The Yen Trader trading system

Fast - is slowly but without breaks.
Japanese proverb

Hello, dear friends, forex traders! Today we talk about the trading system under the clear name Yen Trader.

I like trading systems, which are based on a very simple idea, which is difficult to “break down” - so easy they are. Yen Trader strategy belongs to such. Using logical market inefficiency, we have a statistical advantage, and thanks to automation, we can use the time to our advantage.

Characteristics

• Platform: MetaTrader 4;
• Currency pairs: recommended GBPJPY, but also suitable AUDJPY, CHFJPY and EURJPY;
• Timeframe: H1-D1;
• Trading Hours: around the clock;
• Recommended brokers: Roboforex, Forex4You

What is a correlation

This strategy was first published in a ForexFactory forum. The strategy is based on the principle of correlation, so you need to have a full understanding of the concept of correlation to understand the idea. In the case of Forex, most often examples are EURUSD and USDCHF correlation.

As we can see, most of the time pairs live their lives, but at times there is quite a strong negative correlation. A negative correlation means that in the case of EURUSD falling, USDCHF will rise, and vice versa. Positive correlation means that the price of both instruments move in one direction. An example of a positive correlation - AUDCHF and AUDCAD pairs.

The table of correlations of different currency pairs can be found on the myfxbook.com website. Here you can highlight (1) pair with a correlation greater than a predetermined value and to indicate (2) a timeframe for calculating the correlation. The closer it is to zero, the weaker the dependence. We are interested in strongly correlated pairs, with values close to 100% (positive correlation) and -100% (negative correlation).

The idea of the strategy

Now go directly to the idea of the strategy. The idea of the author is to compare the movement of the main currency pairs with USDJPY. Roughly speaking, when the major’s movements match, we will enter them on the cross.

For example, if the GBPUSD and USDJPY grow, we buy the GBPJPY, as a derivative of the two pairs.

If you try to compare the USDJPY and GBPUSD charts, you will see that they move most of the time differently and visually no explicit dependence is observed. Therefore, it is important for us to catch the moment when a strong positive correlation appears between the pairs. When this happens, and GBPUSD is showing growth, pound also grows. In turn, if USDJPY is rising, the yen falls. When at the same time the value of the pound increases and yen falls, you can expect the GBPJPY to move up.

Look at the chart below. As you can see, the most active growth is observed for GBPJPY, when both majors grow. Actually, that’s the principle of the strategy in a nutshell: as soon as we notice that the two pairs begin to grow - buy GBPJPY. The same goes for the reverse situation, when the two currency pairs fall - sell GBPJPY.

The same principle works for other pairs. For example, analyzing the EURUSD and the USDJPY pairs, you need to enter them on cross - EURJPY. The same goes for the Australian dollar, and AUDJPY cross. Also, according to the system you can trade CHFJPY cross, but I would not recommend it, as the Swiss franc in the last time is not the most stable currency. Given the direct quotation, rules for entry will be slightly different. When the USDCHF falls and USDJPY grows - buy a cross, when the dollar-franc is rising, the yen-dollar falls - sell CHFJPY.

The logical question is: how do we determine when the price rises, and when not? In fact, a simple filter on the basis of the moving average can be used for this task. Before opening a sell trade, check that the price in both currencies is below the average and the previous candle was of bearish type. In case of buy – vice-versa. If desired, you can not take into account only one previous candle, but two, three or even more (specified in the advisor settings).

Stop-loss is calculated based on the ATR volatility indicator. You can also use a trailing stop. ATR value in the strategy is not used directly but is normalized with respect to the timeframe. Let’s consider a calculation of a normalized ATR value in the example.

Example 1

Let’s say you chose the M30 timeframe. The current value of ATR on D1 - 332 points, on M30 - 26 points. Instead of using the value of 26 points, normalized ATR is calculated by the following formula:

332 / square root of (1440/30) = 47 points

That is, the day ATR value is divided by the square root of the result of D1 divided by M30. Roughly speaking, this formula makes ATR a little higher, when the current value is too low, and vice versa, makes it a little lower when ATR is too high.

Example 2

Consider the case with H4 timeframe. Let’s say, the ATR value on H4 equals 102 points, while on the monthly chart it’s 1070 points. Accordingly, the calculation would be:

1070 / square root of (43200/240) = 80 points

This same value of ATR we will use with a multiplier (optional). You don’t have to calculate manually, expert adviser undertakes this task.

EA installation

EA installation is done like for any other MT4 platform adviser. There are detailed instructions on this process on our website.

EA must be attached to the cross, that is, on the pair, which we will trade. For the test, we will use the GBPJPY, as the best currency pair for this system. So, open the GBPJPY chart with the correct timeframe (I do not advise to go down below H1) and attach the adviser to the chart.

