{quote} Michael, My eyes have recently been opened in this direction also. This is a great thread IMHO. I try to find 2-3 reasons why one nation's currency is fundamentally strong, and 2-3 reasons why another's is fundamentally weak. These must ideally be reasons that central banks and institutional traders are primarily focused on. Then, to maximize the probabilities, pair the strongest currencies against the weakest. For me, the tricky part is deciding whether to enter immediately at current market price, or to wait for a pullback against my chosen...
I hope it will add something to the discussion about whether to wait for a pullback to fade price, whether to enter at market, or whether to perhaps use breakouts.
The strategy is very rigid in it's application, with risk/reward set at 1:2 always. It fades objective support and resistance levels, using previous daily highs and lows which naturally forms support and resistance levels. Stops losses and targets are multiples of the daily ATR. There is no trend filter, which is why this is relevant to the discussion. The data present is from Jan 2012 - June 2014.
When I was initially compiling this data I was testing fading only, however after several hundred trades it became obvious that fading price didn't have an edge under the parameters tested. So instead I tested breakouts, and as you can see there is a theoretical edge, and if this data was extended to current day price, the edge for breakouts is likely to improve as the markets have been very 'trendy' lately.
All in all the data comes out strongly against fading price and I have found this to be true in all non trend filtered methods I have tested. I am sure Hanover, you have tested more than I have. By the very nature of the types of orders, fading is a counter trend entry, whereas breakouts are a trend following entry.
Breakouts have been confirmed to work, Richard Dennis, Ed Seykota, Bruce Kovner, Michael Marcus... the market wizards all used breakout methods.
Here is some rational against fading price:
''Breakouts keep you moving with price, rather than fighting against it, it allows price to confirm your fundamental bias rather than hoping it will be confirmed, it keeps you out of the market when there are no trading opportunities as opposed to taking a position when price moves against you. Consider fading price with leverage as the alternative to breakouts, if you fundamental bias is that price should move higher, yet price moves lower, then every tick lower represents a better buying opportunity. However there is also an innate contradiction in how price is reacting to your bias… if your fundamental bias is for price to move higher, then why is price moving lower? For investing purposes short term price fluctuations against your position doesn’t matter, but when trading with leverage, small swings can bust an account.''
Now here come the caveats:
(Note, I don't trade this method for reasons outlined below. But I do live by the rules that the data demonstrate)
1. These are theoretical gains, on intraday time frames spreads can widen around news releases which can cause large amounts of slippage. Are breakouts still profitable even factoring in slippage, possibly, even probably if you have slippage control, but you have to be prepared for the drawdown.
2. There is less of an edge per trade intraday than on higher time frames. Small stops using only fractions of intraday ATR are highly susceptible to market noise. Higher time frames are better in many respects because it gives price a chance to follow trend.
3. I am 100% sure that trend based methods of fading have an edge. The ultimate edge is in the trend, however, fading price by itself does not have an edge, whereas breakouts however do.
My suggestion therefore is that if you are trend trading with a fundamental bias, then take only breakouts. Breakouts at meaningful highs and lows confirms or denies your fundamental bias, price can help you tell you if you got it right or wrong, if the market is ready to move or not. It might hurt to see those better prices which you would have faded turn into decent profit, but like it or not, fading is a contradiction to your bias, and over the long run breakouts are better at keeping your alive.
