Little update - loose pinbar backtest

My preliminary backtest on my mechanical pinbar system showed a profit factor hovering between 1.15 and 1.3. This week, I decided to stress-test the system with the entirety of data I had for the EURUSD and NZDUSD from 2001 to 2012. 

 

My profit factor turned out to be a little less than 1.0. It was almost as if I was trading randomly. As to the discrepancy, I'm not sure how to explain it. I suppose you have a system, and it performs okay 90% of the time. However, it may hit a pocket of "bad luck" 10% of the time where consecutive trades fail. Random sampling may not pick up on these pockets, especially if the pockets and/or sampling is too small. Either that, or I was just lucky with my preliminary sampling.

 

I added an RSI(10) filter to measure the trend. Pinbars tend to behave as trend-reversal signals, but they can also act as trend-continuation signals, as seen below:

As you may see, my criteria for a "tradable" pinbar is very loose. I totally ignore the prominence of the pinbar's "nose" with regards to to the previous candle e.g. the noses of the very first and very last pinbars don't even break the previous day's low. The open and close of the candle must also occur only in the top or bottom 50% of the pinbar, which is also very loose. I'll explain more if my backtest continues to be positive.

 

Adding an RSI filter improved my results significantly. Here are the results, filtered with the RSI indicator. Basically if RSI(10)>50 and we have a bullish pinbar, we're trading with the trend. If the pinbar is bearish, we're against the trend. Vice versa when RSI(10)<50.

Trading with a 2:1 reward:risk seems best. I used an ATR(14) * 0.5 for my stop loss. As you can see, going against the trend was very bad. The backtest so far suggests a frequency of 1.5 signals a month per currency pair, which is very good (trading six pairs = 2 signals a week), and compensates for the relatively low profit factor.

 

The next step(s) is to test the other pairs, of course. This may take awhile. Any suggestions on improving this system are welcome.

Pinbar backtest - 40% complete

I'm currently backtesting a mechanical system based on pinbars, but with my own modifications. Profit factor is hovering between 1.15 and 1.3 at the moment. I've only gathered 400 trades from four pairs so far (GBPUSD, EURUSD, AUDUSD, USDCHF) between 2001 and 2012. The goal is to gather 1,000 samples. What's making this system real juicy is the frequency of trades. If I trade the top 8 liquid pairs, the results suggest a frequency of 6-8 trades per week.

10th April 2012 - loss on EURJPY

A pin bar formed on the EURJPY overnight at a support level. I placed a pending long which was triggered, then ended in a loss. The pin bar is visually presented below.

Details of the order zoomed in...

I looked at any possible news releases that would explain the downturn but couldn't find anything of real importance. I guess this is one of those statistical trades destined to fail. A factor that could've went against my trade was the strong bearish momentum before the pinbar, where three consecutive bear candles exist. However, the pin bar itself was quite prominent and closed with a bullish tone. I don't really see anything screaming out not to take this trade.

Tightening my SL to the 25% mark of the pinbar helped improve R:R once again.

9th March 2012 - EURAUD stopped out

My trade on the EURAUD failed overnight on the back of speculation from the ECB. The pinbar formed at resistance and around a significant psychological level (1.25000). I'd set a reward of around 1.5 x risk. Some time after entry, a news release from the ECB seemed to trigger bullish speculation and knocked out my stop loss.

I saw no viable setups this morning. TGIF.

7th March 2012 - pinbar on GBPAUD

An auspicious pinbar formed overnight on the GBPAUD off resistance. GBPAUD has been ranging for the last few months and this seems like a good probability trade.

Rather than use a trailing stop loss, I've decided to split my order into two, with a TP at support level #1 and a second TP at support level #2.

1st March 2012 - USDCHF hits SL, pinbar on GBPUSD

USDCHF

I was feeling a little uneasy when price continued to meander around support. The support level held and the bulls eventually won, hitting my SL.

The trade was offering a good reward-risk ratio so I can't complain. One likely mistake that hindered probability was the fact that I was trading the break of the inside bar INTO a support level, rather than PAST it. A better entry may've been the break of the first bearish candle that had hit support (24th Feb). An inside bar that falls short of support or resistance is a sign of market hesitation / consolidation. Either the market doesn't know what to do or the big buys are accumulating positions for a reversal. Thus an inside bar that falls SHORT of a support or resistance level may be traded as a reverse signal, rather than a continuation. If the break of an inside bar occurs BEYOND a support or resistance level, then it should be traded as a continuation signal. My lesson for the day.

GBPUSD

A textbook pin bar formed overnight on the GBPUSD. The pin bar's sticking out like a sore thumb as both a rejection from resistance AND a significant numerical benchmark (1.6000). I've decided to split my order into two, with my first take-profit at support level #1 and my second take-profit at support level #2. I'll be using a trailing stop-loss so both orders will move to breakeven once they are halfway to their target. My initial stop loss is set at the 61.8% retracement level of the pin bar.

11 February 2012 - potential weekend setups

Gold

On Friday's close, a promising pin bar formed as a rejection of the 21 EMA, short-term support and a Fibonacci retracement level. How to trade this pin bar is a little tricky. I'll most likely enter a pending long that'll trigger on the break of the pin bar, with a stop-loss around 50% of the pin bar. Take-profit will be set just below resistance at 1760. This resistance level has been respected twice already. The setup should provide a 1:2 risk:reward ratio, which is how I like it.

EURJPY

An inside bar has formed just above a resistance-turned-support level, so this setup is looking optimal. Take-profit has been highlighted below.

What I don't like about this setup is that other yen currency pairs are much more bearish. I assume the neutral-ish tone of the EURJPY is due to a prospect of a breakthrough over Greece. I'll probably trade this, though.

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.

30 January 2011 trade

I went long on the EURJPY as soon as the market opened this morning. The EURJPY then dived throughout the day. Just a few moments ago my stop loss was hit and I lost around 85 pips.

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.