EA settings

• Magic Number - a unique adviser number, which allows it to distinguish its orders from the other ones (opened manually and by other advisers);
• Fixed Lots - the value of the fixed lot, if you do not want to trade a dynamically changeable lot;
• Variable Lots - calculation of the lot as a percentage of the account balance. Here you need to be very careful. If you set the value of 1%, it does not mean that in the case of failure, you lose one percent of the balance. This means that 1% of the balance will be used as a collateral in the case of stop-loss triggering, you can lose a lot more. If you do not fully understand how the calculation of the lot works, it is best to check it in advance in the strategy tester;

Signal Filtration - settings unit responsible for signals filtration

• Signal TimeFrame - the timeframe in which the adviser will look for a signal to enter. It may be different from the one on which you installed the bot;
• Loop Back Bars - how many candles before the current one to take into account to determine the rise or fall. Less than two can not be set, as 1 is the current candle. And, for example, if you put 3, the adviser will look for 2 previous bars;
• Price Type of Loop Back Bars - based on what boundaries the above setting should be taken into account: High / Low candles or by a closing price;
• Moving Average Period – the period of moving average;
• Moving Average Method - type of moving average;

Signal Multiple Indicators - unit of the possible inclusion of additional indicators on the signal pairs (not cross)

• RSI – turn on / off RSI indicator;
• RVI - turn on / off RVI indicator;
• CCI - turn on / off the CCI;

Pip Levels Setup - fixed stop, takes, etc. settings unit. If you do not want to use it, put zeros, then the value will be used on the basis of ATR

• Stop Loss - Stop value in points;
• Take Profit – Take-Profit value in points;
• Break Even – breakeven level;
• Profit Lock - how many points higher should the stop be moved in case of reaching the breakeven;
• Trailing Stop - the size of the trailing stop;
• Trail stop shift - the level of a possible trailing shift;
• Min Distance between orders - the minimum distance between the orders;

ATR levels settings

• Enable ATR based levels - on/off levels calculation based on the ATR. When off, it is completely disconnected from the fixed values of the block above;
• ATR timeframe - the timeframe for calculating the ATR. It can be any;
• ATR Period - the period of the ATR;
• Stop Loss ATR Multiplier - a multiplier for the ATR stop loss;
• Take Profit ATR Multiplier - a multiplier for the ATR take profit;
• Trailing Stop ATR Multiplier - a multiplier for the ATR trailing stop;
• Break Even ATR Multiplier - a multiplier for the ATR transition to break even;
• Profit Lock ATR Multiplier - a multiplier for the ATR for moving stop to profitable area;
• Max ATR multiples to MA - ATR multiplier for the maximum distance from the moving average, which is allowed to enter the transaction. As known, when the price is quite far from the moving average, it’s too late to enter;
• Min Distance (ATR multiplies) between orders - the minimum distance between orders, the multiplier for the ATR;

ATR Normalisation - parameters limiting the size of the ATR

• Min ATR Pips - the minimum allowable value of ATR in points;
• Max ATR Pips - the maximum value of ATR in points;

Trade Conditions - block for trading conditions setting

• Max Open Trades - the maximum number of simultaneous positions;
• Close on opposite signal - close the position in case of appearance of the opposite signal;
• Hedge on opposite signal - whether to open an opposite position in case of an opposite signal;
• Entry Type when Entry TF < Signal TF - how to enter the transactions when Signal Timeframe is longer than the timeframe on which the adviser is set: pyramiding, averaging, or both methods;
• Max Spread - maximum spread;
• Max Slippage - the maximum slippage;
• ECN Account - set to true, if the advisor is used on ECN-account;
• Reversal Mode – logics reversal (replacing buy by sell, and vice versa);

Distance to moving average - distance to the moving average settings block

• Cross Pair MA period - period of moving average on cross (traded pair), set to 0 if you do not want to use it;
• Cross Pair MA method - type of moving average;
• Max Pips to MA - maximum distance from the moving to entry;

Cross Pair Higher TF Filters - filter settings unit on higher traded cross timeframes

• Higher TimeFrame – which higher timeframe to use for filtering;
• MA Period - moving average period on higher TF, 0 - to turn off;
• MA Method - type of this moving average;
• Enable Heiken Ashi on Higher TF – turn on/off the Heiken Ashi candle on a higher timeframe.

Examples

Test on GBPJPY for current year with standard settings has shown the following results:

In the default settings the multiplier for take-profit is five times bigger than the stop-loss, because of what profit target is more than 500 points. Generally, this value can be reduced to obtain a greater number of transactions and possibly greater profit. You can also use a trailing stop.

A positive side effect is that one take profit closes immediately 5 stops. In the example below 2 deals were closed by stop, and one by take-profit.

Preferred for the system is the GBPJPY pair, but you can experiment with the settings, and try to find the optimal settings for other pairs. And, of course, selecting the settings you should be guided by common sense and visual testing. At the beginning test everything in the demo, and then try in the real account.

Conclusion

The strategy principle is very simple, we can say, “old-schoolish”. That is, we find very simple inefficiencies of the market, in the style of the classic books on trading, and use them. This approach works, and it is based on a simple and logical principle - cross movement as a result of the major’s trend. To make this relationship disappear, some incredible event is needed, so you can be sure in the system, which is needed to continue trading even during the periods of drawdowns.

Download strategy Yen Trader files

Take care, Michael

ForexTraderPortal.com