So there are at least 2 variables we need, in order to create this algo. We need a definition of trend. In order to remain consistent with our Breakout Algo, we are going to use the same trend filter:. Once again, to remain faithful to our principles of robustness, and building on a classic trend-trade risk management rule detailed in a previous article, our objective is simple:.

The Equity Curve performed by our non-optimized Pullback strategy programmed by Craig Consulting on EurUsd. As usual, we do not simply want to marvel at the results a system can obtain on one currency pair and in one single version.

We need to check parameter stability and currency pair performance. And that is exactly what we proceeded to do next. The Profit Factor chart illustrates the relative performance stability of the Pullback system, across various permutations and various currency pairs.

Here are the actual statistics of the original method. Something that the Breakout system and Pullback system have in common, which may not yet be evident, is that both systems require the market to be in a trend , in order for the system to work. We have already discussed the overriding importance of the market state trend or range compared to any entry or exit tactics of a system but it is always worth restating. The better you become at filtering a trending market state, the better your results will be, whether you trade breakouts, pullbacks or both of them.

It is very true that some currency pairs react differently than others. It is the reason why certain strategies work so well on the EurUsd, for example, and not on UsdCad. So without optimizing strategies, or adding extra filters, a solid approach might very well be to exploit the inherent characteristics some currency pairs seem to have always possessed and still do, to this day.

This way, trend systems can be applied to currency pairs that demonstrate strong trends, whereas range systems can be applied to currency pairs that demonstrate more of a range bound behaviour.

In the chart above we once again highlight the profit factor of a breakout system that attempts to replicate the exact rules of the Turtle Traders. Once again we find that when applying systematic rules:. Why is this? Is there any explanation for this recurring behaviour? Of course, many people have asked this question before us, and some analysts at Citigroup attempted to offer an answer many years ago.

Here are the main conclusions:. And that is exactly what we see with our models as well — and the behavioural traits continue to this day. So for example, whether you use our own Channel Breakout System, Pullback System or Turtle System, or any other system for that matter, here are general practices to help you use them wisely:.

In this article, we have demonstrated how Systematic Channel Breakouts and Systematic Pullbacks are still, to this day, fully functional strategies that can allow for profitable trading, whilst remaining light on the number of inputs necessary.

Understand your edge, filter your currency pairs and rank them according to the background criteria that can bring fourth your edge, and execute with confidence. And as always, if you get stuck somewhere along the way, get in touch and hopefully, with the experience of our members here at FXRenew, we will be able to guide you towards a more consistent performance.

Justin Paolini is a Forex trader and co-owner at www. com , a provider of Forex signals from ex-bank and hedge fund traders get a free trial , or get FREE access to the Advanced Forex Course for Smart Traders.

If you like his writing you can subscribe to the newsletter for free. Systematic Breakouts and Pullbacks in Forex Trading: Two Strategies That Work by Justin Paolini. Too often, traders fall into a cycle that goes something like this: Study a method for an inordinate amount of time Perfect it and test it Take it live Achieve consistent results for some period of time Look for ways of pushing the limits of the method using it on multiple time frames, looking for trades instead of waiting for the most evident, etc.

Examples of Pullback Trades in an uptrend The premise is that each system is meant to capture a particular aspect of market behaviour. Successful system traders know exactly what their edge is, and have programmed that edge into the system, so that: There are no forced trades, only top quality trades The background conditions are most favourable So read on, and see our proprietary Channel Breakout and Pullback Expert Advisors programmed by our resident programmer Craig and understand the principles behind their success.

Example of Channel Breakout Trade in a downtrend Breakout vs. Pullback: is there a winner? We have already covered a variant of breakout trades extensively in a previous article so here we will just summarize the main points that allow a channel breakout system to be successful: Play breakouts from a given range which is determined by the length of channel.

The length of the range is not as important as you think. Diversification: seek to incorporate multiple asset classes into your portfolio. Position sizing: seek to keep each position small and sized based on volatility, so the portfolio is never overly exposed to one trade. Time horizon: which trends are you seeking to capture? Perhaps combining multiple time-frames can help to smooth the equity curve. Capitalization: evidently, managing a professional diversified trend following strategy requires a decent sized trading account.

