Equity Curve Trading 3


Salve a tutti,

as you may have read in my EURClimber EA review it uses a nice money management strategy that they called “Equity Curve Account Protection System“. This strategy is nothing more than what’s usually called “Equity Curve Trading“.

It is a very interesting strategy that focus on the equity curve and not on single trade performance. It’s more or less that same focus I try to have when developing my EAs and that’s probably why I particularly like it decided to develop more on that direction.

What does it mean “Equity Curve Trading”?

First define the equity curve. In MT4 we distinguish between balance and equity curve.

With balance we define the curve made by all the closed profits and losses. When we close an order, the balance is updated and it remains the same until a new order is closed in profit or loss.

With equity we define the curve made by the balance plus or minus the value of the open orders. So The equity will be lower than the balance if the actual open orders are in loss, or greater than the balance if the open orders value is positive.

Usually we should focus on equity as is the real value of our account as it also takes into account open orders value as well.

For EQT (Equity Curve Trading) we may use both the balance or the equity. Most of the people applying them use the balance but I personally prefer to work with the equity. But much depends on HOW you decide to apply the strategy. More over I’ll detail the possible approaches.

EQT is made by applying a moving average (usually a simple moving average) to the equity (or balance) of the last N points. Depending on how you calculate the equity they can be the last N days/hours of trading, or the last N orders. In case you decide to work with the equity you’ll probably calculate it time based. In case of balance you can use time or order based curves.

If the equity line is BELOW the moving average of itself then we may decide to stop trading live or reduce the lot size of the trades. Viceversa, if the equity line is ABOVE the moving average, we trade the strategy live or we use an increased lot size.

Why we do that?

Because if the equity is below its moving average we suppose that the trading sistem is not performing as it should (it’s in a “bad period”) and needs to be paused waiting for the strategy to come back to perform well.

But we don’t have to stop the system from trading completly. We should continue to let it trade as usual but in demo (or simulating) so that you can come back trading live when the demo equity comes back above the moving average.

Some don’t stop the live account from trading but adapt the lot size based on the fact that the

What are the benefits of this strategy. Well, the benefits come from the fact that we avoid trading the strategy when it is evidently not trading well. We know that all the strategies have “bad periods” due to different reasons (Ex. too much volatility, or not enough volatility, etc). Instead of making the strategy run when it is not meant to run, we pause it, waiting for it to come back to trade with best performances. That way we should be able to increase performances and lower the draw down.

What are the cons of that kind of approach. Some strategy may not benefit from that approach as we may let them not trade in periods when they can recover the previous loss. So sometimes with EQT we may have the opposite result of decreasing performances and sometimes rise the draw down. So use it on strategies after you’ve done some analysis on previous performances and on their equities.

How to do that?

What I suggest you to do is have two MT4 platforms: a demo and a live one. The demo one will ALWAYS trade. The live one will trade ONLY when the equity curve is above its moving average. So in reality the main one is

How to calculate the equity line and most important the moving average of it?

Well, I personally use an indicator I developed for it. It’s still not ready 100% but I’ll post it in the next days.

But you may record your trades on Excel (or OpenOffice Calc), create a chart and apply a moving average to it.

There’s also a nice software that I used named TradeLogger that can help you in that. It not cheap ($47.99/month) and it doesn’t not integrate easily with Metatrader 4. The images in this article are taken from Tradelogger online manual.

Here’s a screenshot of the tradelogger in action:

The period of the movinf average depends on the strategy and you should play a little with it. Usually a 9/10 period is used but to get optimal performances you need to experiment.

Cross of Angle?

Since now we spoke about the cross of the equity curve above/below its moving average. But some use another approach that is by simply looking at the moving average angle. In this last case we stop trading live when the moving average is poiting down (last value lower than the previous one) and resume trading when it is poiting up (last value higher that the previous one).

Here’s an example of trades filtering based on equity crossing its moving average:

and here’s an example of trades filtering based on the equity moving average “angle”:

The “angle” approach is a little slower but usually takes less false signals. Again every strategy “equity” needs a little of tests to find the best results.

EQT for EA Portfolio

In our portfolio management, we may for example decide to enable/disable one EA based on the each single EA equity curve. That way we can stop one EA from trading when we see it’s balance cross below the moving average and resume it when the balance of its orders come back above it.

I hope you find that strategy interesting. As I told you this strategy is used by the EURClimber EA and I’m also implementing it in the next version of the “pimped” Forex Growth Botthat’s why it is taking a little more time to have the new version of it :)

NOTE:

If you want to read more about the EQT money management strategy and others a good book is: “The Trading Game: Playing by the Numbers to Make Millions” by Ryan Jones.


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3 thoughts on “Equity Curve Trading

  • Todd

    Andrea

    It all sounds great. I think that Growth Bot has so much potential in the way it senses new trend and also baskets of order, more orders the stronger the trend.

    Thanks

    Todd

  • Mointy

    Hi Andrea, i think that this kind of approch is a very nice complement on the money management if we take lot size into account (alwyas the smalest). The beauty of it is to automaticly implement it in the EA. If we put it that way im sure that 30% DD on Crescendo will never ever be hit with a large loss as one trade in the wrong direction will make a less signifiant mess than 4 or 5 trades.

    Great approch mister genious, can't waite to get the new Pinp My EA set of the FGB.

    Cherio

    • Andrea Post author

      Crescendo is not the kind of EA that can use that strategy as it is. But I'm thinking to something similar that can help lowering the DD. Probably won't be on v1.4 anyway as my idea will require a lot of time for development and testing.