The Most Profitable Trading Pattern You Will Ever Encounter

Trading Systems Free Forex Trading Systems
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Hi Philip,

I am brand spanking new to this forum, as you can see. I am NOT an FX trader; I am an equities and futures trader. I stumbled upon this thread through a Google search.

I am intrigued by your system, but by nature, I am skeptical of all systems, until sufficient back-testing is accomplished, to give a rough indication of results.

I do not have FX data to back-test, but decided to back-test 25 year’s worth of Daily DOW-30 data, to see how things fare. I am reviewing my back-testing code now (I’m using Wealthlab) particularly on the FIB trailers part. Early indications are that this system works much better winning %-wise from the LONG side (74%) versus the SHORT side (54%). Additionally, equity curve also much better from LONG side as well. With max drawdown of 20%, my back-testing model shows significant losses in 2003, 2004, 2006, and 2009. Given my my parameters, equity curve only doubled from 1993-2015. I would like to share my results with all of you, once they have been completed and verified (may be awhile due to other obligations)…and I’d love people to poke holes in my implementation.

That said, I do have a couple of questions for you:

  1. Have you used your system outside of the FX arena at all? Have you noticed differing results?

  2. I’m a little confused on initial STOP LOSS setting…there appears to be times when the stop loss derived from
    Hi/Lo of EMA crosses is actually higher than Buy Entry point or lower than Short entry point. If this is the case,
    what should initial stop loss be?

  3. There are some instances when Stochastic values are already at the “opposite side of scale” on trade entry. Is
    this a problem at all (in other words, in these case stochastics don’t have to travel to opposite extreme)?

  4. Have you or anyone else on this board back-tested this system for a significant # of years? I know you’ve said
    that you’ve been trading this system for 5 months or so.

I hope you don’t mind my questions as a Newbie on this board. I’ve been following this thread, and would love to corroborate results over a lengthy period of time.

Thanks in advance.

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That is very strange, It never touched the breakeven after it closed below the 100 level (which took place today). May be you moved it to break even yesterday when it was close to the 100 level?

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I entered on the fib’s level 23, the candle was near of level 100, I think I moved the SL to BE too early, my bad.

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I just found this trend from November, I’d like to ask about how did you face it, once the candle closed below 127.2, it “pullbacked” close to level 61, and then stayed on the trend… Catching a full trend like this would be catching 600 pips :o

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I don’t remember entering that trade. But what I know is that my GBPCAD and GBPAUD longs from earlier this year caught 1000 and 600 pips respectively. So you shouldn’t be shocked, you will capture moves like that.

One thing I wanted to clear up as well. We do not move our stop when price hits the fibonacci extension, we move the stop when price [B]closes[/B] past that level.

So for example your recent AUDUSD short, you should only move the stop to BE after price [B]CLOSED[/B] below the 100 level. Touching the level does not make us move the stop loss at. I hope this is clear.

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Wow thanks for this, I really appreciate it. Well let me try to answer your questions to the best of my ability.

I have not used outside FX at all unfortunately. But I use it for trading gold, silver and SPX CFDs, I doubt the result would have been different from CFDs and futures.

[B]Initial Stop[/B]: I don’t think my stop loss and target trail stop technique can be coded unfortunately. What I can do is give you an alternative. Let’s say we will short. Price moved from point x (high) to point A (low) causing the EMAs to cross downwards. Stochastic was oversold then moves to overbought and crosses downwards. This should equate to point B for price (retracement). We open two positions at point B

Stop loss would be 10 pips above point X. While target would the 127.2 and 161.8 extension of move XA. As I said two positions.

On point 3) I’m not sure what you are trying to say here. My rule is stochastic needs to be giving an opposite signal to what the EMA is giving at the point of crossing. So if 20 EMA crosses below 50 EMA, the EMAs are telling us to go short. At that point stochastic is oversold, telling us to go long. We only enter short once the stochastic tells us to go short. The same with the buy signal. I hope this answers the question.

  1. I have tested the system for 6 forex pairs or so using the 4 hr timeframe for theyear 2013, 2014 and 2015. It wasn’t as elaborate as yours because I did it manually. But I still have the data if there is something you are looking for.

One thing I wanted to ask, you said the equity curved doubled from 1992-2015. In that case you are saying it took 13 years to double the account? If that is the case, can I ask what was the money management technique used?

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Hey guys, when GBPUSD and nzdusd were going down after NFP, why did GBPNZD go up? Are they inversely correlated?
I’m sorry for a rookie question. I hope someone can clear this out.

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Hi Philip,

Thank you for responding to a newbie -:). Thank you for clarifying the Initial Stop logic, and providing that suggestion. I’m going to have to re-work this into my model, and you’ve given me food for thought.

Regarding my point 3) and your questioning it, I made a mistake in my analysis and the chart viewing of the EMA crosses. The stochastics are as they should be in these cross-over scenarios, so please disregard my comment here.

No need to provide me with FX data yet, as I’d like to think that this algorithm of yours will work with most liquid instruments, the higher the timeframe, the better. I’m figuring (I hope) that Daily Dow-30 data will fit the bill for testing. I have access to TD Ameritrade intraday data for the last 2 years, so I can subsequently test using lower timeframes. Also (I believe) that I will have access to FX data through that API facility as well (TBD though).

Probably best to ignore my equity curve comment until I resolve STOP logic to the best of my ability, but what I meant was that I showed significant losses in 2003, 2004, 2006, and 2009, which yes, resulted in taking 23 years to double my simulated account…equity curve was much higher at points, but 2009 was a doozy! It is super-extreme scenarios like 2009 that I’m very interested in back-testing. FYI, my money management technique used was very simplistic: Starting Capital: $25,000; Fixed $3,000 Dollar Allocation to each trade, no margin (hence, a max of 8 positions open at any given time). Just something to give me a baseline.

