Saturday, May 12, 2012

Entry on trend retracements

I'm currently backtesting entry on trend retracements.

Whenever a currency pair trends, there will be moments when price will temporarily pullback before resuming the trend. These pullbacks, or retracements, are ideal points to enter a trade and exploit the trend. 

Below is an example of retracements on the AUDUSD during 2003. Here we see a few examples of pinbars, engulfing bars and two bar reversals forming during a retracement of the bullish trend off resistance-turned-support levels. Entering a trade at these points would reward a trader handsomely.

If using line graphs, the basic setup would look like this:

Unfortunately, backtesting a discretionary trading system like this is hard and tedious. The rules aren't completely mechanical, so things like bias and emotion will influence backtesting results. The placement of support and resistance levels are also subjective.

I'm halfway finished with my backtest on the AUDUSD. I hope to move on to the EURUSD, GBPUSD and USDJPY in the next week, then the cross-currency pairs.

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