Weekly update on Forex Robots

Welcome back Forex Fans.

The US Fed increased the discount rate 0.25% to 0.75% in a surprise move at about 4:30 PM on Thursday Feb 18th.

This was during the Megadroid trading window and Megadroid had just gone long the EUR/USD which quickly shed 42 pips in a few minutes time. Apparently, the Fed didn't get the memo that you're not supposed to change interest rates between 4-7PM EST when the scalper robots trade!

Just goes to show you that in trading anything can happen, and usually does given enough time. Anyway, Megadroid has had 14 straight winning trades, so it was due for some drawdown.

Its a healthy reminder that even good trading systems can have period of drawdown and you have to be ready for them. Taking a look at Megadroid's back-testing results for 2009, we see it went into drawdown 3 separate times. At one point it went down to a balance of about $800 and had a top-to-bottom drawdown of 40%

This brings up another good point.

My buddy Sir Redford suggested (a while back) that back test Megadroid with a 30% risk setting versus the 5% risk setting I used in my tests. I tried that today for 2009, and I found that it blew out the account (exceeded 50% drawdown) before the year was half way done!

In the FRWC competition, they stopped any Robot that had more than a 50% drawdown from the initial deposit and I think that's a good rule of thumb.

Its makes perfect sense in that there's a linear relationship between the percent risked, and the amount or drawdown or profit you will experience. And that's another factor to consider to determine how much to risk. If your expected drawdown for your selected risk exceeds 40% of your account size, you're getting too close and you have to dial down the risk.

What's to say that drawdown won't go any higher than 40%?

Well it certainly can, and all we can do is hope that the account balance will have grown enough to survive the larger drawdown when it eventually comes.

Megadroid showed a 40% drawdown in 2009 and 2008, which was the highest in its 10-year history of back-testing. So I don't want to go any higher than that 5% risked per trade.

Enjoy your weekend and check back later.