The consistency of the results is what matters the most. That in many ways forms the basis of the core strategy and how your portfolio progresses. So back testing a strategy is crucial before you put in real money. This works even for these systematic trading strategies. So, the price pattern gets a clear prominence in this case. The price pattern can convey just about any trend. It can be as simple as the closing high or the intra-day highs.

It is also capable of indicating complex elements like reversal patterns or continuations. The price pattern in trading is often the first acknowledgment of any potential pattern.

It identifies the why, how and when of price movements. Often the price pattern becomes the instrument of change in sentiment. For example, if there is a head and shoulder price pattern, it signals two smaller patterns around a big one. Double tops refer to short-term swings and failed attempt to breach earlier highs. Double bottoms too refer to a short-term swing but towards the lower levels. As a result, here the second swing often refers to a failed attempt to break below earlier lows.

So, in many ways, they become the primary indicator of not just a specific trend but overall sentiment too. In many ways that is where systematic trading strategies can trace their beginning and also the continuation.

When you look for the top systematic trading strategies, the moving averages crossover is one of the most popular ones. You already know how to determine the trend by plotting the key moving averages. You can already determine when a trend is likely to continue or end. Now supposing you add a few more moving averages and wait for the crossover. That is the moot point of your strategy. When the moving averages cross over one another, it signals a potential change in trend.

So this may be your opportunity for a better or more profitable entry point. Normally a crossover happens when a moving average for a shorter period moves above or below a moving average for a longer period. Of it crosses above, it is considered a bullish trend.

However crossing below is normally a bearish trend. There is a slightly more conservative take on it too. Instead, you go for middle-level ones like day average and wait for crossovers if any with even slower ones like day averages. Primarily this trading system is based on analyzing the time period of the two moving averages that are crossing over. This system also includes the moving average convergence divergence indicator. Even the triple moving average crossovers are part of this same systematic trading system.

In many ways, it takes into consideration the difference between two primary moving averages. That is how you can get a clearer idea of the points where the trend is set to close. As a result, it keeps the basic tenets of systematic trading in place and returns too.

Be it in terms of the mechanical nature of undertaking the trade or exercising control on risk. Forget about systematic trading, any type of technical trading is primarily based on the fundamentals of support and resistance. They form the backbone of all types of technical analysis. This is because they are a representation of the floor or ceiling for any type of stock or forex price.

The support refers to the lower end of the price band while the resistance is the higher end. The concept of trade here is based on the fact that any stock price will have difficulty in crossing either of the price bands. It may be breaching above a specific level or falling below a particular floor price. As a result, trade is normally limited between a certain range. But when the stock does break above a resistance level, it becomes the floor or the point of support.

Similarly, if the slump in so deep that the stock slips below the support zone, it creates the new resistance for the stock. There can be a variety of factors that determine the support and resistance zone. The primary trigger, in this case, can be anything from economic factors to stock-specific issues. Essentially these support and resistance zones become the foundation for identifying the trend.

They help create a trading system. As a result, they are the most important aspects of systematic trading strategies. They help in finalizing the broad trend and how the technicalities linked with it operate. Another interesting aspect of this trading strategy is the ease of creating an automated trading system. Once the resistance and support prices are established, you do not need anything else to create a trading system.

Profit booking and stop loss levels can be set up as per these. As a result, trading then goes on the auto-pilot mode. Whether you are looking at channel breakout or volatility breakout, they are both based on the concept of looking for a specific trend.

As the term, systematic trading strategies indicate, it is all about creating an order or looking for a system. The market is uncertain for sure, but prices, in general, follow a specific trend. The volatility breakout and the channel breakout are all price dependent. So the pricing becomes the primary basis for creating a trend. In the case of channel breakouts, a price channel is identified.

