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TDW and TDM - test the theory of Larry Williams on Forex

Many authors of various books on trade often share their vision of the market, trade secrets and a general approach. But if you take any approach from any book and trade according to it, know that you are acting thoughtlessly. Each time you meet a new trading idea, before you put it into practice, you just need to first thoroughly check and test it on historical data.

Surely you know that the economies of various countries are subject to cycles. And if not, then read this article. The site also has a special tool that calculates seasonal cycles in the movement of currency pairs. Larry Williams in his book “The Long-Term Secrets of Short-Term Trading” thought about the cyclical nature of markets and invented filters such as TDW (Trade Day Week) and TDM (Trade Day Month). The idea is very simple - to find patterns in the growth or fall of the market on certain days of the week / month. And today we will check the possibility and expediency of their application in the forex market.

Who is Larry Williams?

Trader Larry Williams is one of the most famous professional currency speculators to date. His main successes are related to CFD and stock trading. In addition to practical activities, Larry is widely popular as a theorist who regularly holds seminars in different parts of the world. Books of the legendary trader have become real bestsellers, sold in hundreds of thousands of copies.

Williams was born in October 1942 in the tiny town of Miles City, in Montana, USA. He began his career while studying at a school in his hometown of Billing (Oregon), moonlighting at the enterprise where his father worked. The young man was promised a great future in the epistolary genre, and it is not surprising that Williams graduated from the University of Oregon with a degree in Journalism in 1964.

Having completed his education in his native state, Williams moves to New York and works as a proofreader at one of the local advertising agencies. After a while, he returns home to organize his own newspaper, The Oregon Report. The publication specialized in covering economic and political events. It was this topic that determined the future development of Larry. As the financier himself recalls, one of the articles prompted him to become interested in playing the stock exchange, from which he learned about the serious growth of the company's shares.

At the first stage of a trader’s career, Larry Williams specialized exclusively in stocks. Work on the basis of technical analysis carried out by studying indicators of the time did not bring much success. On the advice of one of his friends, Williams switches to the derivatives market, and, as it turned out, it was an exact hit in the “top ten”. Already in the early seventies, Larry became a millionaire, after which his career was steadily going up.

The real finest hour of Larry Williams came in 1987, when he, being a successful investor, volunteered to participate in the Robbins World Cup futures championship from the investment company Robbins Trading Company. The rules were simple: to achieve maximum profit in a year with an initial investment of 10 thousand US dollars.

Exactly 12 months later, the world was shocked: Williams showed a profitability of 11,376%. The result could have been even more significant if it had not been for “black” Monday, October 19, which resulted in the record breaking of the Dow Jones index by almost a quarter. By that time, Larry’s assets totaled more than two million, and the profitability at the moment exceeded 20,000%.

One of the most important merits of Williams to the trader and the international community is the improvement of technical analysis methods. He has developed and improved a number of popular indicators. His most famous brainchild is Williams% R, also known as the Williams Percent Range.

What are TDW and TDM?

Have you ever had the feeling that the market behaves as if by pattern over the course of a week? Yes, not always, but still at least once you caught yourself thinking like that. So, Larry Williams decided to check whether this is really so.

To test his hypothesis, taking a specific system, Williams simply added up the resulting system results on Mondays, Tuesdays, and so on. He found that certain days are much more suitable for shopping, and some, on the contrary, are suitable for sales. He conducted his audit for stocks in the US market. That is why, taking and starting to apply the results of his research thoughtlessly, you will merge the deposit. But, fortunately, today we are investigating in detail the applicability of its findings to the forex market.

So what is TDW? In English, the decoding of this abbreviation sounds like Trade day week or trading day of the week, in Russian. TDM, respectively, Trade day month or trading day of the month.

The main idea of ​​these patterns is that the market is cyclical and due to various processes occurring in the economies of world countries, on some days of the month or week, the probability of closing is higher or lower than the opening price is significantly higher than 50%.

Hypothesis test

To test this theory, I wrote a simple adviser that opens a deal of the specified direction on the specified day of the month or week and keeps the deal open for a certain number of days. No tracking of positions, stop levels and take profit is provided, so that they do not affect the result. The exit point, as you know, is of great importance for the final result of the system, sometimes even more important than the entry point. It is very often possible to make a profitable trading system out of a loss-making system by choosing the optimal exit option. Therefore, only one indicator will affect the exit - the number of days the position was held, and for all days it will be the same. That is, we will have only one exit point.

