No matter how hard I study the markets and how well I think I understand the fundamentals, my predictions of what price should do are mostly crap. Maybe I just don’t have the talent. Also, I am much more drawn to following price action rather than playing the long-term game of “when will everybody else wake up to the over-/undervaluation that I have already figured out before everybody else”! Wait, when I read that I can confidently state that I am not that smart. I will never be that guy. So all thats left for me is technical chart analysis or price action.
So I have been working hard to put my visual predispositions into something of a valid strategy. And the results give me hope that I have created something of value. I am documenting it here, feel free to backtest yourself, refine, copy, pick my brain. If you have suggestions on how to improve it, I would be happy to hear from you.
The basic idea I am trying to realize is to swing trade in trend direction. Nothing unique about that. So we roughly four things: a definition of trend, entry signals, stop losses and take profits.
The trend is simply a set of exponential moving averages which all more or less point upwards in an uptrend, all more or less point downwards in a downtrend, or are mashed up in a sideways market. I don’t follow this religiously and sometimes still trade even when the trend is not clearly defined because the dominating signals in my strategy are given by trendlines.
I have a couple of entry signals here explained for long trades in uptrends:
- 3 Drive: Draw a trendline through two troughs, the third touch of that downward sloping trendline will be the entry signal
- Trendline Break & Retest: a downward sloping trendline which is drawn through peaks is broken to the upside and subsequently “retested” again from above.
- Channel completion: A downward sloping channel is drawn through two peaks with the parallel line attached to the trough formed in between those peaks. Enter on a touch of the lower channel boundary.
The stop loss on each trade is very simply a fixed amount of pips from the entry price. The amount of pips depends on the volatility of the traded instrument and timeframe. A good starting point for stop loss size on daily charts is about 0.8 – 1.2 % of price. So for example on EURUSD which trades at a price of roughly 1.20 the stop loss I use is currently 100 pips.
Profit targets are determined more or less like the entry signals. So mostly the completion of a 3 drive or a channel in trend direction.
So let’s get to it. I have tested this on several pairs and on daily and 4h timeframes with very promising results. Here I will show my backtest for EURUSD on a daily timeframe for the period from 01.01.2014 until 20.09.2017. Here are the stats:
And here comes each individual trade in a sequence of images to understand the results and setups in detail.