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Reversing Forex Strategies and Expert Advisors

July 23, 2008

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 strategy’s 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:

  1. Buy and sell orders don’t depend on each other.
  2. Entry points don’t depend on the previous positions’ profits.
  3. Order closing doesn’t depend on price (no stop-loss or take-profit).
  4. The strategy itself shouldn’t endorse only long or only short orders.

Reversible strategies exit positions depending on the time — usually it’s either a certain amount of the new bars closed or a new signal generated. In theory stop-loss shouldn’t be used at all, but in practice if it’s used only for securing position from the extreme price movements and is rarely triggered it won’t 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 it’s positive it goes long, if negative — goes short. It’s rather stupid strategy but it’s only an example. We won’t take into account the broker’s 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 let’s try reversing it. Now we’ll go long on negative Close-Open difference of the previous bar and short on positive. On the same bars as above we’d get: -10, +40, -5, -5, +20. That’s 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 it’s 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 you’ll still get your margin eaten by the broker’s spread.

Example 2. The strategy from the first example produced 40 pips loss with 5 trades. If it’s 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 we’d get only 10 pips profit (500 — 7×70). Such reversing isn’t 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 I’ve back-tested in my MetaTrader 4 tester remained lossy after reversing. That doesn’t 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.

2 Responses to “Reversing Forex Strategies and Expert Advisors”

  1. Shunmas

    Hi ! Do you have any Reverse EA ? How we use it to reverse trades, because my EA is a money losing EA. How do we create coordination between two EAs ?

    Thanks

    Reply

    admin Reply:

    While it is possible to create a coordination between two EAs (using order magic number, comments or shared files), it will hardly help in case of a losing EA. It is not always possible to obtain a profitable strategy just by reversing losing signals.

    Reply

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