Examining Breakouts in Forex (Step 7)

Sept. 2, 2020

We recently started a journey to beat the market. We want a system that will vastly outperform the market over time and build that system step-by-step so anyone can follow along. Feel free to ask questions as we go. 

To review, here’s what we’ve done with our Breakout system so far:

1. We introduced the greatest trading methodology of all time;
2. We talked about how no one wants to trade this methodology;
3. We learned the details of the system.
4. We put our systems on Futures.
5. We touched on The Great Debate (Everything or Trend-Only).
6. We looked at breakouts on individual stocks.

So far, so good.

Our simple breakout system built on timeless principles and the settings of the masters has produced a lot of profit in Futures and individual stocks. (As long as those stocks were hard-trenders).

But Forex is another animal entirely.

Forex doesn’t have a long bias and isn’t based on physical items. No one is going to have Eurodollars delivered to their front porch.

Forex is based on technical patterns and not emotional reactions to real companies or real commodities.

So, will our system work?

Before we even begin, we’re going to make one small change. We’re going to shorten the stoploss.

The idea is that Fx really breaks out when it wants to. But many times it wiggles back and forth. A bigger stop loss isn’t going to help us. It’s going to hurt us. The breakouts will take care of themselves. Let’s lose less when we don’t win.

Here are the settings, then, for our Breakout system on Fx:

1. Go Long or Short on the break of the high/low of the past 40 Daily bars. Same as before.
2. Use a 20-bar trailing stop once in profit. Same as before.
3. Use a stoploss that’s 0.5x of the current ATR. We used a 1x ATR for the other instruments. This makes the stoploss smaller.

How’d we do?

Lousy!

On the GBPUSD (supposedly a trendy instrument) using 1 lot each time from 2008-2020, we lost money.

We lost $12,424 to be exact.

I hate to say I told you so (actually I love it), but, as you can see, Forex is not the same as stocks and Futures. Those things are based on real things. Forex is based on co-mingled relationships of various countries’ fiscal policies and economic status.

But let’s try one more thing before we throw it in the dumpster. We’ve been saying to use the right horses for the right courses. I thought GBPUSD was a trending instrument. Maybe it’s not. Let’s try a different one.

Here are the results using the GBPJPY with the same system:

Well, that did much better. The GBPJPY must be more trendy.

Which begs the question: Are there other instruments that are also trendy?

We’ll take a look at a portfolio of instruments in our next email.

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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.