DEVTOME.COM HOSTING COSTS HAVE BEGUN TO EXCEED 115$ MONTHLY. THE ADMINISTRATION IS NO LONGER ABLE TO HANDLE THE COST WITHOUT ASSISTANCE DUE TO THE RISING COST. THIS HAS BEEN OCCURRING FOR ALMOST A YEAR, BUT WE HAVE BEEN HANDLING IT FROM OUR OWN POCKETS. HOWEVER, WITH LITERALLY NO DONATIONS FOR THE PAST 2+ YEARS IT HAS DEPLETED THE BUDGET IN SHORT ORDER WITH THE INCREASE IN ACTIVITY ON THE SITE IN THE PAST 6 MONTHS. OUR CPU USAGE HAS BECOME TOO HIGH TO REMAIN ON A REASONABLE COSTING PLAN THAT WE COULD MAINTAIN. IF YOU WOULD LIKE TO SUPPORT THE DEVTOME PROJECT AND KEEP THE SITE UP/ALIVE PLEASE DONATE (EVEN IF ITS A SATOSHI) TO OUR DEVCOIN 1M4PCuMXvpWX6LHPkBEf3LJ2z1boZv4EQa OR OUR BTC WALLET 16eqEcqfw4zHUh2znvMcmRzGVwCn7CJLxR TO ALLOW US TO AFFORD THE HOSTING.

THE DEVCOIN AND DEVTOME PROJECTS ARE BOTH VERY IMPORTANT TO THE COMMUNITY. PLEASE CONTRIBUTE TO ITS FURTHER SUCCESS FOR ANOTHER 5 OR MORE YEARS!

Simple and Profitable Weekly Set and Forget Strategy for Forex

This is a very simple and easy to implement weekly brakeout strategy. It takes less than 2-3 minutes per week to execute and has so far produced profitable results. There are many popular weekly brakeout strategies that can be found online but this is my version of it. I tweaked the exit rules and added some trade management that fits my trading style but the core of the strategy remains the same, we look to profit from the initial brakeout at the start of the trading week. This article goes over applying this strategy in the forex market. I also plan to apply this strategy to the bitcoin and altcoin markets so keep an eye out for my new articles.

What’s the strategy?

The strategy is very simple. First you need to put up a 4 hour chart of your chosen currency pair on any forex trading platform. We’ll go over how to choose a currency pair a bit later in the article. After the market opens on Sunday and four hours go by, take the first 4 hour bar and add a buffer of 20 pips to each side. In other words, add 20 pips to the bar’s high and 20 pips to the bar’s low. Whenever price breaks each of these two price extremes we would issue an order to buy / sell the pair. The chart below shows a very recent example of this trade.

The easiest and simplest way to execute this strategy is to place pending orders on each side of the bar. In our example above, the EUR/JPY marked a high of 145.009 and a low of 144.631. After adding a price buffer of 20 pips, we arrive at 145.209 for our buy order and 144.431 for our pending sell order. Because the convention in forex is to display charts with the bid price, we need to add the spread to our buy stop order because long orders get triggered at the ask, not at the bid. No changes are needed on the sell stop order. Here’s how we arrive at our pending orders.

We enter a buy stop order at

145.009 + 0.200 (20 pips) + 0.02 (2 pips spread for the EUR/JPY) = 145.229

We enter a sell stop order at

144.631 – 0.200 (20 pips) = 144.431

Because our charts already display the bid price we don’t need to add the spread for the entry for the sell order. We do however need to add it to the stoploss on the sell (more on this later). If the spread your broker offers for the EUR/JPY is not 2 pips, change the equation above with your broker’s spread.

Stoploss and Takeprofit

The stoploss for this strategy is also very simple, we exit our trade if the opposite price extreme is breached. In other words, our stoploss for our long position would be placed right at 144.431, the same figure where our sell stop order will trigger. The reverse is true for our sell, the stoploss for our short at 144.431 will be placed at 145.229.

Where should we take our profit? The answer to this question is very subjective. It depends on what style of trading you prefer and on your risk tolerance. Some traders like slow, steady and predictable results while others prefer to go for the jugular. Since I’m closer to the latter, I will use a very aggressive takeprofit target of 4R. R here is the initial amount of risk on the trade. To put it simply, if our total risk on the trade is 50 pips then gunning for 4R would mean targeting a takeprofit of 200 pips.

