Monday, September 10, 2012

Latest results on fractal breakout backtest

I just finished the backtest on the USDCAD.
This pair would've been horrific if you tried to trade fractal "breakouts" naked. The USDCAD loved to range and retrace, especially after 2006.
If you tried to trade fractal breakouts without any filters, expectancy would've been very low or moderately negative as you increased your R:R.
I decided to apply an ADX(14) filter to see how it could be used to improve my trades. My original thought was that a higher ADX would improve expectancy since it would indicate a trending market.
In fact the opposite occured. Expectancy significantly improved if I traded breakouts when ADX(14) was less than 18. To ensure I wasn't merely curve-fitting, I applied a ADX(14) < 18 filter on the AUDUSD and EURUSD backtest results and found similar improvement.
What does this mean? During trending conditions, I suspect that fractals will start appearing at the beginning of a range / consolidation period. So if you try to trade a fractal break when ADX(14) is high, the trend would be fading and you'd lose. This might make a good exit signal in another system. 
On the otherhand, when ADX(14) < 18, the market has been strongly ranging for a period of time. Stops would've accumulated outside the range, so a breakout has much more "thrust" when it finally occurs.
A 2.67 R:R still provided the best overall ratio, with an expectancy of 39% after spread cost. There were around 190 trades between 2001 and 2011 where ADX(14) < 18. I'm not happy with this sample size and will obviously continue my backtest with more pairs.
As of to date, here is my equity curve for this system:

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