Thursday, March 7, 2013

Venturing into the brave new world of limit orders...

So I've spent the last week designing a new system on the daily timeframe. I'm still focusing on the pinbar candle pattern. While most price action traders enter their trades on the break of the short-wick end, I've been testing entering limit orders on the break of the long wick. My belief is that the tip of the long wick represents short-term support / resistance. If price hits this area the next day, I believe that price will be smacked back again, and this will make an ideal place to trade against the market. (this builds on my previous post about my recent system design "failure". It gave me the idea of trading limit orders at the break of the long wick).

If you're a contrarian, you'll be familiar with limit orders. If price is moving up and your limit order is triggered, you're going short. And likewise, if price is moving down and your limit order is triggered, you're going long.
From my backtesting so far, it's very difficult to win enough trades with small reward-to-risk to be profitable. Short-term momentum will almost always be against you. However, it is looking very profitable with reward-to-risk ratios over 2:1, trading with the trend. I've tested the GBPUSD, AUDUSD and USDJPY from 2001-2012 so far and my profit factor is around 1.54 from a little over 100 trades. I still have eight currency pairs left to test, but at this stage I'm pretty confident that this system will work.

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