As for the entry point, in the advisor settings I set one of three options for each day of the month - 0 (do not enter), 1 (purchase) and -2 (sale). It is these parameters, along with the time of holding the position, that I will optimize. The system also uses the simplest trend filter - if the price is above the moving average with a period of 100 - only purchases are allowed. If lower - only sales. Filter parameters remain unchanged for all currency pairs. Optimization will take place from 2000 to 2013. The rest of the period is reserved for forward testing.

The whole process takes place automatically to eliminate the subjectivity of evaluating the results of the forward test - everything is done for me by an algorithm that offers one, the most optimal result. When selecting parameters, results with a small number of transactions, with a low profit factor (less than 1.1), with a maximum drawdown exceeding 20% ​​are immediately noted. In addition, sets of settings are noted, in which the values ​​of the profit factor or drawdown during the optimization and forward periods differ by more than 10%. Thus, only the most stable sets of settings remain, from which the best by the specified criterion is also automatically selected. To test the resulting system, I selected the number of transactions, profit factor, drawdown and final profit as the selection criteria for the best option.

System building

If the hypothesis is true and the TDM pattern really works, then you can build a complete trading system. Thus, after the basic test, we will add to the system the use of stops by ATR and take as a percentage of the amount of stops.

The third step will be to add various exit options to improve the outcome of the strategy. These will be outputs according to the readings of various indicators and indicatorless signals. Then we pick up various options for tracking positions, such as ATR trawl. And the last step is to apply the TDW pattern - we will prohibit trading on those days of the week in which the results of the system will be the worst.

Testing

Below I will give summary tables for each stage of building the system for USDCHF, GBPUSD, EURUSD, USDJPY, USDCAD and AUDUSD, as well as combined tests.

Let me remind you that optimization will take place from 2000 to 2013. The rest of the period is reserved for forward testing. For all tests, Alpari broker quotes are used.

The first test is carried out only according to the TDM pattern itself, without the use of stop and take profit orders, trays and various exit rules. An entry rule is a specific day of the month. If for this day in the settings is 1, then the adviser will buy. If minus 1, then sell. At the same time, for purchases, the price should be higher than SMA (100), and for sales - lower. Exit - after a certain time set in the settings.

Drawdowns are quite large, and yet the pattern works quite well. Let's add ATR stops and take profits depending on the amount of stops:

In some cases, the final profit increased and the profit factor increased, and the drawdown decreased. You can add rules to exit. There will be quite a few of them - this is the way out after very volatile days, and according to the indicators Stochastic, ADX, WPR, CCI, and even at the intersection of moving averages.

And again, a more attractive result was achieved. We add several options for the trailing stop - according to BollingerBands, according to the moving average, according to ATR, by the shadows of candles and the usual transfer to breakeven:

Results improved slightly. And finally, add the use of the TDW pattern - we will allow or prohibit trading on certain days of the week:

This pattern has brought almost no change. Apparently, the system parameters are already quite optimal. Let's look at the end result test results for each of the currency pairs:

AUDUSD:

The application of the pattern on this currency pair is not effective enough for its use in real trading.

EURUSD:

The use of the pattern on this currency pair has shown sufficient efficiency for use in real trading.

GBPUSD:

The application of the pattern on this currency pair has shown sufficient efficiency to work in real trading.

USDCAD:

The use of the pattern on this currency pair has shown sufficient efficiency for use in real trading.

USDCHF:

The application of the pattern on this currency pair is not effective enough for it to work in real trading.

USDJPY:

The application of the pattern on this currency pair is not effective enough for its use in real trading.

And, traditionally, let's look at a combined test:

With a certain stretch, this trading system can be called quite suitable for trading. The picture is very spoiled by a rather high drawdown, which in real conditions may well grow up to 25%. Moreover, the final profit margin is not so great.

I know that many people like to use martingale to drain their deposits, so that my research is not so boring, I tried to test the pattern using a soft version of martingale. Its meaning lies in the fact that it turns on after a 2-4 losing trade and after a certain series of winnings (even if the adviser did not manage to exit the drawdown), it turns off. Unlike less smart options, this one allows the deposit to live noticeably longer. I did not carefully optimize the settings, set the first more or less attractive results. Let's, for entertainment purposes, see what happened:

Conclusion

Today we saw that the TDM pattern works and is quite capable of making a profit. The TDM and TDW patterns are especially relevant as filters for existing profitable systems. They can significantly improve trading results.

It would be rather difficult to find out the reasons for the performance of these setups, as you would have to understand the many nuances of the macroeconomics, thoroughly study the work of banks, funds and other major foreign exchange players. But we do not need this - it is enough that this inefficiency is indeed present in the markets of most currency pairs. And this means that you need to use it if your goal is to make a profit.


Watch the video: Larry Williams Best Trades Right Now (November 2019).

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