To try something different, I decided to write a system with an entry based on a very simple chart pattern and an exit based on a profit target rather than on the reversal of an indicator.
The chart pattern for a long setup begins with at least three consecutive up closes. This condition should tell us that the short-term trend is up. However, three consecutive up closes may also suggest that the market may be a bit overextended and due for a correction. Therefore, after three consecutive up closes, we’ll wait for a down close. Our idea is that the down close should alleviate the market’s short-term overbought condition and complete the setup.
Therefore, our buy setup is the three up close/one down close pattern and we’ll place a long entry when the price moves above the open of the bar that follows our setup. We’ll enter long on the bar after the setup at the open plus 25% of the 8-bar average true range.
Once we initiate a new long position, we’ll place our protective stop at the 10-bar low. Then, as the market trades higher, we’ll trail a % risk trailing stop.
Our exit for the Consecutive Close System is unusual. We’ll exit at the open of the next bar once two bars have closed above the high of the three up close/one down close pattern. In other words, after we buy, we’ll wait for the market to post two opens above the high of the setup pattern, and we’ll exit on the next open. Our thinking behind this exit strategy is that since the setup and entry are based on short-term price action, the exit should be as well.
Let’s take a look at the short side of our system. The chart pattern for a short setup begins with at least three consecutive down closes. This condition indicates that the short-term trend is down. However, three consecutive down closes may also indicate that the market is susceptible to a correction. Therefore, after three consecutive down closes, we’ll wait for an up close. The up close should cancel the market’s short-term oversold condition.
Therefore, our sell setup is the three down close/one up close pattern and we’ll place a short entry when the price moves below the open of the bar that follows the setup. We’ll enter the market short on the bar after the setup at the open minus 25% of the 8-bar average true range.
After we take a short position, we’ll set our protective stop at the 10-bar high. Then, as the market trades lower, we’ll trail a % risk trailing stop. We’ll exit on the open after the second consecutive close below the low of the setup pattern.
Defining your Trading Rules
In this system, we defined both long entries and short entries as well as exit orders. The entries and exits are described next:
Long Entries
We look for three up closes and a subsequent down close. This is our buy setup. We place a buy stop order on the bar after the setup at the open plus 25% of the 8-bar average true range.
Short Entries
a) We look for three consecutive down closes and a subsequent up close. This is our sell setup. We place a sell stop order on the bar after the setup at the open minus 25% of the 8-bar average true range.
Exit Orders
Once we initiate a position, we’ll place our protective stop at the 10-bar low and 10-bar high for long and short positions, respectively.
After we buy, we’ll wait for the market to post two opens above the high of the setup pattern, and we’ll exit on the subsequent open.
After we take a short position, we’ll wait for the market to post two closes below the low of the setup pattern, and we’ll exit on the subsequent open.
Designing & Formatting
This section presents the EasyLanguage instructions and formatting for the system, with the EasyLanguage instructions broken down and explained line by line.
(you can download the whole system for free by joining my Telegram channel)
Inputs
Following is the list of all the inputs we used in this system:
In addition to these inputs, we define the following variables:
- Vars: HH(0), LL(0), LCount(0), SCount(0);
Long Entries
We used the Most Recent Occurrence (MRO) function is used to determine if there were any down closes in the last 3 bars, not including the current bar. The function returns the number of
the bar on which the down close most recently occurred. If no down closes are found, the MRO function returns a -1.
Therefore, if a down close has not occurred in the last 3 bars, and the current close is greater than the close of the previous bar, we place a buy stop order at the open of the next bar plus a percentage 2% of the 8-bar average of the true range. Also, we set the variable HH to the highest high of the last 4 bars. We’ll use the value in HH in our exit criteria.
Short Entries
Like with the long entries, we again use the MRO function to determine if there have been any up closes in the last 4 bars. If an up close has not occurred and the current close is less than the close of the previous bar, we place a sell stop at the open of the next bar minus 25% of the 8- bar average of the true range. Also, the lowest low of the last 4 bars is stored in the variable LL. We’ll use the value in LL in our exit criteria.
Long & Short Exits
- If the current market position is short or flat, the variable LCount is re-set to 0.
- If the current market position is long or flat, the variable SCount is re-set to 0.
If the current market position is long and the next bar’s open is greater than the value stored in HH, then the LCount variable is accumulated by one. If these conditions exist and LCount holds a value of 2, meaning that the open has been higher than the value in HH for two bars now, we exit our long position at the open of the next bar.
If the current market position is short and the next bar’s close is less than the value stored in LL, then the SCount variable is accumulated by one. If these conditions exist and SCount holds a value of 2, meaning that the close has been less than the value in LL for two bars now, we exit our short position at the open of the next bar.
Finally, we will use the highest high and lowest low of the last 10 bars as a trailing stop.
(you can download the whole system for free by joining my Telegram channel)
Testing & Improving
Now let’s try this strategy on different underlyings, I remind you that these are partial results and do not give us an effective picture of the robustness of the strategy, but we can start from here to understand where it works best and in which timeframes.
Wheat
Nasdaq
Crude Oil
Gold
Bitcoin
Euro
Conclusions
This strategy promises very well from these tests, it seems to perform much better on large TMs even if with few trades. There are many tests to do and that you can do yourself, let me know!
(you can download the whole system for free by joining my Telegram channel)