SCOTT WELSH TRADING BLOG

This Week: Using Pullbacks on Forex

This Week: Using Pullbacks on Forex

September 19th, 2018

There are mountains of research on Breakout systems.

Trading on a breakout worked for the Turtles in the 1980s and it worked for the Tulip traders in the 1630s.

It’s a great way to trade.

But I love trading on pull-backs. For several reasons.

One, Warren Buffett trades on pullbacks. Deep, deep pullbacks. And I got into trading because I wanted to trade like the Oracle. So that style will always resonate with me.

Two, trading on pullbacks gives us a better price. Going Long on a breakout gets us in the market way up there. Waiting for a pullback gets us in at a much lower price. Lower price means more profit when it goes my way and I can also place a tighter stoploss in the market.

Third, it makes me feel good. If we know it’s going up, then getting a better price is getting a deal. It makes me feel smarter. And a confident trader is a better trader.

For stock trading, pullbacks are fantastic. For Futures trading, pullbacks also seem to work.

But does pullback trading work with Forex? Without any upward bias, it seems like pullback trading on Forex might not be a good strategy.

That’s what we’re looking at this week.

Before giving you the numbers, keep in mind two things.

I like to get paid to trade. How do we do that? We trade in a direction where we might get a little “carry trade” interest rate discrepancy boost. What that means is that if we trade certain pairs in a certain direction, we get “paid” to be in that position (with interest rate credits applied to our account).

One such example is the USDJPY. If we go Long on the USDJPY, we get paid. Because of that, there’s an ever-so-slight upward bias on positive carry-trade type currencies.

And the way we’re going to get a pullback is the Stochastics indicator. When Stochastics drop down, that will provide our pullback, and we’ll get in then.

Let’s take a look at the settings and the results for trading USDJPY on a pullback:

  • System: Stochastics Pullback on Forex
  • Philosophy Behind It: Getting in on a pullback allows us to get a better price on our entries
  • Need Special Indicator? No. Stochastics come in all trading packages.
  • Chart: Daily
  • Instrument: USDJPY
  • Long or Short? Long Only
  • Entry: 1) Price must fall into Oversold; 2) Fast Stoch must cross above Slow Stoch while Oversold
  • Settings: Slow Stochastics set to 29 length, 20 Oversold (smoothing lines at 3-3, as usual)
  • Hypothetical Profit: $63,267
  • Hypothetical Max drawdown: -$10,761
  • Profit target: 300 pips
  • Stop loss: 165 pips
  • Trade size: 1 full lot
  • Hypothetical account size: $10,000
  • Test Period: 1999-2018
  • Number of Trades: 121

Here’s the profit and Tradestation’s calculation of how much we’d get paid for trading Long ($2,943 of Rollover Credit):

And here’s the Performance Report:

Trading Forex on pullbacks definitely looks inviting. As always, feel free to put your own spin on any of our systems.

To see the weekly YouTube video that talks about trading pullbacks on Forex, go here.

That’s all for this week. More emails on this system coming this week for anyone on the email list, and you can join the email list here.

Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.