolves we will be able to implement new features and correct bugs that may appear but currenlty this new profit and draw down analysis tool is a very nifty and welcome addition to Asirikuy. From later today, Asirikuy members will be able to download this piece of software from the Experts section of the website. If you would like to learn more about my journey in automated trading and how you too can start to design your own long term profitable systems based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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Five Reasons NOT to Use a Trading System ~ forex trading in usa

2:53 AM in a, advisors, an, expert, five, forex, galactico, not, reasons, review, system, to, trading, unbiased, use

Yes, it is true. We all want to find a profitable trading system that produces money in the long term and we get easily excited with anything that might look promising. This is especially dangerous for new traders as most of them still dont have the ability to recognize the potential of a trading strategy or the actual defects that will make it very hard to trade or simply impossible to succeed with in the long term. Some people new to forex trading are easily convinced with a few trading setups and a week of results while others venture into using systems that dont even offer clear entry and exit setups that have been proved to succeed in trading. On todays post I will give you some advice regarding this subject, I will talk about the characteristics you should look for in a system and the five main reasons why you should NOT use a given trading strategy.

If you go into any of the currently available forums with a section on forex trading systems you will find people using some trading setups that experienced traders would never use. Often these threads will continue until the system faces a draw down period, time after which the rules are changed and the cycle is repeated. This often continues until the general users loose interest and the thread dies, moving onto the next "new technique". How could you know which systems have the possibility to succeed and which ones dont ? Keep reading if you want to learn the FIVE main reasons why you should run AWAY from a trading system.

1. Lack of Statistically meaningful testing. Any system worth using must be evaluated through a statistically meaningful period. The length of this period - if you want a system that has a fighting chance against future market conditions - is of AT LEAST 5 years. This doesnt mean that the system has to be automated and backtested but that the system needs to be evaluated, even if only visually and a record of these simulations MUST be kept. I have seen HUNDREDS of systems on forums that have just been evaluated for a few months or a year and the result is obvious, they simply fail as the market changes.

2. Lack of risk and profit targets. This is perhaps one of the main reasons why I consider people fail with the thousands of systems proposed in forums. There is simply NO clear idea of what the risk and profit targets of the strategy are. What is the longest expected draw down period ? What is the average yearly profitability ? If you go to any forum and ask these questions about a system you will - most of the time - get no answer. This makes people use a system whose risk characteristics they dont understand, usually leading them to failure. If you want to succeed with ANY system, you need to know its risk and profit targets and these targets must be inferred from periods of at LEAST 5 years.

3. Lack of adequate money management. This aspect is very important as money management includes both the exit criteria plus the lot sizing technique. Money management is not simply "only risk x% per trade" it is the lot sizing plus its complex interaction with exit logic mechanisms that allows you to achieve a profitable outcome over long periods of time. If the system you are trading does not have CLEAR exit rules and CLEAR evaluation that shows over a period of at least 5 years of simulations how the closing logic benefits the system and how the overall money management reduces risk then you are not going to succeed with this strategy. Generally systems on the internet developed my inexperienced traders are filled with very complex entries and a vague and unevaluated money management concept. A weak money management strategy that has not been evaluated adequately is definitely something you should RUN away from.

4. Lack of reproducibility. A trading system cannot succeed for everyone who uses it if it cannot be reproduced accurately. Often you will see that systems proposed or shared online fail to have clear exit and entry rules that allow you to follow or evaluate them accurately. It is fairly common to find very vague descriptions of exits like "exit at the next significant support or resistance or Fibonacci level". What does the author interpret as significant ? How does he plot the Fibonacci levels ? This excessive level of discretion is very bad and it usually leads to systems that are extremely hard to evaluate or use successfully. If the systems lack reproducibility it is a definitive signal to run away.

5. Changes every 5 minutes. Perhaps the thing I dont like the most about many forums where systems are shared is the fact that changes are suggested and made very frequently. You will often find that the first post suggests a 50 pip TP only to find 30 posts later that they changed it to a 20 pip TL and then 50 posts later to a 100 pip TP. This is usually the consequence of LACK of confidence, lack of adequate evaluation, lack of adaptability and a general lack of understanding of draw down periods. Every time some loses come by the users build up a correction of the logic based on a few trades without a statistically meaningful evaluation. If you find that the systems characteristics are changed every now and then, you should move on.

