Missed out on a winner - "Hermes"

I missed an entry on the USDJPY due to a mental miscalculation. The range on the USDJPY was 17 pips on the 27th of September, less than 50% of ATR(14). However, I did a quick mental calculation and thought it was 27 pips and ignored the entry signal.

If I did trade this, the low of the entry signal bar would've broke and trigger a short, resulting in a loss. However, price rebounded and broke the high. A long with a 2-to-1 risk-reward would finish in profit today.

 

The lesson here? I need to learn how to program indicators in MT4! And to be less careless with my mental arithmetic.

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.

 

 

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.

50% ATR backtest on USDJPY

I spent most of my Sunday backtesting the USDJPY with the system I described in the previous entry. Gathered around 250 sample trades from 2001 to mid-2012.

An equity curve is presented below, using 2.5 reward-to-risk and 2% risk per trade. This yielded a win% of 37.35% per trade, with an after-spread expectancy of 27.65%.

15th March 2012 - quiet week

It's been a quiet week so far. Staying out of the market when it presents few opportunities is challenging. I saw two setups that failed to trigger, which I will elaborate below.

USDJPY

Early this week, an inside bar formed at a perfect position on the USDJPY - at the extreme end of the previous bar, and around a resistance level. The break of the inside bar's high would've signalled a continuation of a bull run. As you can look at the graph, this is precisely what happened.

I attempted to trade this with a pending long on the break of the IB's high, but if you look at the chart, you can see that price fell and broke the IB's low first. This is what actually occured, and once the low was broken, I cancelled my pending long and missed out on the bull run.

A good question would be, why didn't I also enter a pending short as well? After all, an inside bar can go either way as it represents indecision? My feeling is that an inside bar should be traded with regard to its relative position to resistance/support. If most of an inside bar is beyond resistance, then I would regard as a bullish signal. If most of it is below resistance, then it would be better traded as a bearish signal. If it's split 50/50, trade it either way. As you can see on the chart, the inside bar is mostly beyond resistance, hence my inclination to only trade it with a long. It's about stacking probability in your favour.

AUDJPY

I may've made a mistake in trying to trade this pinbar this morning. The other Yen pairs looked bullish so trying to short the AUDJPY may've been a bad idea. Regardless, the high of the pinbar broke mid-afternoon and I cancelled my pending short.

There's another potential pinbar that is forming. I'll keep an eye out tomorrow morning.

27th Feb 2012 - USDJPY hits TP

This was a textbook trade. My pending long on the USDJPY was triggered on Friday as resistance from August 2011 broke and the pair entered a bull run. It hit my take-profit target today before bouncing off resistance from July 2011. Profit = 99 pips.

USDCAD

I saw an inside bar form in the USDCAD, but price action over February looked pretty ugly. Price WILL breakout, but there's alot of potential to get whipsawed in an undecisive market before then, so I decided to sit this one out. 21 EMA looked very flat too.

24 Feb 2012 - inside bar on USDJPY

I took a bit of a break over the last week. I'd spent so much time backtesting that I couldn't use my mouse for more than an hour. My index finger needed a rest from all the clicking.

Two inside bars formed on the GBPUSD and USDJPY at the close of yesterday's market, which was only 15 minutes ago.

USDJPY

Of these two bars, the USDJPY presents a cleaner setup with a TP target slightly below a significant resistance level at 81.500. This has been illustrated below. What I like about this setup is if the inside bar breaks, it will simultaneously break resistance around 80.250-80.350, providing plenty of space for a bull run. The 21 EMA also indicates a clear trend. Summing the probabilities, this looks like a suitable trade.

GBPUSD

This setup is not as clean. Probably the most important observation is the fact that the 21 EMA is flat. Flat EMA = ranging market. This is where inside bars fail. Having said that, the inside bar is around a level of support, so if that support breaks, there is scope for a bearish run. However, price movement over the last few weeks suggest the cable is currently ranging.

Since inside bars are a trend-trading strategy, a pre-existing trend presents better probabilities, hence why I will trade the USDJPY and not the GBPUSD.

Three black crow backtest continued - USDJPY 2000-2009

I spent the latter half of today backtesting the USDJPY from the years 2000 to 2009, using the same three black crow / three white soldier candle pattern I identified in the previous post.

The results aren't quite so positive. A reward-to-risk ratio of 2 provides a meek positive return on risk, and higher reward-to-risk ratios return negative results. I've provided a comparison between the USDCAD and USDJPY below.

Overall, I would say that this strategy is viable with a reward-to-risk ratio of 2. Because of such a large stop loss, this strategy will require you to keep your trades open for weeks to provide a 2x reward.

USDJPY inside bar backtest - 2001 to 2008

I just compiled a backtest of inside bars for the USDJPY pair between 2001 and 2008, using a 21 EMA to measure the trend. I'm completely fatigued. This took around eight hours to complete, a great way to spend my Saturday, but I think it's a good indication of my seriousness.

The results of the USDJPY backtest are comparable to the EURUSD, which is excellent, as the USDJPY and EURUSD are one of the least correlated currency pairs. Trading inside bars would be profitable, as seen below.

RESULTS

Trading with the trend
187 trades initiated

Risk:reward ratio = 1:3
Expected return per trade = 19.79%

Risk:reward ratio = 1:2
Expected return per trade = 13.9%

Risk:reward ratio = 1:1
Expected return per trade = 17.65%

Trading against the trend
182 trades initiated

Risk:reward ratio = 1:3
Expected return per trade = 16.48%

Risk:reward ratio = 1:2
Expected return per trade = 13.74%

Risk:reward ratio = 1:1
Expected return per trade = 9.89%

CONCLUSION

It's good to see positive results for a different currency pair. It means that inside bars can be traded beyond the EURUSD. Trading with the trend seems to yield slightly better results, which is expected. Scalping with the trend seems like a safer way of trading with a 1:1 risk:reward ratio.

I'm very pleased. This strategy is looking solid.

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.