Here we’re again reusing the same example from above. Because our initial risk on the trade is 77.8 pips, a 4R target would translate into a take profit of 311.2 pips. This would mean that our TP order for the sell would be placed at 141.319. As we can see from the chart above, after a rocky start of the week that saw the EUR/JPY trade close to our stoploss, the currency pair finally broke down on Thursday and reached the 3R takeprofit level by Friday. As the week after proved to be a dud, reaching the 4R level took 7 days extra.

Variations of the Weekly Brakeout Strategy

Keep in mind that this version of the Weekly Brakeout Strategy is my own adaptation, there are plenty of other versions out there that may better suit your needs. I’ll mention some of the more popular options here so that you can experiment with them. The most widely used take profit levels are 2R or 3R.

Different variations exist regarding the initial brakeout price buffer. We used 20 pips, other values that are sometimes used include 10, 50 and even 100 pips. Keep in mind that as you increase the buffer, your risk will also increase since the stoploss is placed on the other side of the channel. A 10 pips buffer increase adds an extra 20 pips to our initial risk.

How to evaluate a trading strategy

There are plenty of trading systems out there. Why trade this one? By going over my reasons why I choose this strategy above all others, I hope to give the reader some useful tips on how he can do this selection process himself. This process involves five important steps that must be followed as close as possible.

Step One – Logical reason behind the strategy

Why trade the Initial Brakeout at the start of the trading week? Before considering whether to trade a particular strategy you should always try to figure out what is the logical reason why a particular trading strategy works. In the case of the Weekly Brakeout strategies, the start of a trading week is an important time because this is when big financial institutions like banks and hedge funds are coming back into the market and placing their orders. A lot of these entities exit all of their positions before the close of trading on Friday and reenter them on Monday. They do this to avoid keeping trades and orders open during the weekend when market volatility and gaps in price can negatively affect their risk exposure.

Step Two – Under which conditions does your strategy thrive?

The next step is to figure out what are the conditions under which your particular strategy will thrive and on the flip side, under what market environment will your system underperform? Because our 4 Hour strategy is a brakeout trading system, it will do well in a trending and volatile market. It doesn’t matter which way the market moves, it just matters that it moves a lot. Find out your system’s strengths and weaknesses. What market environment does it operate best in? Is there a certain period of the day or a particular market phase that is best avoided?

For example, summer tends to be a slow trading period in the forex market. Over 90 percent of the trading volume in the Fx market comes from banks. The traders in these institutions, like the workers of all companies, generally take their yearly holiday break during the summer months. Most trading desks operate with a limited capacity during summer and this has an effect on trading volumes. The lower volume usually translates into range bound trading conditions. This is sometimes referred to as ‘’the summer doldrums’’. A flat, low volume market is not conducive to trend following systems.

When doing your backtest always try to pay attention to the time period, especially lookout for the ‘’summer doldrums’’ effect. In forex, this period usually encompasses July and August (June can be slow as well). Another events to take note of are trading around major US holidays like the 4th of July or Non-Farm Payrolls day (usually released on the first Friday of every month). This is especially true if you’re a scalper or a daytrader. If you’re trading on the daily chart, one day events like these will generally not pose a problem.

If you’re a day trader, always split your tests between the busier and the slower trading sessions. Most of the volume in the forex market is traded during the London trading session, followed by New York. The London banks open at 8 AM UK (3 AM EST) and New York Banks close at 5 PM EST (22:00 in the UK). You can read more it in this article on *The Three Major Forex Trading Sessions. Take note of how your system performs during the different sessions. If the results significantly deteriorate during a certain time period like the summer or the Asian session, consider ‘’switching off’’ your system until more favorable trading conditions develop.

Step Three - Choosing which currency pairs to trade

When I first re-discovered this strategy few months ago one of the things I did was to look for the best pair to trade with this strategy. I choose the EUR/JPY currency pair. Why the EUR/JPY and not the EUR/USD or some other pair? There are two main reasons why I decided to go with this currency pair over all others, I’ll go over these below. Keep in mind that the market is ever changing and by the time you read this article another pair could climb on top. You may need to apply these selection criteria yourself to pick the most suitable currency pair for you.

Reason 1 - Volatility

The first reason is Volatility. If we compare the 100 Day Average True Range (ATR) of the major currency pairs, we can see that the most volatile currency pairs are the Yen denominated pairs. A brakeout trading strategy relies on volatility and market movement to generate profits so the more volatile a trading instrument is, the better. There are several yen pairs that have good volatility: the EUR/JPY, GBP/JPY and the AUD/JPY all look decent. While the GBP/JPY wins out by few pips in a strictly pip on pip basis, the EUR/JPY has several fundamental factors that make it a better choice in my opinion.

