Monday, September 24, 2012

"Hermes" low volatility daily breakout system

Disclaimer: this system is not intended as financial advice. I'm purely posting this for feedback and discussion. As always, perform your own due diligence before trading.
I backtested this system back in August and made a few blog posts about it. I did some further work this week, testing a few more pairs and cleaning up my results.
I dub this system "Hermes". It is a low-volatility daily breakout sytem.


System Type: Breakout
Trade frequency: 8 trades per month
Backtest sample size: 1203 trades
Dates tested: 2001 to mid-2012
Reward-to-risk: 2
Win rate: 40.87%
Profit Factor (approximate after spread): 1.26
Grade: B

Equity Curve from 2001 to mid-2012 – $10,000 initial balance, 1% risk. 2 R:R
Profit factor from pairs tested (after spread):
System Type
System Description
Look for a daily range that is half or less than ATR(14). Setup two pending orders in the next day to trade the break of the daily high and low.
To trade the break of the high, setup a pending long with entry = yesterday's high + 1 pip. To trade the break of the low, setup a pending short with entry = yesterday's low - 1 pip.
Stop loss will be situated at yesterday's low - 1 pip if going long, and ysterday's high + 1 pip if going short.
Rationale of System
A daily range < 50% of ATR(14) suggests one or more of the following:
a) Neutral traders have left the market for the day, standing by to re-enter when a trend (re-)establishes itself
b) The preceeding momentum has stalled, meaning trend-followers are closing their positions and/or the big money are accumulating positions for a trend reversal.
c) Traders in general have left the market, particularly during a holiday period (e.g. XMAS to NYE), but stand ready to flush the market with orders once they return.
All three scenarios increase the probability that a day of low volatility will be followed by high volatility, which is where we will make our profit. The daily high and low are good places to place our entries. We use a 1 pip buffer as volatility is currently very low.
We trade both the break of yesterday's high and low in the same day. Pending orders should only stand for 24 hours from the start of the new market day. This means that during some days, both our long and short will trigger. The first break may be an unsuccessful fake-out or stop-hunt, but with a 2:1 reward-to-risk, a successful second break will mean that we will still finish in profit.
We trade the top 8 liquid pairs. They are:
Indicators Used
Average True Range (14) to measure volatility.
Break of yesterday's high + 1 pip if long, and break of yesterday's low - 1 pip if short.
Stop Loss
If long, yesterday's low - 1 pip. If short, yesterday's high + 1 pip.
Take Profit
2R, where R = |entry point – SL|
Example Trade
- Sample size is good, around 1,200, across the top eight liquid pairs from 2001 to mid-2012. The  system seems robust enough.
- Some entry signals will occur across multiple pairs on the same day. I'm not sure of the best of trading this. My preference would be to trade no more than 4 signals simultaneously, so with 1% risk per trade, I'm risking 4% on the same day.
- During quiet periods and holidays (XMAS to NYE, Easter), you may receive a glut of entry signals as traders leave the market. I took care not to trade on Christmas and New Year's Day themselves, but the days surrounding these holidays will also be quiet and relatively illiquid. My backtest indicate that it's still profitable to trade during these periods, but the glut means your risk exposure may be higher if you trade all of them.
- I'd like to test this system on the 4H and weekly charts.


  1. Hi Kevin

    I am curious how you back test your systems. I wonder:

    - what is the source of the data do you use to back test your systems?

    - What is a daily bar? What is the open of your daily bar? Midnight GMT? and close is one minute before midnight GMT? Something else?

    - What assumptions do you use for commision/brokerage and slippage?

    - Have you traded some of your back tested systems and how do the tests compare with the real trades?


  2. Hi Thomas. Some good questions.

    - I use Forex Tester 2 for my backtests. The tick data is from Forexite, provided free by Forex Tester. I do my backtests manually i.e. I enter a hypothetical order, click forward on the chart to see what happens, and input the details (entry price, exit price, date etc) into a spreadsheet.

    - A daily bar is a bar (or candle) on the daily timeframe. I use GMT+2 for the open of a new market day. And close would be one minute before.

    - I use the average spread quoted by Pepperstone in my backtest. ( So using the data from Pepperstone, I used 1.2 pips as my spread (or "commission") for EURUSD, 1.6 pips for GBPUSD, etc. I made no account for slippage or swap rates in my backtest, but the majority of trades would close within a few days or less.

    - I've been forward testing the "Hermes" system since the end of August. I've got 1 win, 2 losses, and 1 open trade, ATM. I haven't forward-tested the fractal breakout system "Mercury" since completing my backtest as no orders have been triggered yet.

    Hope this helps.

  3. Hi Kevin

    Thanks for your responses.

    Now I understand why a test of one currency pair takes you long. Perhaps you should consider to test these systems with a programmable tool (ie Excel or specialized ones like Amibroker, Tradestation, Multicharts to name a few).

    I am using the same data, only for a cheap alternative to have a long period of time for my FX tests. I have also downloaded the 1 minute data from Interactive broker to compare my test between this free source and my broker of choice and the equity curve looks virtually identical.

    I am not trading FX at the moment, only futures markets. As FX markets are not regulated I am a bit worried about the quality of the data especially when reading this from a very reputable vendor:

    I was testing ideas around the Asia breakout. I noticed that assuming too much commision/spread/slippage can kill the system and not giving enough makes it appear too good. - Do you experience any slippage with your real trading? Which broker do you use?


  4. I've thought hard about automating my backtests. It'll make life alot simpler and return most of my leisure time. At this time, though, I still consider myself a novice and I feel I need to accumulate alot more chart time. Looking at historical charts and seeing how the market moves is almost as good as watching a live chart, and I also get to generate ideas from observation. But I hope to move onto programming next year once I've developed a few more systems.

    I'm currently with Pepperstone. They seem to have some of the best spreads I've seen. I haven't experienced any slippage with them (yet), but I've only opened four orders with them so it's a very small sample.


Note: Only a member of this blog may post a comment.