Sunday, March 17, 2013

Wednesday breakout - USDCAD

I've spent this week analysing a possible "Wednesday breakout" system on the USDCAD.
I've a suspicion that price generally moves cyclically throughout the five day week.
My logic is this - as Monday and Tuesday pass by, stops from intra-week traders accumulate outside the Monday-Tuesday range. Wednesday presents a good day to take out those stops.
This is quite a vague logic to begin with. I chose a random pair to backtest, the USDCAD, and analysed the break of the Tuesday high or low, in favour of the trend. We use RSI(14) to measure the trend. If it's above 50, we go long on the break of the Tuesday high. And similarly, if RSI is below 50, we go short on the break of Tuesday's low.

My stop loss was 0.75 * ATR(14).
The backtest involved 300 sample trades from 2001 to mid-2012. The optimal reward-to-risk was 0.67-to-1. This provided a profit factor 1.16, which is quite low, but compensated by the relatively high frequency of trades (2.5 trades per month).
The equity curve at 2% risk per trade is below...

The curve isn't bad. While experimenting with OpenOffice I figured out how to calculate and graph linear regression (R^2). Generally you'll want R^2 to be as close to 1 as possible. In this case, our linear regresson is 0.83. I don't know if this is good enough for an equity curve as I'm still doing research on this topic. From my current level of knowledge and experience, though, this looks tradable.

I will focus on the AUDUSD next.

It's interesting to see the different ways of determining entries. In this case, we're using time rather than price action or candlestick patterns.

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