Entry signal on XAUUSD

A low volatility candle has appeared on XAUUSD (gold) at Friday's close.

Entry signal on NZDUSD, full-bodied candles

A low volatility candle appeared on the NZDUSD over the weekend. The NZDUSD is running into some resistance, so it will be interesting to see how this plays out.

Full-bodied candles

 

I'm currently backtesting a new system based on full-bodied candles. Essentially, the open and close of a full-bodied candle should occur within the top and bottom quarters of the candle. I'm building a database on the USDCHF which will also contain RSI(14), ATR(14) and ADX(14) values to see if there is any relationship between these variables and profitability.

 

I have noticed that full-bodied candles can be profitable when their range is between 100% and 150% of ATR(14), trading with the trend. The sample size was 100, from the USDCHF between 2001 and 2006. Our entry would be the break of the candle's high or low, and our stop loss would be the opposite end of the candle. With a 1.5-to-1 reward-to-risk, profit factor was 1.36, which is okay. The profit factor for all R:R ratios above 1 are also positive, so thus far this is looking promising. 

Optimisation of Hermes

My optimisation of my "Hermes" low-volatility breakout system is proving to be very messy.

 

The trouble with optimisation is that you can take it in any direction. At the moment I added an RSI filter to check how the sytem performs when going with and against the trend.

 

There is a noticable improvement in profit factor when trading with the trend. I have also noticed that the system performs best against the trend if I use a Reward:Risk ratio greater than 2, while trading with the trend performs best with a Reward:risk ratio of less than 2.

 

I suppose this makes sense. If you are trading with the trend, the likelihood of running into the end of the trend is relatively high. On the otherhand, if you trade against the trend and the trend-reversal is strong, it can turn into a new trend and you succeeded in catching the beginning of this trend. This would explain the bigger pay-off if trading with a larger reward:risk ratio.

 

With that in mind, I have also noticed other behaviour that can be used to "optimise" my system further. For example, I have noticed that trades perform better when you have a multitude of entry signals on the same day. I guess the entry signals on different pairs reinforce each other. Trading only on days with multiple signals may improve my profit factor, but at what point does it end being an exercise in optimisation, and the start of curve-fitting?

 

To be safe, I may stick with one level of filtering only. I also feel that I'm getting sidetracked. Mechanical systems are not intended to be perfect. They should be "rough but ready", and ideally deployed as part of a portfolio of independent trading systems. To win mechanically, you should trade with a low risk per trade, and let high frequency and exponential growth do the heavy lifting. To do this, though, you'll need more systems to trade with. I'll return my attention to system development.

An interesting few days...

EURUSD

Monday provided a gush of low-volatility entry signals on the EURUSD, NZDUSD, gold and silver.

 

I decided to trade the EURUSD, being the most liquid, and both a long and short were triggered on the break of Monday's high and low.

I initially aimed for a 1.75:1 reward:risk ratio. As you may see, my long didn't go far before I was stopped out. Price broke downwards and after triggering my short, I began to lose confidence about my trading plan and closed my trade with a reward:risk ratio of 0.3:1.

 

Price continued to move down and would've hit my initial profit target. It then reversed, producing a bullish pinbar this morning.

 

The main lesson here is psychological. If I had maintained my faith, I would be in the green right now. My trading plan is complete. I just need to stick with it. Trading is 10% technique, 90% psychology.

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.