Candle Slope entry method

Candle Slope entry method

Postby snailbeard » Tue Dec 02, 2014 2:49 pm

Now that ZB4 is chugging away with a modest number of trades per month on several pairs, it is time to look at a way to squeeze some pips out of pairs like EURUSD, which are not currently moving enough for ZB4 to bother trading them.

The title is not very informative since the essence of the entry method is to enter after a H1 high or low. The faster candle pattern directions need to be in the same direction as the slower H1 candle direction.

This is one interpretation of an abstract idea. The abstract idea is that there is a faster price move (more pips in fewer minutes) than in the previous few hours, but the pips for both time periods have moved in the same direction as the faster move. There can be quite a few ways to code the basic idea. However one of the simplest is to ignore all the other indicators and just concentrate on the candle patterns and price change.

Below is a concrete example of when this works:

idea-H1-M15-candle-slope-entry-method-2014-12-01.png


In this example there is a longer term downward bias in favour of a downward move and there is a recent significant pullback against the main direction. The pull-back has an upward slope of about 4 pips per bar whereas the falling slope is stronger with falling gradient of 6 pips per bar. This results in a preference to trade down, although if the upward slope strength is high enough the counter trades could be viable as well.

In order for this method to work, entries need to be near enough to the H1 top or bottom pivot so that the entry is not too late into the swing which could result in a reverse to the stop-loss.

The second image shows a close-up of the M15 candle pattern where price moves fast enough to meet the downward requirements:

idea-part2-close-up-2014-12-01.png


This simple method should produce lots of signals, although a high proportion are likely to be losing trades.
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Candle Slope entry method

Postby snailbeard » Tue Dec 02, 2014 3:35 pm

The basic method requires only a few lines of code. This first stage is just to find out the frequency of signals and the proportion of wins to fails. If there are too few signals or too high a proportion of losses to wins then no point in taking the method any further. I am looking for about two trades per week per pair and a raw win rate of about 50%.

The first back test meets the frequency requirement but the loss ratio is disappointing:

eurusd-raw-candle-slope-entries-2014-12-02.png


The report gives more details about loss/win ratio:

eurusd-report-for-raw-candle-slope-2014-12-02.png


It seems that only 40% of entries are successful. This means we need to squash about two-thirds of the losing trades to make a meaningful profit. Alternatively if half the losing trades were converted to winning trades that would also be acceptable.

The next test finds out if losing trades can be profitable if reversed. So the signals are simply reversed and the test repeated. Many trading methods are not meaningfully reversible but in this case the results are more interesting:

eurusd-reversed-candle-slope-method-2014-12-02.png


This time we actually see some significant although temporary gains.
And this time the report shows a higher proportion of wins:

eurusd-report-reversed-signal-for-candle-slope-2014-12-02.png


So rather than trying to reduce losing entries just by filtering, we actually want to find reasons why a signal should be reversed.
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