Reason 2 - Fundamentals

The second reason I picked the EUR/JPY is the fundamental backdrop surrounding the two currencies that comprise the pair, the Euro and the Yen. Europe’s fundamental story is well known by almost everyone by now. The continent just came out of a serious debt crisis. The measures that some of the governments are implementing in a bid to pay down debt are in most cases unproductive. Increasing taxes but not decreasing government spending will lead to a low growth high taxation environment. This will not bode well for the future longterm prospects of the Eurozone. In addition, despite all the talk about ‘’austerity’’, last year the debt to GDP ratios rose in almost all indebted peripheral nations. Although the Crisis has been on the back burner for the past few months it could come back any day with vengeance.

The Yen story has been all about Abenomics. Named after the current Japanese PM Shinzō Abe, it's a specific set of policy measures that include inflation targeting at a 2% annual rate, correction of the “excessive” yen appreciation, radical quantitative easing and an increase in government spending (called investment).

Under Abenomics the Yen has lost over 25% of its value versus the US Dollar, going from 79.79 to 102.37 where it’s trading at the moment. The USD/JPY reached a high of 105.43 on January 2nd 2014. That's a massive rally of 2564 Pips in 15 months. Against the Euro, the Japanese currency lost 3656 pips since November 2012. The rally upward hasn’t always been straightforward, large retracements happened along the way. As our strategy is a brakeout strategy, volatility is our friend. It doesn't matter if the EUR/JPY goes up or down, it just matters that it does move.

Step Four - Does the strategy has any merit?

The initial step before doing any extensive testing of a trading strategy is to check and see if the strategy has any merit. Go back in time and look at the last 20 trades. Do a quick backtest and see how the strategy performs. No reason to waste your time doing an extensive backtest only to see the strategy fail miserably in the end. It is true that by doing a quick test of the last 20 trades you stand to miss out on some profitable systems that happen to underperformed recently. But life is too short and unless you have a lot of time on your hands I personally see no justification to proceed with a backtest unless the first impression of the strategy is that it might be profitable. Time might not be so much of a problem if you’re doing automated backtesting but I still do most of my testing manually in order to get a feel for the strategy. The manual testing will also make it a lot easier to spot obvious weak points of the system and make changes accordingly.

Step Five – Perform an extensive backtest of the strategy

If the last 20 trades of the strategy signal that it might have potential, go further back in time until you have at least 100 to 200 trades. This is where most traders give up and say to hell with it, I’ve done enough backtesting. I’m bored it’s time for some real trading. This is usually followed up with an excuse of why the backtest is not really needed. Oh well 20 trades is good enough and even if I test 1000 trades I still can’t be 100% certain that I’m on to a sure winner so why waste my time?. One my personal favorites that I’ve used time and time again is I have to start trading this strategy now because I might miss a big win if I stay on the sidelines for too long.

Whenever these types of thoughts start creeping up in that head of yours, it’s time to stop and regain the lost focus. It’s true that even the most perfectly done backtest will not guarantee that the strategy will work forever. But if you only do a quick backtest with a small number of trades and not a proper full test, in many ways you’re worse off than if you haven’t done any backtest at all. Doing the small test may give you a false sense of confidence. You may end up taking a string of trades on random chance thinking that you have an edge. If you’re trading blind you’ll be more likely to stop and say to yourself Wait a second, why am I trading this way? I haven’t even tested this system, I better stop and regroup.

On the other hand, a trader who has done even a partial backtest is more likely to carry on in the face of adversity. While gaining confidence is one of the major positive side effects that comes with the backtesting process, this can have a negative impact if someone has done the process incorrectly. They may end up taking loss after loss in a mistaken belief that they have to follow the system. In conclusion, not doing a proper backtest can only sets you up for a disappointment. The market punishes the unprepared and the lazy. Always backtest, the more trades you can evaluate, the better. If your system is not conducive to backtesting, forward test it real-time with small sums of money. Never put significant amounts riding on unproven trading techniques. While you may get lucky once in a while without going through the necessary preparatory process described above, over the long run the only way to profit in the forex market is to trade when the odds are in your favor. And the only way you can know this is by doing your homework beforehand. Every battle is won before it’s ever fought Sun Tsu, ‘’The Art of War’’.

Investing | Forex | Trading | Trading Systems


QR Code
QR Code simple_and_profitable_weekly_set_and_forget_strategy_for_forex (generated for current page)
 

Advertise with Anonymous Ads