Trend Following end-of-day Channel Breakouts by michal9

I have just shared on my blog a new post with the simplest "action plan" to become a consistently profitable trader. Simple, not easy, which is evident from this journal results to date, as I am not there yet.

But in its simplest way, down to bare essentials, I believe it is just this: find and learn the profitable trading system, then execute it with excellence.

Right? Or am I missing something? Yes, psychology, discipline, risk management, broker and costs and market conditions, but all of this is just a "how". Yes, there are many more questions to be answered to be able to just do it, i.e. trade the right system flawlessly and effortlessly.

Hi Mike,

I have a question on the ADX Filter: since we are looking at daily charts, the ADX will only produce a new value once the day closes. So even if a 55-day breakout occurs, we have to wait for that particular currency pair to show an ADX rising, and the only way for us to see that is when a new candle is formed. Once a new candle/day starts on the chart, and it is confirmed that the new ADX value is higher as compared to the previous day, we enter via market execution. Is this how you do it? Meaning, we enter the market a little later than the actual breach of the 55-day since we are using the filter.

Also, does this leave you with no pending orders at all? Since the orders might be triggered in the middle of the day and a new ADX value has not arrived yet..

Hi, good question.

I place the pending order if ADX (55) is already raising.

So, sometimes I have the pending order in place, and enter exactly at the breakout, if the price breaks out, if thew ADX was raising already before the breakout, which it often does.

In some cases , if ADX(55) is flat or declining, I do not have a pending order in place. In such case, as you say, I need to wait for the daily bar to close to show ADX turn up and then I enter... either at market (as I recently did on GBPUSP becasue it closed at the low) or I place a buy stop or a sell stop order above or below the last bar high or low. In that case my entry price is not as good as it would be if I entered at a breakout, but I will enter. So the strategy makes sure that I will not miss a move.

This ADX filter... in some cases it eliminates a losing trade, but in some cases it makes me enter a day later, at a less favorable price.

So it has pros and cons. Once my 3 months (Sept-Nov) trading period is done, I plan to carefully analyze all trades and judge if ADX filter impact was overall positive or negative. I sense it might be a thing to drop... but will see. Surely ADX filter is no holy grail and not a sure fire way to predict the market. On the other hand, it is a valid indicator showing a trend strength... and we want to enter the trades only if the trend is strong...

I hope I answered, let me know and I am happy to provide more info.

AUDUSD trade... turned out to be a losing trade. This happens. While I am not in the business of predicting the market moves, I cannot help but thinking that now it will drop significantly ;-) Will see.

I also cancelled USDCAD and EURGBP and USDMXN pending orders as ADX (55) turned flat.

Thank you very much for your response!

I see. I didn't really prioritize the ADX filter but you mentioned that you backtested it and it helps filter a losing trade, hence it caught my attention. I hope you share your stats/thoughts once the 3-month trading period is over.

I guess we're both happily holding on a long position on Yen pairs.

Another question: I am strictly trading currencies. I was thinking of diversifying to CFDs such as oil but the monthly contract expiration would seem to hinder trend-following strategies. Also thinking of including Gold, Silver, USDCNH. Any thoughts on these financial instruments? Thanks in advance for any feedback.

Hi,

Yes, I will share the results of my journal analysis after 3 months. And indeed, I am long USDJPY. I wish I was long other pairs, but I usually do not take correlated positions so as not to double the risk.

In terms of instruments, I like to believe that trend following should be profitable on "eveything". This is what Covel and other books lead me to believe, as well as my observations of charts. Anything that moves, that has trends, should be a trading opportunity. And I see beautiful trends on historical charts of commodities, which, had I traded this system, would be very profitable to trade.

So, as you can see from this journal, I am taking trades on gold, oil, natgas, copper, etc. Basiacally anything that my broker offers CFDs for and enable microlots trading. And as you say, contract expirations are a hurdle... in such case I re-enter.

In short, I believe trading more markets is beneficial, as it provides more trading opportunities. Watchouts are: correlations, risk (can this be traded using a position size that is right), contract expirations, gaps, transaction costs... all of this has to be taken into consideration as well.

Thanks.

USDJPY holds and gains. This is nice to watch.

I also have open trades on OIL, XAU, USDNOK, GBPUSD... most of them slightly out of money... but holding for now.
Screenshot with positions snapshot attached... just to save me typing... with profit and loss in pips

No new setups today.

Not much change today vs. yesterday.

GBPUSD moved back to a profitable territory. Let's see for how long.

USDJPY keeps looking good. I am very aware I will need to give back a lot of profits between the top and my exit level.

