Tuesday, January 31, 2012

January 31st Trades + pin bar backtesting

I finished in the green today. This morning I identified a pinbar on the AUDUSD that formed as a rejection of the 8 EMA and trend line. However, a major resistance level existed around 1.0700.

I opened at the start of the new market day. Price movement quickly moved in my favour and I closed my trade about 15 pips short of 1.0700. All up I won around 70 pips.

Pin bar backtests

I conducted more backtesting on pin bars, this time focusing on the AUDUSD and USDJPY pairs. The backtest covered 2008-2010 on the daily timeframe. The criteria is entry upon the breaking of the pin bar candle in the direction of the pin bar's body, with stop loss located at the 50% retracement level of the pin bar.

Trades entered: 65

Risk:reward = 1:4
Win % = 20%
Lose % = 80%
Expected return per trade = 0%

Risk:reward = 1:3
Win % = 25%
Lose % = 75%
Expected return per trade = -1.54%

Risk:reward = 1:2
Win % = 34%
Lose % = 66%
Expected return per trade = 1.54%

Risk:reward = 1:1
Win % = 57%
Lose % = 43%
Expected return per trade = 13.85%

Risk:reward = 1:0.5
Win % = 80%
Lose % = 20%
Expected return per trade = 20%


I didn't find much difference in performance whether the pin bar was traded with or against the trend. However, results suffered badly if the pin bar was traded during a neutral trend. A risk:reward ratio of 1:0.5 is optimal but is vulnerable to large drawdowns if I meet a succession of failed trades. For every failed trade, I must win two just to break even.

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