Holy Grail
Sorry I couldn’t resist saying that. The only thing I can’t resist is temptation.
This is not a highly polished well developed trade strategy. Just something I’ve been looking at that I thought I would share and get your thoughts on.
Take a look at a daily chart. I’ll use GBP/USD in my example.
Do you see it?
Kinda sticks out like a sore thumb doesn’t it?
Did you ever notice how the candles are all the same length and lined up in a horizontal flat line across your screen like a bunch of dominoes?
No? You didn’t notice that?
Well that’s because they don’t!
So what does price do? It moves! up and down. Even when it’s in a narrow range it bounces up and down inside that range. (good for boll bounces but that’s a different thread).
So most of the time a candle will be offset from the previous candle. It will extend either above the previous high or below the previous low or sometimes both.
On a daily candle even a small extension can be worth enough pips to make a trade worthwhile. But not on time frames less than daily. So that’s why this is going to be a ‘daily’ high / low system.
after looking at the last 10 years of daily candles…
96.32% of them will extend either above the high or below the low, or both, of the previous daily candle.
The trade strategy is obvious. Place a pending buy stop at yesterday’s high and a pending sell stop at yesterdays low. You will get at least one order triggered 96 days out of a 100. Of those 96 days, 10% of them will get both orders triggered.
So Of those that go above or below the previous daily High or Low, price will go at least 20 pips 78.66% of the time. This will give you an average of 1573 pips per 100 trades, (78.66 times 20 = 1573). But this is not the optimum.
The optimum Take Profit is actually somewhere in the range of 45 to 75 pips. This gives you in the neighborhood of 2377 to 2489 pips per 100 trades.
Specifically a take profit of 55 or 60 will each yeild 2489 pips per 100 trades.
This only takes into account wins, not losses.
When taking losses into account the optimum TP may be entirely different. (caveat emptor).
That may not seem like a lot, only 24.89 pips per day but with compounding it can add up in a hurry.
And also there will be days when price moves a lot farther than 20 pips so maybe some kind of trailing stop would be worth using?
Notice I haven’t said much about losses or Stop Loss distance. That’s because I haven’t figured that part out yet. Obviously there has to be a balance between how small you can make your stop loss and still leave enough room for price fluctuations so that price will hit your TP. That’s the tricky bit.
An alternative that I’ve been looking at. (no statistics yet) is a break of the daily open or close rather than the high or low. A cursory look gives me the impression that this might have a higher pip yield.