XAUUSD is out of money. May go up to stop loss or down to profits. Trend is down.

USOIL is in the money. which I obviously like.

USDNOK is in red. Trend is up, let's see. I have just noticed that I made a mistake on this trade. My rule tells to exit the trade manually at market if ADX(20) turns down from above 40. I have not noticed this happening a few days ago. Now, becasue the last bar is a bullish pinbar, I will keep the trade on, just trailed the stop a little bit. I am doing the market review quickly and almost mechanically these days, as I think by now I know the system very well... and yet a mistake like this. Well, the situation of ADX turn down exit happens rarely, which may be why I have not experienced it enough times to quickly see it. Anyway, a good learning.

Overall, ADX(55) is flat or declining almost everywhere, i.e. no strong trend. Almost all the markets I look at. And there are ~30 of them.
In the few markets where ADX(55) is raising (indicating a strong longer term trend), I do have positions (Oil, Gold, Yen), except USDNOK where I missed the moment ADX turned down.

OK, that's it for today.

I would have forgotten, let's check the ultimate truth of my performance... asking my fx book... ta da... minus 1.5%, unfortunately, but that's the reality I face with no problem. On a positive side, there is an uptick on the equity curve. And I am executing my strategy with discipline and learning and gaining experience.

GBPUSD looking good.

USDJPY looking good. ADX(20) is above 40, so when it turns down, I will be getting out, if I do not forget ;-)

XAUUSD has not decided where to go yet. It is creating a triangle. if it breaks down, I am already short. If it breaks up, it will meet my stop loss.

USOIL feels good to be short.

USDNOK undecided, too. Somewhat like XAU. No surprise and both are partly driven by U.S. dollar strength. In fact all my trades are long U.S. dollar short something. In line with the trend, that's how it should be.

Somehow in spite of those nicely profitable GBPUSD, USOIL, and USDJPY trades, my fx book does not seem to show any signs of recovery.

It may be that I need to catch some really big winner, just like the hypothretical USDRUB trade that I showed a few days ago, to cover for all the small losses.
Or something else... there can be a lot of different root causes why I am not profitable with this strategy at this time, anyway, I stick to my plan.

XAUUSD stopped out on Friday, USDNOK slightly out of money, GBPUSD, USOIL and USDJPY hold and profitable.

GBPCAD beautiful breakout... not traded becasue it was just 44 days low, not a 55 days low.
Probably, because the consolidation was so perfect and so long, I should have traded it anyway, i.e. placed a sell stop below Nov 13th, 2014 low. On the other hand, I followed the rules. Makes me wonder to what extent a trader should stick to the rules of the strategy almost mechanically vs. be more flexible. Anyway.

Performance summary
Balance -2% (closed trades)
Equity -0.7% (including open positions)

Two and a half months passed, two more weeks to go, two percent loss to show for.

What can I say? The screenshot from my fx book says it all. We got a perfect downtrend there, unfortunately.

On the other hand, the recent downmove has been just 4 days... this is nothing, I mean not a significant period. At the same time, is has been 53 trades already and ~50 working days... so by this time I would expect the edge to show up... although some sources say that at least 100 trades is needed, and of course good trades only.

That's it for today and for this week.

One more thing I noticed -

U.S. dollar index printed on Friday:
- a bearish pinbar
- a false break of a double inside bar
- false break of the 55-days channel high, after a channel line was flat for 5 days

This offers a Ride the Rejection Rule setup accoriding to my strategy.
This indicates some probability of the dollar index to go down next week, perhaps to a level of its previous high from October 3rd.

This is bad for my long USD positions, unfortunately.

I will not trade dollar index becasue of the contract size at my broker is too large for my risk management parameters.
But it would be a good trade, also as a kind of a hedge for my long USD trend following positions.

Anyway, let's see how this plays out.

GBPUSD, USDJPY and OIL hold & profitable.
On USDJPY and OIL the ADX(22) is already above 40, which means that, once it turns down, I will exit as per the rules... which mean the next correction... which means likely the profits will not be huge, unfortunately, as I will need to give back some of paper profits before it turns down, to let the profits run for now.

USDNOK is out of money, almost stopped out today, but holds for now.

(new) trade AUDNZD sell stop, channel breakout setup. ADX55 is up. Sell stop below the channel line.

U.S. dollar did not go down in spite of Friday's RRR setup which I mentioned.
I am glad I did not trade it ;-)

No strong trend on most pairs, i.e. ADX55 flat or declining.

