The Most Profitable Trading Pattern You Will Ever Encounter

PhilipPirrip · March 14, 2015, 1:33pm

You are spot on regarding point 1. As for point 2, stochastic has to travel all the way to the other extreme and cross there to exit.

Point 2 is actually a more complex issue than that, but I think my answer for now is good.

PhilipPirrip · March 14, 2015, 1:36pm

For some reason some people got involved in a GBPAUD long. It is clear on my picture (the vertical line), stochastic crossed before EMAs turned back up. You can even see the horizontal line by my broker that shows where I entered (exactly at the close of the candle.) So it basically was a failed pattern that got me lots of pips in profit.

The picture also shows that there was no reason at the time to go long, stoch did not cross above signal line from oversold.

I really don’t have anything more to say on the subject, there is nothing different about the pattern.

Shemski · March 14, 2015, 2:06pm

First and foremost, thanks Pip for this greatly thought out but simple system! I’ve been lurking here for a while and figured now’e the time to join and hopefully add value to this forum. I’ll do the exact math later this week, but i’m up on about 13 of my 14 trades. I also need to add that I set my stops extremely quickly to break-even as soon as the price crosses.

I am looking at the following set ups for the upcoming week:

aud/cad
nzd/cad

eur/gbp
gbp/nzd
gbp/chf
chf/jpy
eur/sek
cad/chf
eur/nok

A few exotics in there, but i’llvbe most aggressive on the top two. Good luck trading next week everyone and thank you again Philip!

Jalapenofan · March 14, 2015, 3:03pm

On the GA trade, where would have you put the stop? I mean, you exit when the stochastic goes from oversold to overbought, but also if it goes through the previous high (in this case), right? Would you stop this trade if it reaches 2.00?

PhilipPirrip · March 14, 2015, 3:10pm

Am I long or short?

I just apply the same rules to this case. The stop is 10 pips above the high (assuming you mean I’m short).

Forexmike · March 14, 2015, 4:33pm

hi molonist

would you like to explain a bit more about how you would basket trade this strategy?
do you limit open positions to a certain limit per currency (as most of the time you will not get equal number of signal for each currency)?

meads797 · March 14, 2015, 9:05pm

Has anyone developed an EA or a custom indicator for this yet? I tried making indicator arrows to fit this particular setup, but couldn’t get them fine-tuned.

doughayman · March 14, 2015, 9:37pm

As promised, here are some back-tested results of Philip’s great system, using Daily DOW-30 Daily data from 1982-present (32+ years). I am not currently an FX Trader, but I plan to be. My supposition is that a trending system should work with any instruments. As Philip pointed out, stocks have largely been in an up-trend over the years, so he felt that given my data, ONLY Long trades should be used - he was correct, the system falls short (no pun attended) when using it as a Short system. The system was implemented in WealthLab Developer 3.0, which
uses a robust, Pascal-like programming interface. Even if you are not a programmer, you should be able to follow along with my implemented algorithm. By the way, feel free to point out any flaws in this implementation that you see, or ask any questions about the coded algorithm, which I’m hoping you can port to your favorite back-testing system.

Nonetheless, here are the basics of the system:

Daily data for 31 DOW stocks (I added Apple and left AT&T in) from 1982-present;
I Start with a $250,000 account;
Very basic money management; I take trades which are 10% of my equity;
I implemented Philip’s Fib Extension rules and incorporated into the model;

I ran 3 different implementations of the system:

(1) Full Long/Short system, which uses High/Low Initial Stops, uses Fib Extensions
to preserve gains, and uses Philip’s EMA Cross, Stochastic movement to opposite
end, and stochastic cross as an Exit in the Overbought/Oversold areas (if Stops aren’t hit);

(2) Long system only, which uses High/Low Initial Stops, uses Fib Extensions
to preserve gains, and uses Philip’s EMA Cross, Stochastic movement to opposite
end, and stochastic cross as an Exit in the Overbought/Oversold areas (if Stops aren’t hit);

(3) Long system only, which eliminates initial High/Low Stops (this is what Philip
does), uses Fib Extensions to preserve gains, and uses Philip’s EMA Cross,
Stochastic movement to opposite end, and stochastic cross as an Exit in the Overbought/
Oversold areas (if Stops aren’t hit);

