Win on USDJPY - "Hermes"

I've conducted four trades using the "Hermes" system so far - two wins and two losses. This is an entry on my latest trade.

Over the weekend I identified an entry signal on the USDJPY, and put in a pending long and short. The short was triggered on Monday and I decided to close and take profit today (Friday).

Price lingered about 5 pips from my profit target over a two day period, which you can see on the chart above. When price hovered at the same low for two days, I felt that support was forming and closed the trade. This shaved 10% from my intended profit, and as I'm typing this entry, price broke the low and hit my original profit target.

While price lingered near my profit target, I noticed myself checking my trade every couple of hours. This constant checking made me frustrated as my profit target seemed so close, and yet so far. I think this encouraged me to close my trade early and end that negative emotion.

On the chart, you can notice two dojis that formed in the middle of the trade as the price decline slowed. They also spooked me a little. Again, I was asking myself why risk the entire trade just for 5 pips when I've already won 85-90% of my trade?

The discretionary trader inside me thinks that price will continue to fall. A short-term descending triangle was formed, and it looks like the bottom is now being broken.

 

 

"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.

SUMMARY

System Type: Breakout
Trade frequency: 8 trades per month
Backtest sample size: 1203 trades
Pairs tested: EURUSD, AUDUSD, USDCAD, USDJPY, EURJPY, EURGBP, USDCHF, GBPUSD
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 DETAILS

 

System Type

 

Breakout

 

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:

 

EURUSD

GBPUSD

AUDUSD

USDCAD

USDCHF

USDJPY

EURJPY

EURGBP

 

Indicators Used

 

Average True Range (14) to measure volatility.

 

Entry

 

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

 

 

Thoughts

 

- 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.

Entry signals on USDJPY

The USDJPY is flashing two entry signals over the weekend.

 

Signal #1. Friday's daily range is less than 50% of ATR(14). I'll be placing pending shorts and longs on the break of the high or low on Monday morning. 2:1 R:R.

 

Signal #2. ADX(14) has fallen below 18. The USDJPY has been ranging for some time, but it's not near the recent upper or lower fractals, so it may take a few more days to trigger an entry.

 

But take note of the three candles highlighted in yellow. Their range was less than 50% ATR(14) and would've provided a nice profit at 2:1 R:R. I traded the last highlighted candle and pocketed some profit before the day ended.

A little update

I'm currently doing more backtesting on my daily range < 50% * ATR(14) breakout system. I want to include results for ALL of the top 8 liquid pairs. I only have one pair left to test. I'll hopefully publish my results next week. But so far it's looking very positive.

 

My order on the book Come Into My Trading Room by Dr. Alexander Elder arrived a few days ago. I've read one-third of it so far. A trader should never stop absorbing new information. It's a general trading book with no focus on any particular market, but it provides useful insights on certain indicators that I haven't found anywhere else. I'll post a short review and any notes that I've taken once I'm finished.

"Mercury" fractal breakout trading 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've been sitting on this system for awhile. To be honest, I'm not happy with it. The backtest results are positive, but I'll explain my thoughts towards the end.

 

I'm naming my systems after gods of trade and commerce. I dub this one "Mercury".

SUMMARY

System Type: Breakout

Trade frequency: 3.5 trades per month
Backtest sample size: 492 trades
Pairs tested: EURUSD, AUDUSD, USDCAD, USDJPY, EURJPY, EURGBP, USDCHF, GBPUSD
Dates tested: 2001 to mid-2012
Reward-to-risk: 2.75
Win rate: 32.37%
Profit Factor (after spread): 1.26
Grade: C

Equity Curve from 2001 to mid-2012 – $10,000 initial balance, 1% risk. 2.75 R:R

Profit factor from pairs tested (after spread):

 

 

 

 

SYSTEM DETAILS

 

 

System Type

 

 

Breakout

 

 

System Description

 

 

Look for the start of a ranging period where ADX(14)(High + Low / 2) is equal or less than 18. When this occurs, apply pending orders at the break of the most recent upper fractal + 5 pips, and lower fractal – 5 pips.

 

 

Stop loss will be situated at 0.75 * ATR(14) pips from the entry price.

 

 

Rationale of System

 

 

A low ADX(14) indicates a ranging period. When ADX(14) < 18, the ranging has become extreme, stops have accumulated outside the range and a breakout is imminent.

 

 

A fractal is most likely to be situated near short-term resistance and support. If a breakout is to occur, the fractal must be broken first. We apply a 5 pip buffer to our entry to increase our odds of entering a genuine breakout.

