Weekly Breakout Hedge EA

Remember the series of robots we were testing a while ago? Among them were a few based on weekly breakouts. They were extremely promising, sometimes giving huge returns - although only when the market felt co-operative, which lately hasn't been often. 

One of these robots is still running, although it has lost $1,500 from a $5,000 demo account quite a while ago and the balance has barely moved since.

Frustrated with the seemingly constant whip-lashing around the weekly open line, I created a hedge robot. If the price breaks out and keeps travelling in one direction for the entire week - great. If it whipsaws, then it hedges the move with additional buy or sell orders and attempts to close the orders when they reach at least $1 in profit. 

It's been running for a month and it's doing fairly well. 

$166 profit over a month isn't much, but this robot is running very conservative settings. The profit was generated fairly safely. 

With a $50,000 account, that would equate to a relatively safe $1,660 monthly profit (bar something extremely bizarre happening in the market, or more likely, problems with the broker). It's perhaps not a liveable income for most, but 3.30% a month it is a very decent rate of return.

With hedging robots, I've learned the hard way not to over leverage, because doing so gets you into trouble very quickly.

I have several other hedging robot designs currently being tested, and they're doing OK, but even with small lot sizes will go into uncomfortably high levels of draw down sometimes, and they can stay that way for a few weeks, tying up capital, until the market finally moves and allows additional orders in one direction or another and the robot can finally close in profit.

This particular robot seems to spend a lot less time with open orders in draw down than the others. I'm thinking because weekly open line is significant and thus makes a better starting point for placing orders than some of the other designs. 

Code for this robot is not currently available. However if you look at the chart, you should be able to easily figure out how the robot works. 

EURUSD - 2012-09-25

EURUSD broke through a step bullish trend line last week after forming a double top (see 4 hour chart below), but its struggling to become bearish. Other currency pairs are behaving similarly. Apparently there is yet more news from .... Europe .... due out this week, which could explain the lack-luster behaviour. Still, EURUSD is making lower lows.

EURUSD Daily Chart 

EURUSD 4 hour chart

Lately I've been looking at the tick volumes. I haven't yet decided if they provide any useful information or not. The volumes on the 4 hour charts show a slow down at the end of the US session, but the daily chart includes volumes over the entire trading day, so may be more useful. The daily chart above shows volumes slowing. The last few candles have long wicks - suggesting a lot of uncertainty. Considering we have both bearish and bullish candles, and that they all have wicks, it's suggesting a lot of uncertainty. Looking at other currency pairs (not shown) reveals a similar story. 

Not much we can do except hold tight and see if the orange trend line on the 4 hour chart is respected. In the meantime, we could risk a small short order below 1.2870.

Tops and Bottoms

They say "don't pick tops and bottoms" and "follow the trend" and all that other good stuff. It's good advice, but it's still fun to try and determine when a trend might end. If you get it right, you'll be in on the very beginning of a new trend! Of course if you get it wrong, then all the people with orders following the trend will thank you very much for your money. 

First of all, are we in a trend? It depends what time frame you look at. If you look at this chart below, then you could safely say "yes". Price is well above the 100 period high & low moving averages.

4 hour EURUSD chart

But look at that trend - so step! Surely it's over extended and due to come down, right? And you know what they say - the bigger they are, the harder they fall. Or something like that. 

So lets look for evidence that the trend is about to end, so we can possibly get a nice trade set up. 

First we have the 4 hour EURUSD chart, same as above, but this time with a yellow box. See the long wick of the candle in the yellow box? And the following candles have not yet penetrated this high. Also, if you look at previous candles, none have a wick quite so long. This could mean buying is exhausted for the time being. However it could also mean that traders booked their profits on Friday and went home early, so let's see what other evidence we have. 

4 hour EURUSD chart

Dropping down to the 1 hour time frame, we can get a little better idea of what might be happening. We can now draw a bearish trend line, and wait to see it price will touch it a third time. Also, note the RSI indicator is also showing lack of bullish momentum. If we were feeling brave, we could possibly place a trade below this recent price action at 1.3100 and hope it drops to the bullish trend line. However the trend is strong, so it's risky. 

1 hour EURUSD chart

For a bit of confirmation on what might be happening, let's look at the AUDUSD, which is often (but not always) correlated with EURUSD. Here we can see price hit a major resistance level, made two big wicks, and how now dropped to the bullish trend line. How exciting! 

4 hour AUDUSD chart

Below is the daily USDCAD chart. Usually (but not always) this pair will be inversely correlated to EURUSD and often also AUDUSD, depending if resources are rallying or if markets in general are feeling frisky. We can see a nice long wick on the daily candle here, and price has started moving back up. Things are moving uniformly together across the pairs, at least. 

Daily USDCAD chart

Lastly, here's a cherry picked 15 minute EURUSD chart with Ichimoku Kinko Hyo plotted. Price has broken through the cloud to the downside. Sell! Right? Maybe. Look at the size of the candles though - not very big. It shows there isn't much momentum going on yet.

15 minute EURUSD chart

So, if we felt adventerous we could place a small bearish EURUSD trade with a stoploss above Fridays high. But personally, I'd wait to see what these other pairs are doing, and wait for momentum to pick up. If AUDUSD broke through it's bullish trend line, I'd be more willing to place my EURUSD bearish trade. Otherwise I'd be looking to go long if price either moved above Fridays high or made it all the way back down to it's bullish trend line. 

If we take fundamentals into account as well, selling EURUSD at this time probably isn't recommended, except perhaps on the smaller time frames. 

