A $GDX Trade With Awesome RRR

RRR-wise, it can’t get much better than this $GDX trade! My estimate is an initial RRR of about 20:1!!! How are the odds that this plays out as planned? I don’t know, as I have never backtested wedge breaks. But it doesn’t really matter that much, be it 50% win ratio or 20% or even 10%, this bet is good! Let the wedge break to the upside and long the shiz out of it. Stops below the recent lows or below the supporting trendline.

* Please don’t take this as investment advice. I’m just presenting my opinion about the market.

Backtest of a swing trading strategy on EURUSD daily chart from 2014 until today

Goal

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.

Hope

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.

Setups

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.

Trend definition

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.

Entry signals

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.

Stop Losses

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.

Take Profits

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.

Results

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:

 

Charts

And here comes each individual trade in a sequence of images to understand the results and setups in detail.

 

DAX finally completes ascending channel

The German DAX finally touched the upside of a long-term ascending and immediately gets rejected almost 150 points. Technically this provides an opportunity for a bigger correction, but with all this central bank support of the financial markets you never know. Anyway, I am still cheering for a correction, I have not managed to participate in this rallye enough!