 

 

We trade the top 8 most liquid pairs only as these tend to provide the most accurate technical signals. They are:

EURUSD

USDJPY
GBPUSD
AUDUSD
USDCAD
USDCHF
EURJPY
EURGBP

Indicators Used

ATR(14) Close for stop loss

ADX(14) High + Low / 2 to filter for ranging conditions

Bill Williams' Fractals indicator

Entry

Break of the most recent upper fractal + 5 pips, or lower fractal – 5 pips

Stop Loss

If long, entry price – 0.75 * ATR(14). If short, entry price + 0.75 * ATR(14)

Take Profit

2.75R, where R = |entry point – SL|

 

Example Trade

 

(from Forex Tester 2)

 

 

Thoughts

 

The system has some weaknesses as it is.

 

#1. Sample size is around 500. I'd prefer it to be closer to 1,000, but the market history only provides 492 trade signals. On the otherhand, it has been tested on eight pairs, with seven out of eight showing positive results, so it seems robust enough.

 

#2. The system has been in drawdown since 2011. I'm really not happy with this, even though the overall equity curve is positive. I'd recommend a position size of 1% or less for this system to reduce the drawdown magnitude.

 

#3. I just get the gut feeling that there's a better entry point than just fractals. When a market's ADX(14) drops below 18, it usually doesn't stay there for long.

Fractal backtest COMPLETE

Finally finished my backtest on my fractal breakout system. I decided to only analyse fractal breaks where ADX(14) < 18 on the USDJPY and EURJPY and skip the rest. The USDJPY had a positive expectancy, and EURJPY slightly negative.

 

After deleting duplicated trades from all five pairs tested (EURUSD, USDJPY, AUDUSD, USDCAD, EURJPY), the system has a positive expectancy of 26%. Total sample size is 265 trades. It's low, but I don't have any more low-correlation pairs to test. GBPUSD and USDCHF are highly correlated with EURUSD, NZDAUD with AUDUSD, and GBPJPY and AUDJPY with EURJPY.

 

I thought about testing the more obscure cross pairs like EURCAD, but I don't really want to trade them because of higher spreads and illiquidity.

 

Here is the final equity curve for the system from 2001 to 2011, using 2% risk and 2.67 R:R. All trades are in chronological order. Duplicated trades that occured on the same day between multiple pairs were deleted, with the trade from the most liquid pair kept.

It's not the most sexy equity curve. The system is prone to bouts of drawdown if ranging conditions prevail for too long. The longest losing streak was 14 trades at 2.67 R:R. I'd recommend a risk level of less than 1.5%.

I'll post more details in my next entry. It's past midnight here and I need to sleep.

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:

 

 

Skipping trade after a loss - a valid tactic?

My curiosity was piqued during my last entry, so once I woke up this morning, I fired up my backtest results on my daily range < ATR(14) * 0.5 low volatlity breakout system. I decided to see how my results would change if I skipped every trade after a loss.

 

There was little change with overall expectancy or win%. However, the frequency of my trades dimished quite a bit, so this tactic would still be harmful.

 

Some thoughts. My low volatility breakout system isn't very vulnerable to ranging conditions. You're most likely to get an entry signal just after a large movement when the market pauses to breathe. If price starts to range, ATR(14) will adjust and cease to provide entry signals.

 

I think skipping a trade after a loss may be useful if you're using a system that frequently triggers and fails during ranging conditions. Ranging markets can exist for prolonged periods of time, so you may avoid up to 50% of your losses with this "tactic". I'm not sure what other market conditions would suit this.

Update on fractal breakout - skip trade after loss

It's 3am and I need to sleep.

 

I sunk some more time and decided to see what would happen if I skipped the next trade after a loss.

 

Expectancy improved substantially from 9% to 17%. The number of trades dropped from around 310 to 190. which was expected.

 

The equity curve is below, and it looks much more healthy than before:

 

Fractal breakout system on AUDUSD - disappointing results

I spent the last few days backtesting a fractal breakout system on the AUDUSD from 2001 to 2010.

 

Entry = previous fractal + 5 pips

 

SL = 0.5 * ATR(14) 

 

Results were quite disappointing.

 

The system started off well from 2001 to 2004, but then went downhill. This system gets absolutely slaughtered during a ranging market as you will receive many entry signals that quickly reverse. The pic below shows a good example during late 2010.

 

 

 

The ideal R:R was 2.67. The equity curve is provided below:

 

 

So yes, you might make a bit of money with this system. But otherwise it's not an impressive system. And just look at that drawdown towards the end.

 

Now, the reason why I'm posting this system is that I really do feel it has alot of potential. Despite getting slaughtered in ranging conditions, it still made SOME money. Expectancy was around 9%. I need to design a way that will minimise my exposure to ranging markets. I plan to continue tinkering with this system over the next week.