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.

50% ATR backtest on AUDUSD

The result of the AUDUSD backtest is pretty bad. With a 2.5 reward-to-risk, expectancy was an unremarkable 1.43%.

However, if we reduce our reward to 1.67R, expectancy climbs to 10.88%. With a 1.67R reward, the expectancy for the USDJPY is 26.68%, and the EURUSD 31.15%.

The equity curves for 1.67R are below:

2 February 2012

I attempted to trade a trend-reversing pinbar that appeared on the AUDUSD yesterday but was stopped out. I lost 53 pips from the trade. The AUDUSD is currently trending in an ascending triangle so I'm predicting a bullish breakout in the next few days.

Lesson:
- don't trade into resistance / support zones, especially if they've been well-respected.

January 31st Trades + pin bar backtesting

I finished in the green today. This morning I identified a pinbar on the AUDUSD that formed as a rejection of the 8 EMA and trend line. However, a major resistance level existed around 1.0700.

I opened at the start of the new market day. Price movement quickly moved in my favour and I closed my trade about 15 pips short of 1.0700. All up I won around 70 pips.

Pin bar backtests

I conducted more backtesting on pin bars, this time focusing on the AUDUSD and USDJPY pairs. The backtest covered 2008-2010 on the daily timeframe. The criteria is entry upon the breaking of the pin bar candle in the direction of the pin bar's body, with stop loss located at the 50% retracement level of the pin bar.

Trades entered: 65

Risk:reward = 1:4
Win % = 20%
Lose % = 80%
Expected return per trade = 0%

Risk:reward = 1:3
Win % = 25%
Lose % = 75%
Expected return per trade = -1.54%

Risk:reward = 1:2
Win % = 34%
Lose % = 66%
Expected return per trade = 1.54%

Risk:reward = 1:1
Win % = 57%
Lose % = 43%
Expected return per trade = 13.85%

Risk:reward = 1:0.5
Win % = 80%
Lose % = 20%
Expected return per trade = 20%

Conclusion

I didn't find much difference in performance whether the pin bar was traded with or against the trend. However, results suffered badly if the pin bar was traded during a neutral trend. A risk:reward ratio of 1:0.5 is optimal but is vulnerable to large drawdowns if I meet a succession of failed trades. For every failed trade, I must win two just to break even.

Weekend trade setups

I currently have no trades open, but the close on Friday has presented two trading opportunities come Monday.

Trade Opportunity #1 - Inside bar on the AUDUSD

An inside bar also presented itself on the AUDCAD pair, but since it is highly correlated with the AUDUSD, I will stick with the Aussie for my analysis.



Normally I'd be happy to trade this inside bar by going long on the breakout, but as you can see, the inside bar is just short of a major resistance level that has held twice in the last six months. Additionally the RBA is expected to announce a reduction in interest rates on February 7, giving me about a week for a pending long to hit and achieve a 1:2 R:R ratio. Additionally the inside bar is bordering the upper-side of a trend channel. All these factors make the Aussie dollar look bearish.

The only factor that'll favour a bullish breakout is the 8 and 21 EMA. I'm thinking of skipping this possible trade because of these conflicting signals.

Trade Opportunity #2 - Pinbar on the EURJPY

The following setup on the EURJPY is looking more juicy.



We have a bullish pinbar that is favoured by the following factors:

- It formed as a result of bouncing from support and the 8 EMA.
- It is in the direction of the 8 and 21 EMA.
- It has plenty of scope for a bullish run (the next level of resistance is around 105.600, about 400 pips away).
- If we examine the bull-run from January 17th, it looks like part of Wave-4 in Elliot wave theory (a minor point for me as I'm not a big user of wave theory).

The only factor against the bullish pinbar is a potential resistance level around 102.500, although it looks minor.

On the sum of probabilities, this would make a suitable trade.