Many traders encountered strategies and expert advisors that produce highly stable loss as the result of their trading. The majority of those traders at least once considered a possibility of reversing the strategy/EA by switching the buy and sell orders, hoping to reverse the strategys results. In almost every case this tactic would fail and the results of the reversed expert advisor would be no better than before. The problem is that not every Forex strategy or expert advisor can be successfully reversed. The Forex strategy should be symmetrical to be reversed right.
Reversible (or symmetrical) Forex strategy is the strategy where:
- Buy and sell orders dont depend on each other.
- Entry points dont depend on the previous positions profits.
- Order closing doesnt depend on price (no stop-loss or take-profit).
- The strategy itself shouldnt endorse only long or only short orders.
Reversible strategies exit positions depending on the time — usually its either a certain amount of the new bars closed or a new signal generated. In theory stop-loss shouldnt be used at all, but in practice if its used only for securing position from the extreme price movements and is rarely triggered it wont hurt the reversibility (the same can be applied to the take-profit parameter too).
Example 1. Simple reversible EA — it opens a new position after opening of the new bar, closing the previous position simultaneously. To determine the direction of the position the expert advisor checks the Close-Open difference of the previous bar and if its positive it goes long, if negative — goes short. Its rather stupid strategy but its only an example. We wont take into account the brokers spread in this example. This EA first went 2 times long and then 3 times short with the results being: +10, -40, +5, +5, -20. The total loss of this expert advisor would be -40 pips. As we see this is a reversible EA (it complies with each of the four conditions for reversibility), so lets try reversing it. Now well go long on negative Close-Open difference of the previous bar and short on positive. On the same bars as above wed get: -10, +40, -5, -5, +20. Thats exactly +40 pips — a reversed strategy produced a reversed result (with spread wider than 0 it would be another result, but for the sake of the example spread is ignored here).
If you back-test or forward-test a reversible strategy and get a negative profit over months, you can turn it to positive simply by reversing this strategy. But unfortunately its not that easy. Often the reversible strategies will produce almost zero profit/loss over a long period of time — in this case reversing is useless. There is a strict and quite obvious rule to find out if the reversing would be justified. If the loss in pips for the period is significantly greater than the spread multiplied by the number of trades made for the period, then this strategy is worth reversing; in other cases youll still get your margin eaten by the brokers spread.
Example 2. The strategy from the first example produced 40 pips loss with 5 trades. If its EUR/USD pair which usually has 2 pips spread, then you get only 10 pips (5×2) of loss produced by the spread. So, reversing the strategy in this case will change -40 pips result to +30 pips — definitely a good result.
Example 3. Consider a reversible strategy that produced 500 pips loss over 6 months of backtesting. The currency pair used in the test was GBP/JPY (7 pips spread) and the number of positions opened and closed during this test was 70. If we reverse this strategy and run the back-test again wed get only 10 pips profit (500 — 7×70). Such reversing isnt justified as the gain lies within the normal profit/loss fluctuation range.
If you try to reverse asymmetrical Forex strategy, most probably, it will produce the same result as before due to its inner mechanics. At least all lossy expert advisors that Ive back-tested in my MetaTrader 4 tester remained lossy after reversing. That doesnt mean that everyone should stop developing irreversible strategies and switch to symmetrical. Each of those strategy types has its own advantages and disadvantages. Just learn to distinguish one from another and use it accordingly.