I want to work on this and get it right for simulation. I’m using an old version of Wealthlab (3.0), which I like because I’m an old Pascal programmer (hope I’m not dating myself). Once completed, I will share revised Performance data on this thread, and will also share my WL code, so you guys can poke some holes into it, or attempt to convert it into your favorite back-testing system.

Thanks again for your system, and thanks for getting back to me!

Doug

P.S. I’ve been avoiding trading FX - not sure why - but I’d love to make the transition over to it, since it provides me with more time flexibility. This forum has given me the impetus to move forward with this plan. The Free School offered by BabyPips.com is really, really good - hats off to the website owners!

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It’s clear, I guess I was just a bit afraid of loosing more than what I could loose, but now I regret exiting there. I have been doing a manual backtest on the AUDUSD, and the results are awesome, could you share the results of the 6 pairs you have backtested from 2013 to 2015, please? I think index CFD’s work in a different way, that’s why the shorts use to fail more in my opinion.

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I love how you breakdown your trading system. You have a knack for development. Although I would suggest the reason the trade went against you is because you shorted into the start of a retracement on a higher timeframe. Price eventually fell at the end of this retracement. You must be aware of whats happening several levels above where you are operating. Otherwise you will get blind sided by reversals on higher time frames.

I believe the central bank lowering interest rates served merely as a volatility injection and had no impact on direction. Price reversed bullishly because… it was time for a bullish reversal based on many technical factors.

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Philip… Great stuff here. I’ve been reading on this since last night and couldn’t hold it any more. I have some questions.

1. Dealing with very late stoch correction
Take a look at this chart here. GBPJPY H4.
The arrow to the left shows a EMA 20 crossover EMA50. Stochs 14,3,1 is overbought, so we wait.
But when Stochs turn to oversold, marked by the circle, price already moved a great deal.
How do you deal with such trades?

gbpjpy_question.jpg700×323 31.8 KB

2. Markets enter a range mode after a signal
In the chart here, notice how the EMA’s flattened. But we would already be on the short side after the first pullback. Price failed to go any lower than the previous low. So do we just wait until the SL is hit (P.S: I think there is still some candles left before we assume this trade will be a loser??)

aud_rangemode.jpg700×323 34.4 KB

3. Confluence of EMA crossover & Stochs
With EMA crossovers, I noticed that in ‘some’ cases, the stochs actually are at the other end of the scale i.e: in a bullish crossover, stochs move up from oversold levels, which I think would be a perfect all in trade? (Will try to find that chart I was looking at last night)

4. Any specific reason why Stochs set to 14,3,1?
14,3,3 tends to give the same signal, with a bit more smoothing?

Thanks again for taking your time out to answer the questions and also sharing a very simple but strong system.

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Hi guys. Any possible setup for this week?

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Two possible setup, any opinion guys?
I’m doing right?

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Nice catch leon. I have my set up for AUDNZD too. In fact all systems a go for this one.
Daily shows a bullish continuation and weekly is a very nice bullish candlestick. I’m waiting for the stochs to pullback but also watching a retracement to 1.037ish levels.

AUDJPY are shaping out for a short trade, and the same with GBPJPY too where a pullback is likely.

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Hello Phil,
Had a question regarding the pullback phase in which we wait for the stoch. If we get a crossover b4 stoch. signal. Does this null the trade or when price break the original high/low.

Thanks

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NZDJPY might be turning into a sell if stochs confirm just goes to show that I should trade by the rules, only take the first signal after the crossover.

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You should give FX a try you will get the hang of it in no time. One thing I noticed and wanted to convey to you is that I had a look at the monthly chart for the DOW Industrials and the pattern seems to work there.

There is no wonder why sells didn’t work as well as longs given that trends of a stockmarket are mainly bullish in the long term. I didn’t encounter a decade-long bear market in the Dow for example, but that run in the sixties, my system should have made a fortune! :smiley:

I also think that the money management systems seem to work differently than in forex, so I need to read up on that because I can be of little help in that aspect at the moment. But my point is doubling, tripling or blowing an account is more down to money management than a trading system. But I agree with you about testing the system out first.

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Yes it invalidates the pattern.

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  1. Dealing with a late stoch is something that is up to money management rather than technical analysis. It usually happens with very strong moves and high volatility. But the role is the bigger the risk, the lower the lot size. I still take those trades and they usually give me lots of pips.

  2. Well there is no way in advance to know when price will enter a range or go in trend. If there were all traders would be millionaires.
    What I do to counter that, is I never enter the other side of a losing trade. This AUDCAD for example, you should have been out of the trade at the close of the green candle at the edge of the box you drew, very small loss. Once I got out I don’t enter a long position so that I avoid getting slapped on the face long and short in a range.

The other thing is let’s say I’m looking to short AUDCAD, I look at other pairs with AUD; are they developing a short? I also look at other CAD longs, are they developing long? If they are, it increases the likelihood that of the trade being in trend. But there are no guarantees.

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I see where you are heading with this. And your every response kind of makes me more fascinated to this system. Its like a complete system (especially when you do a cross currency analysis as well) + include good money management.

[B]P.S: I also noticed that this system requires strict discipline. I don’t recollect the instruments but while visually scanning, in most cases, losing trades are very little in the pips (or [U]small[/U], relative to the moves) when a trade is taken on a stoch signalling a buy or a sell.[/B]

Making the above in bold so that others reading this would also take note.

PPS: Qns 3 & 4 unanswered :smiley:

Cheers mate