Here are the results of each:

(1) FULL LONG/SHORT SYSTEM

Starting Capital:   $   250,000
Ending Capital:     $ 4,091,807 
# Trades:           1,703
# Long Trades (% Winners):  40.33%
Long Trade Profit:  $ 5,745,716
# Short Trades (% Winners): 19.86%
Short Trade Profit: $ (1,903,908)
Overall % Winners:          30.65%

Raw Returns Graph:

(2) LONG SYSTEM ONLY (with Initial Hi/Lo Stops)

Starting Capital: $    250,000
Ending Capital:   $ 10,013,974 
# Trades:         1,122
# Long Trades (% Winners): 38.59%

Raw Returns Graph:

(3) LONG SYSTEM ONLY (No Initial Hi/lo Stops)

Starting Capital: $    250,000
Ending Capital:   $ 13,307,658
# Trades:         888
# Long Trades (% Winners): 66.5%

Raw Returns Graph:

Several preliminary conclusions:

With long-term up-trending stock market, LONG system works much better than SHORT system.
The LONG system (w/initial stops) stopped out a lot after 1 or 2 bars often, minimizing loss.
Only 3 years of losses greater than 5% (but only one over 10%).
The LONG system (w/o any stops) failed miserably in the 2008 stock market crash (losing over 25%).

This is a working model, and I would ultimately like to test in on 4 Hours (or Daily) FX Data (so if you have any data that you want to share, send it over). This is a working model; I plan to try to revise/optimize. This is Rev # 1.

Back-testing Wealthlab Code is text-attached.

molonist · March 15, 2015, 12:15am

Well we are currently in a USD bull market (which may be unwinding soon)

In my basket strategy roughly no more than 50% of my open positions should be short the USD (assuming that i’m trading on 4H timeframe or higher). I’m currently not short the USD at all.

but long

I’ll continue on another post I’ve reached max amount of pics on this one (btw I found a screenshot snipping tool native on windows 7 ultimate. it should be on your system here %windir%\system32\SnippingTool.exe )

anon5370623 · March 15, 2015, 2:48am

That’s the problem.
It is not yet stable pattern. Additional market analysis is necessary to make a final decision. I think plain indicator taking action on that pattern will quick turn your account go downhill so make additional backtest in different market volatility times.
Cheers

jw1981 · March 15, 2015, 5:30am

I doubt an EA would work. There is a bit of rules involved especially in terms of the exits and the initial stops.

However, a ‘Dashboard’ could work.
Ex: Alert when EMA 20/50 crossover on a specified TF. This way, instead of having to scan all the pairs the dashboard alert will let us know what pairs to focus on.

There are many EMA crossover dashboards, but what would be really useful is a dashboard that can show EMA crossover “x” bars ago.

Example:
[I]GBPAUD EMA 20 crossed below EMA 50 on H4 time frame 9 bars ago[/I]

meads797 · March 15, 2015, 6:18am

[QUOTE=“jw1981;688758”] I doubt an EA would work. There is a bit of rules involved especially in terms of the exits and the initial stops. However, a ‘Dashboard’ could work. Ex: Alert when EMA 20/50 crossover on a specified TF. This way, instead of having to scan all the pairs the dashboard alert will let us know what pairs to focus on. There are many EMA crossover dashboards, but what would be really useful is a dashboard that can show EMA crossover “x” bars ago. Example: GBPAUD EMA 20 crossed below EMA 50 on H4 time frame 9 bars ago[/QUOTE]

I agree. What would be even more useful is an EMA crossover paired with a subsequent stochastic alert in the opposite direction. You could set it up on all 4HR charts and then manually trade with custom SL.

leonlee0116jl · March 15, 2015, 9:00am

Probably two possible setup next week.

