SCOTT WELSH TRADING BLOG

This Strategy Shouldn’t Work

This Strategy Shouldn’t Work

June 5th, 2019

I’m sitting here watching my screen to see if this new strategy will take a trade.

Nothing so far.

I’m watching it closely, though, because I’m very curious.

The strategy itself is nothing new or revolutionary. I found it in a trading book I recently finished that was written by a world champion trader.

It’s a breakout methodology, but it uses intra-day charts instead of long-term charts. It enters as price breaks the high or low of the previous day and uses ADX as a filter to only enter when the trend is of a certain strength.

Like I said, nothing super special. Good logic, but not out of the ordinary.

I did not have high hopes for this strategy on Forex, though.

When we trade Forex, obviously we’re looking at a 24-hour market. There is no “previous day” per se. It’s hard to get in at “yesterday’s” high or low. For example, does the day start at 5 pm EST or midnight? It’s not clear cut.

So, without a clear trading session to use for comparison, do you know what the code for this strategy does? It simply compares today’s signal bar to the signal bar from twenty-four hours ago.

For example, the signal bar on my charts is the 9:30 EST bar. I think that’s a good time to look for signals because that coincides with the open of the U.S. stock market.

But that’s not enough to determine a trend, right?

In short, if the 9:30 EST bar today is higher than the high of the 9:30 EST bar one day ago, the strategy goes Long. If the 9:30 EST bar today is lower than the low of the 9:30 EST bar one day ago, the strategy goes Short.

That seems thin to me. I put it on my charts to test but I did not think it would work. I was surprised.

Here are the details:

  • System: Intra-Day Breakouts on Forex
  • Philosophy Behind It: If price is higher than yesterday, break out and go with the trend. And vice versa.
  • Need Special Indicators? No, just the ADX indicator.
  • Chart: 15M
  • Instrument: EURUSD
  • Long or Short? Long & Short
  • Long Entry: 1) 9:30 EST bar must be above the 9:30 EST bar from one day ago; 2) ADX reading must be above 40 (length 10); 3) Enter at Open of next bar; 4) Do not take trades after 10:45 EST (do the opposite for Short trades.)
  • Profit Target Long: $325
  • Profit Target Short: $975
  • Stoploss: $1,075
  • Timed Exit For Long Trades: 17 bars
  • Hypothetical Profit: $64,548
  • Hypothetical Max drawdown: -$10,010
  • Trade size: 1.0 lots
  • Hypothetical account size: $10,000-$20,000
  • Test Period: 2007-2019
  • Number of Trades: 754

Multicharts report is here:

A few thoughts.

You’ll notice most of the money comes from Short trades. Because Long trades weren’t as profitable, we used a timed exit and a small profit target. That seemed to be the best way to make Long trades worthwhile.

Also, there are a lot of trades. For long-term breakout trading, we only get a few trades a year.

Last, that’s a lot of profit and the ROA was great (over 600%).

I honestly didn’t think this type of trading would make a dime in Forex. Stocks and Futures, maybe. But not Forex.

I was wrong.

Can it work on another instrument?

We’ll find out in our next email.

Talk to you soon.

 

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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.