I hope that the above information will be useful if you have been looking for a reliable system to use on some of the forums available online or on the internet in general. It is easy to see why the above criteria isnt met by most of the systems found online. It takes a long time to do 5 year evaluations, figure out profit and draw down targets come up with a robust money management system and a robust overall logic, however by doing this you ensure that you KNOW and understand how the system performs and this will be your ONLY weapons against the draw down periods that will certainly come. Having an understanding that bring confidence into your trading is what separates most successful traders from those who fail.

If you would like to learn about automated trading systems and how you can develop your own with a true understanding of their logic and their risk and profit characteristics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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Why are Five Years Statistically Significant for the Evaluation of Trading Systems ~ forex trading expert advisors

6:35 PM in are, around, corner, effect, evaluation, five, for, Forex, ghost, of, september, significant, statistically, systems, the, trading, why, years

Every time someone asks me what I consider to be the minimum necessary period to evaluate a trading system to know if it has a chance of being profitable under future market conditions I unequivocally say "five years". However - although I have explained vaguely in the past why - I have never written a precise explanation that tells people exactly why this is the case and why systems evaluated over at least 5 years have a better chance of surviving than those evaluated over a 1 or a 2 year period. Through the following paragraphs I will tell you the reasons why this is the case and why using this as a minimum period of evaluation guarantees that systems will have a certain degree of adaptability and the possibility to survive to future market conditions.

The first thing we need to ask to understand the 5 years argument is : What changes when market conditions change ? When you analyze any trading instrument and look for changes in the different quantitative characteristics of the market you will notice that changes in market conditions are usually accompanied by changes in volume. This happens mainly because market participants trade more under rough market conditions and less and more orderly under growing market conditions. In the end what you have in an economic cycle is a series of cycles in volume. Since volume is proportional volatility (which is just a way to measure the length of the movements within an instrument) we find that volatility changes as market conditions change. Generally markets in which the economy is growing are steady and quite non volatile while markets where there is a lot of economic turmoil are extremely volatile.

If we then consider that changes in market conditions correspond to changes in volatility then in order to have a sufficient variety of market conditions for the evaluation of a trading strategy we need to have a large enough amount of change in longer term volatility. When you look at the daily or weekly charts of any given instrument, you will notice that volatility within most years tends to change very little while periods of 5 years usually contain large changes in volatility. The graph shown below of the EUR/USD weekly chart clearly shows you the changes in volatility during the past 10 years (as the 14 period ATR indicator). You can see how any given one year period has an almost static volatility while periods of several years, especially 5, have large changes in volatility.
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The period of 5 years comes from an analysis about these variations in volatility. If we take a look at any instrument and consider the time it takes for an instrument to go from its average level of volatility to a new high and a new low and return to the original level we find that this period is roughly 5 years (like how it is shown above). This means that after a period of five years there is a large amount of different market conditions that a system needs to tackle if it wants to be successful. Therefore a system that survives to testing periods of more than 5 years has a high like hood of surviving to changes in market conditions in the future since it contains - within itself - the capability to adapt to changes in market conditions.

Of course, a 5 years period does not implicitly guarantee that any given system will be able to achieve success in the future since the market can change further or at a faster phase than what the system sustained during that 5 year testing period. However it is true that to survive profitably through such a long period a system needs to have some degree of adaptability that is not necessary to survive to shorter testing periods when hardly any changes in volatility happen during most years. It is for this reason that evaluation of strategies through prolonged periods of time is necessary since short tests of just a few years may only show how the system behaves under some very specific market scenarios. Of course, the longer the period you use for your tests and the larger the overall chances in volatility, the more robust your system will need to be.

If you would like to learn more about the evaluation of automated trading systems and how you can evaluate and create your own systems that return profits after 10 years of evaluation without exploiting any backtesting faults please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)

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