Breakout Trading

When I started this website, I was testing a breakout trading strategy based on a Forex Factory forum, called "Stairstep Breakouts".

Perhaps partly because I did have some success with it to begin with, and partly because of the authors confidence, it was the only system I used for a while. Most of the robots I developed became breakout based, and sometimes they even seemed to work quite well.

It was the first system I ever seriously tried to trade manually. Unfortunately, it hasn't worked out so well for me. It could be because I lacked the patience to sit at the computer for hours on end waiting for breakouts, or because I kept going to bed with live trades active and not managing them properly. Probably the fault is completely mine.

I tried various methods of trading it. I would set alerts to go to my phone. I would try trading every breakout no matter what. I tried trading only on the 4 hour time frame. All without much success.

The biggest problem was that I would often get whipsawed. The next was that the successful trades weren't returning enough profit to counter this problem, and my account balances (mostly all demo) dwindled.

Week after week of looking at charts trying to catch these breakouts, I noticed several things. First, whipsaws occurred very frequently when the market wasn't sure what it was doing (consolidating). Second, in strong trends, I was closing trades way too early.

This lead me to try weekly breakouts, inside bars and swing trading, which worked very well at first, until I had troubles again with consolidating markets.

Then I investigated Nanningbob's trend and pivot based system, which worked even better.

Currently I'm manually demo trading several systems based on the above, and have had a lot more success than I ever have with the breakout system.

However, I credit this particular breakout system for making me watch prices more closely and paying more attention to what's happening, which in turn lead me to the systems I trade now. The time spent studying this system, even though it hasn't worked for me, has been extremely valuable.

Multi pair analysis - EURUSD, AUDUSD, EURAUD, 2012-09-13

Most pairs went on a rally after last news from last Thursday and Friday, and have been charging hard ever since. Tonight there is yet more news from the US, which will either push everything higher, or reverse them, at least for a bit. 

There's some signs of the current trend stalling, which is perhaps isn't as noticeable on EURUSD as it is on some other pairs, such as the often correlated AUDUSD. It's also interesting to watch EURAUD. 

Below we see the EURUSD chart with it's current trend in orange. But the yellow line represents yesterdays high, and price hasn't quite pushed through it yet. 

EURUSD 1 hour chart

Here is the AUDUSD chart which has failed to reach yesterdays high and looks to be descending. If it breaks the yellow support line, I'd be dubious if EURUSD rally will continue tonight. If it does, there may be erratic price action first. 

AUDUSD 1 hour chart

Finally here is the EURUAD chart. We can clearly see price has failed to go past the yellow resistance line twice already and it's preparing for another test. If it fails, it will suggest the EURO has no strength left, and we'd expect to see EURUSD fall. 

EURAUD 1 hour chart

There's several other clues, such as a strengthening USDCAD,  RSI divergence on the 1 hour charts across several pairs, and dubious volume readings (not shown). All of this information is showing that traders are starting to doubt the US announcing QE3 tonight. We'll see how it plays out. 

I currently have a small short AUDUSD trade and long USDCAD trade on demo accounts active. However I also have an ongoing long EURUSD trade from last week which is safely in profit and has a trailing stop set to lock in profit should it drop. 

-- 

Update:

Well, a bit of volatility, but EURUSD & AUDUSD resumed their uptrend. The nasty spike would have made trading difficult. EURAUD bounced off resistance is trading lower in a continuing consolidation pattern, suggesting EURO and AUD are about even right now, whereas USD is losing value. 

EURUSD 1 hour chart

Robot Results to 2012-08-09

Here's this weeks results from the most promising of our robots currently being tested, and one that has been reviewed regularly on this site for a few months now - the Inside Bar robot.

A pretty crappy week, with this robot being down $135. Last week wasn't too pretty either. 

Then, boom! This happened. 

This is how you want things to go!

Looking at the market, many pairs haven't moved much the last few weeks. Everyone was waiting for - wait for it - news from Europe. Combined with August holidays or something, which is seen as a low volume month.

Then when prices finally do start moving, they move rapidly, and this robot caught a nice AUDUSD move.

This move was seen across many currency pairs, and many of my other robots - which had been sliced and diced the last two weeks - caught this move as well and ended up either in profit or at least recovering a lot of their losses.

This reinforces the idea that "systems" don't matter all that much. Keeping out of choppy price action and setting appropriate stop loss and take profit levels can make much more difference.

Big price moves will happen eventually. Price will go up, or it will go down. Many systems will get you into trades. But keeping out of the chop the rest of the time is really more of a skill than catching the big moves.

Think of it as being on a sailing boat. There's no problem when the wind is blowing strongly and you're way out in the ocean. It's when the wind isn't blowing and you're close to the coast trying to avoid the rocks that will test your skills (and patience).

I have 3 other Inside Bar systems I'm trying at the moment, too. Two automated, and one manual. The manual system was doing extremely well, but also suffered this week due to chop. In retrospect, I should just have stopped trading, but was trying to follow the rules of the system and take trades when they were available. It was pretty easy to see, however, that, for example, the USDCAD was flat, and the buy and sell stop levels offered by the inside bar where above/below past candle wicks, and any orders were likely to get stopped out. And they were.

The automated systems have been posting losses for the last few weeks. I'm not sure why. They missed several good trades for some reason. Also the spread can make a big difference. Currently these systems are trading on 8 currency pairs, and the spreads can be quite large. Reducing the pairs traded to just a few low spread ones, figuring out how to filter trades in a flat market, and also why they are missing trades are the things to fix in these systems.