Shemski · March 15, 2015, 10:14am

Double post, my bad

Shemski · March 15, 2015, 10:17am

doughayman:

As promised, here are some back-tested results of Philip’s great system, using Daily DOW-30 Daily data from 1982-present (32+ years). I am not currently an FX Trader, but I plan to be. My supposition is that a trending system should work with any instruments. As Philip pointed out, stocks have largely been in an up-trend over the years, so he felt that given my data, ONLY Long trades should be used - he was correct, the system falls short (no pun attended) when using it as a Short system. The system was implemented in WealthLab Developer 3.0, which
uses a robust, Pascal-like programming interface. Even if you are not a programmer, you should be able to follow along with my implemented algorithm. By the way, feel free to point out any flaws in this implementation that you see, or ask any questions about the coded algorithm, which I’m hoping you can port to your favorite back-testing system.

Nonetheless, here are the basics of the system:

Daily data for 31 DOW stocks (I added Apple and left AT&T in) from 1982-present;

I Start with a $250,000 account;

Very basic money management; I take trades which are 10% of my equity;

I implemented Philip’s Fib Extension rules and incorporated into the model;

I ran 3 different implementations of the system:

(1) Full Long/Short system, which uses High/Low Initial Stops, uses Fib Extensions
to preserve gains, and uses Philip’s EMA Cross, Stochastic movement to opposite
end, and stochastic cross as an Exit in the Overbought/Oversold areas (if Stops aren’t hit);

(2) Long system only, which uses High/Low Initial Stops, uses Fib Extensions
to preserve gains, and uses Philip’s EMA Cross, Stochastic movement to opposite
end, and stochastic cross as an Exit in the Overbought/Oversold areas (if Stops aren’t hit);

(3) Long system only, which eliminates initial High/Low Stops (this is what Philip
does), uses Fib Extensions to preserve gains, and uses Philip’s EMA Cross,
Stochastic movement to opposite end, and stochastic cross as an Exit in the Overbought/
Oversold areas (if Stops aren’t hit);

Here are the results of each:

(1) FULL LONG/SHORT SYSTEM
Starting Capital:   $   250,000
Ending Capital:     $ 4,091,807 
# Trades:           1,703
# Long Trades (% Winners):  40.33%
Long Trade Profit:  $ 5,745,716
# Short Trades (% Winners): 19.86%
Short Trade Profit: $ (1,903,908)
Overall % Winners:          30.65%

Raw Returns Graph:
(2) LONG SYSTEM ONLY (with Initial Hi/Lo Stops)
Starting Capital: $    250,000
Ending Capital:   $ 10,013,974 
# Trades:         1,122
# Long Trades (% Winners): 38.59%

Raw Returns Graph:
(3) LONG SYSTEM ONLY (No Initial Hi/lo Stops)
Starting Capital: $    250,000
Ending Capital:   $ 13,307,658
# Trades:         888
# Long Trades (% Winners): 66.5%

Raw Returns Graph:
Several preliminary conclusions:

With long-term up-trending stock market, LONG system works much better than SHORT system.

The LONG system (w/initial stops) stopped out a lot after 1 or 2 bars often, minimizing loss.
Only 3 years of losses greater than 5% (but only one over 10%).

The LONG system (w/o any stops) failed miserably in the 2008 stock market crash (losing over 25%).

This is a working model, and I would ultimately like to test in on 4 Hours (or Daily) FX Data (so if you have any data that you want to share, send it over). This is a working model; I plan to try to revise/optimize. This is Rev # 1.

Back-testing Wealthlab Code is text-attached.

Thank you Doughayman, woudl it be possible to post when most trades were exited? I’d like to know how often a trade ran deep without getting stopped or if most trades were stopped out within their first few stops.

Thanks and again great work!

Shemski · March 15, 2015, 10:27am

I have an account at FXCM with a few hundred $'s credit on it. Let me see if their IT guys can put something together for us. Of course only if Philip gives me the OK. Pip?

doughayman · March 15, 2015, 12:31pm

Shemski,

I loaded the 1st Implementation (Longs and Shorts) trade data into the attached CSV file, which can be loaded into Excel. The columns should be mostly self-explanatory. The Entry Signal and Exit Signal columns were populated from my code.

Shemski · March 15, 2015, 1:42pm

Thank you kind sir, trying to load in to excel but it looks like i’m going to have to do some editing in the notepad. Any chance you happen to have an excel file?

NO big deal if you don’t. Awesome stuff my man!