Today there is no change vs. yesterday.
The same positions are on, no new trades, USDNOK is almost at stop loss, OIL, GBPUSD and USDJPY have some gains.

That's it for today then.

My USOIL trade was again closed by the broker, because of contract expiration. I really do not like it. To avoid impact I should re-enter at market at the moment they close it, but I happen to have a job. Anyway, at least is was profitable. I do not feel like re-entering.

USDJPY holds and is nicely profitable. I moved the stop below last low.

GBPUSD holds and is somewhat profitable.

USDNOK holds and is in a losing territory, went up a bit today.

Only good thing about a closed OIL trade is an uptick on a balance curve on my fx book. Still in read but moved from 2% loss to a 1% loss.
Which is nice. And equity is right now at exactly 0.01$ profit. I could close all my positions right now and call it a victory of a profitable period ;-) (yeah, right, of 0.01%, that wasn't a plan)

OK, that's it for today.

It looks almost certain that the 3 months period that will end on Nov 30th, will not be profitable. Or barely if I am lucky.

Key question is... shall I proceed with trading this system (trusting it has an edge and my ability to trade it will turn it into seriously profitable over a larger sample of trades) or I should drop it (as after 3 months and 54 trades I was unable to make money following this strategy).

Thoughts anyone? Thanks! (anyway I will certainly stick to my disciplined comittment and persistently trade it until end November, as planned, as shared in post #1).

Before you make the decision, may I know what is the time period for your backtesting and how profitable was it? This could help boost confidence if you proceed to trade the CB strategy. Also, IMO, I think 3 months is short.

Yes, this is a right question to ask.

I backtested it over a period of 1 year, from July 2013 to August 2014 period, and started trading it live on September 1st, 2014.

I backtested it on EURUSD, GBPUSD, AUDUSD, USDJPY and USDCAD.
I did this manually, not as an automated program, so, as you can imagie it has been a lot of work.

It was profitable on all pairs except EURUSD where it lost 60 pips over 1 year.
On other pairs the profits were between 80 and 230 pips per pair.

But you know what... now I looked at my backtest results trade-by-trade and I realized that for all pairs in the backtest it had a 3-months losing periods!

Which makes me think now that maybe a losing period of 3 months is something normal and I should just "trust the process" and continue trading it.

On the other hand, it was 3-months long loing periods on a single pair. I was expecting that, on a wide portfolio of markets, which I am trading live, I would not experience that. However, many pairs are correlated so it may be that adding markets is not such a big help.

Thanks again for your question... it made me think & realize this thing... I still need to think more deeply what it means for my further decision.

One thing that concerns me before I accept a theory that 3-months losing period is normal is that the market conditions seems to have been favorable for this trading strategy. And yet I have 3 months with a losing / flat result (still one more week).

Will see. Thanks.

Today no new trades, not much change to existing positions, they are the same as a few posts above.

AUDUSD broke down the 55 days low, and closed below, but the ADX55 is still declining, so I have to wait.

(new) AUDNZD order got filled.

Missed a nearly perfect breakout on AUDCAD, again not my mistake but a result of the fact that ADX55 was declinig and I follow the system rules. And it is still declining so I am not entering now.

(new trade) GBPCAD sell stop, CB setup.

(new trade) COPPER sell stop, CB setup.

USDNOK, USDJPY, GBPUSD are on and in the money.

There is a setup on bund but the market is closed and there is a setup on Oil, but I will not trade it as my broker's CFDs expire monthly, and being taken out of the trades or needing to re-enter at a specific time, is a hassle I want to avoid.

That's it. The last 3 days of the 3 months period are ahead. I was not even sure if I should be opening new trades, but I stick to the system, so I did.

Not much change to existing trades, but there is a new

(new) USDMXN entry, CB setup.

(new) AUDUSD entry, RRR setup, entered at market. The same setup is available at AUDCHF, but I am taking it against USD. DXY kind of stalled.

There is a long AUDJPY nice price action setup, with fibo and BRN confluence, but this is not this strategy so not taking it here.

DAX has a setup but my broker closes trading on its CFDs at this hour, unfortunately.

AUDNZD trade looks nice, so do a few others, but not much change vs. last time.
I will post once closed, one way or another.

obviously now, seeing a large drop, I wish I did re-enter my OIL short after it was closed by my broker as the CFD expired.
my decision not to re-enter was a trading mistake.
it would be a large winner by now, which would possibly make a difference between profitable or losing 3 quarter.

anyway, learning is great ;-)

another positive, NOK currency gets weaker as OIL gets cheaper and I am long USDNOK :-)