Any reader- note No considerations for commissions, slippage ete- Just comparing what making a single addition or modification can add or detract from a starting system.
Chart 1 showed a great return of buy and hold with absolutely no stops- and a great present success to the present. Up some 7x
Chart 2 introduces a rigid stop-loss following price- and a rule for an entry after a confirming bar
had a net 83% gain - feeble to chart 1's impressive return. Chart 2 is a cautious approach.
In this next chart, I have 2 modifications-
First, I start with an entry on the 1st day of trading with $1,000 at the open, and set a stop directly under the low of that bar (granted- there is no prior history) . This trade starts off by being stopped out for a loss of account value- and then there is a multi bar decline- a period of "downtrend" - lower highs & lower lows. Following a multi bar decline, with progressively lower closes, the entry requires a reversal bar to close higher than the declining bar's open or even perhaps it's high. In the chart- the Oct 11 bullish engulfing candle exceeds both the open and the high of the prior bar- The entry only then occurs after this bullish bar has completed- (explore this further down the road)
Once this bar occurs- an entry to buy the open with a stop below of the confirming bar occurs-.
(worked in this 1 chart- will be expanded later )
The stop-loss criteria remains tight under the low of the prior closed bar, as was done in the prior chart 2.
The change is the entry criteria now uses a buy stop to enter just above the high of the bar where the stop was executed, and not waiting for a confirmation bar-
This single change had a significant impact on the results- compared to the method illustrated in Chart 2.
chart 3 has a 3x return of the starting account due to the 1 adjustment in the approach.
One could easily argue the point that this worked so significantly because the trend stayed up and the consolidations were relatively smooth and sideways.
Trend direction is indeed a significant factor- IMO in all trades-
As one views this chart in hindsight- it occurs that some of the stops were simply caught on price intrabar volatility- and, in the majority of the stops that were executed by the active bar, the active bar may have penetrated the stop level activating it, but did not close below the stop level in most instances.
The next chart may explore that as the next step to consider- Normal price volatility goes both up and down. If the prior bar is the only consideration for a stop level- one gets taken out on moderate volatility even though the trend remains intact. There are additional variables- that can be explored to see what works and what one can be comfortable with. Use an ATR multiple for stops? -use the entry bar for a stop until a closing bar indicates one needs to be concerned? Use a smoothing mechanism- to evaluate price action (a couple of moving averages for perspective?) use a technical indicator- psar? Use price action alone or in conjunction with other ways to improve results? Once an approach looks promising-
how does one define and backtest? Some areas i will explore going forward- hope to learn a bit and share it here, as time allows. This process of analyzing a chart in greater depth is a good exercise for me personally regarding my own trading.
Chart -cure-Monthly3
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