Shemski · March 15, 2015, 1:44pm

As mentioned: 13 trades, 12 winners but a few were stopped out pretty close to break even:

PhilipPirrip · March 15, 2015, 1:47pm

doughayman:

As promised, here are some back-tested results of Philip’s great system, using Daily DOW-30 Daily data from 1982-present (32+ years). I am not currently an FX Trader, but I plan to be. My supposition is that a trending system should work with any instruments. As Philip pointed out, stocks have largely been in an up-trend over the years, so he felt that given my data, ONLY Long trades should be used - he was correct, the system falls short (no pun attended) when using it as a Short system. The system was implemented in WealthLab Developer 3.0, which
uses a robust, Pascal-like programming interface. Even if you are not a programmer, you should be able to follow along with my implemented algorithm. By the way, feel free to point out any flaws in this implementation that you see, or ask any questions about the coded algorithm, which I’m hoping you can port to your favorite back-testing system.

Nonetheless, here are the basics of the system:

Daily data for 31 DOW stocks (I added Apple and left AT&T in) from 1982-present;

I Start with a $250,000 account;

Very basic money management; I take trades which are 10% of my equity;

I implemented Philip’s Fib Extension rules and incorporated into the model;

I ran 3 different implementations of the system:

(1) Full Long/Short system, which uses High/Low Initial Stops, uses Fib Extensions
to preserve gains, and uses Philip’s EMA Cross, Stochastic movement to opposite
end, and stochastic cross as an Exit in the Overbought/Oversold areas (if Stops aren’t hit);

(2) Long system only, which uses High/Low Initial Stops, uses Fib Extensions
to preserve gains, and uses Philip’s EMA Cross, Stochastic movement to opposite
end, and stochastic cross as an Exit in the Overbought/Oversold areas (if Stops aren’t hit);

(3) Long system only, which eliminates initial High/Low Stops (this is what Philip
does), uses Fib Extensions to preserve gains, and uses Philip’s EMA Cross,
Stochastic movement to opposite end, and stochastic cross as an Exit in the Overbought/
Oversold areas (if Stops aren’t hit);

Here are the results of each:

(1) FULL LONG/SHORT SYSTEM
Starting Capital:   $   250,000
Ending Capital:     $ 4,091,807 
# Trades:           1,703
# Long Trades (% Winners):  40.33%
Long Trade Profit:  $ 5,745,716
# Short Trades (% Winners): 19.86%
Short Trade Profit: $ (1,903,908)
Overall % Winners:          30.65%

Raw Returns Graph:
(2) LONG SYSTEM ONLY (with Initial Hi/Lo Stops)
Starting Capital: $    250,000
Ending Capital:   $ 10,013,974 
# Trades:         1,122
# Long Trades (% Winners): 38.59%

Raw Returns Graph:
(3) LONG SYSTEM ONLY (No Initial Hi/lo Stops)
Starting Capital: $    250,000
Ending Capital:   $ 13,307,658
# Trades:         888
# Long Trades (% Winners): 66.5%

Raw Returns Graph:
Several preliminary conclusions:

With long-term up-trending stock market, LONG system works much better than SHORT system.

The LONG system (w/initial stops) stopped out a lot after 1 or 2 bars often, minimizing loss.
Only 3 years of losses greater than 5% (but only one over 10%).

The LONG system (w/o any stops) failed miserably in the 2008 stock market crash (losing over 25%).

This is a working model, and I would ultimately like to test in on 4 Hours (or Daily) FX Data (so if you have any data that you want to share, send it over). This is a working model; I plan to try to revise/optimize. This is Rev # 1.

Back-testing Wealthlab Code is text-attached.

Man thanks for an amazing effort. I’m so happy to have such a fantastic piece of research. The surprising thing for me is that the long-short system failed to capture the 2008 short trade, which would have been rather profitable.

And also even though your comment on the risk associated with system 3 is right (how it lost 25% of equity in one year.) It is clear it is the most efficient system, getting the most amount of return with the least amount of trades.

What I hope you can provide me with is three pieces of information; avg win, avg loss and biggest loss. If you have that I’ll be forever thankful.

Is there a way I can help you back testing this on forex?