Monday, October 14, 2013

Prototype system: two-bar engulfing

I spent today developing and backtesting a system on the weekly charts. So far the results look okay. I've only tested four pairs from 2001-2012 (USDJPY, EURJPY, GBPJPY, AUDJPY). It's based on a candlestick pattern that I thought of while scalping last week. 

We look for a candle whose body and tail engulfs the body of the previous two candles, as illustrated below.

Every week, the market gives a 'verdict' on a currency pair. This verdict is the difference between open and close prices, and can be visually seen as the body of a candle. When we have a new verdict that overwhelms the previous two weeks, it represents a resounding  shift in opinion and we trade in the new direction. 

That's the logic, anyway. Using an inverted reward:risk ratio of 0.25:1, my profit factor is roughly 1.32, although other R:R ratios are also profitable. Sample size is currently 180. I still have at least 10 other pairs to backtest, and hope to finish by this weekend.  

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