This basically takes into consideration the highest high and the lowest low. You get a trade signal if the market breaks below lowest low or above highest high. Now just the highest high and the lowest low may stretch over an indefinite period. But that cannot put a system in place. That is why these price channels consider specific time periods. Normally this channel is calculated over a day period. The systematic trading system takes these channel breakouts as their trend identifiers.

This is how a holistic trend comes into being and becomes an essential part of a system. Volatility breakout is similar to channel breakout in some aspects. But in this case, the trend is based on the volatility breakout. Therefore, the average true range of an entity helps determine the volatility.

Normally this ATR is an average of the range seen in multiple price bars. It is then added or subtracted from the current bar price. That is what gives the exact volatility breakout. The advantage in both these cases is that the price range under consideration is changeable. The time period depends on the duration that the trading system determines. So, this again works on identifying the pattern. So far we concentrated on price pattern and systematic trading systems created by identifying pricing trends.

But the prices are not just the single source of identifying long-standing patterns or systems in the market. There is another factor that works in tandem with the overall pricing. Yes, I am referring to the overall volume movement in the market. The volumes too form a crucial part of the market moving fundamentals and triggers for price movement.

Volume essentially refers to the total quantity of a stock or currency that is traded at a specific time. That is why you have intra-day volumes, closing volumes, total turnover, day volume and the like. Just like pricing, here the volume becomes the indicator of sentiment around the particular entity.

Often the volume becomes the instrument to validate a certain phenomenon in the market. It becomes the standard option to identify value pockets and general sentiment.

This is exactly why you will see blue-chips and popular midcap winners showcasing strong volume performance. Therefore, when you are talking of reliable systematic trading strategies, the volume becomes a crucial factor. It underlines the value elements all around. Now so far when we were discussing systematic trading strategies, we primarily dealt with technical indicators.

Given the nature of these mechanical strategies, technical indicators do play a key role in enabling hassle-free automation. After all, technical indicators are not emotion-driven, or they do not have any emotional bias.

It is a straightforward price movement that is taken into consideration. But that is not the only way to put a trading system in place. There are many other mathematic alternatives to this too. These are broadly bunched together as market forecasts. Mathematical formulas are often used to predict certain market trends in future. This is more of a qualitative analysis of the market sentiment. These are primarily meant to identify future possibilities and potential.

by Justin Paolini. In this article, we are going to illustrate the results of 2 complementary systems: a channel breakout system and a pullback system. One system buys highs and sells lows, while the other buys lows and sells highs. Illustrating results of fully-functional EAs as we are going to explore further along in this article, serves a very precise purpose: to tilt the odds in your favour. In more ways than one. It has happened to me. And It probably happened to you too.

As a solution, in this article , we will attempt to convey the correct way of looking not only at system trading, but about any method used. The premise is that each system is meant to capture a particular aspect of market behaviour.

No system is a passe partout. Successful system traders know exactly what their edge is, and have programmed that edge into the system, so that:.

So read on, and see our proprietary Channel Breakout and Pullback Expert Advisors programmed by our resident programmer Craig and understand the principles behind their success. If you focus on this, you will understand with a good degree of accuracy what the future odds of success can be. We have already covered a variant of breakout trades extensively in a previous article so here we will just summarize the main points that allow a channel breakout system to be successful:.

The point is that playing channel breakouts and looking for continuation is a simple strategy that works, with diversification, steadily over time.

Attempting to optimize the results only clouds the essence of the strategy. But what about Pullbacks? How did we build our systematic Pullback Strategy? To understand the method, we first need to define a pullback in a systematic way. Stated simply:. A pullback, on any time frame, starts when price moves in the opposite direction of the prevailing trend, and finishes when price starts moving in the direction of the prevailing trend again.

So there are at least 2 variables we need, in order to create this algo. We need a definition of trend. In order to remain consistent with our Breakout Algo, we are going to use the same trend filter:.

Once again, to remain faithful to our principles of robustness, and building on a classic trend-trade risk management rule detailed in a previous article, our objective is simple:.

The Equity Curve performed by our non-optimized Pullback strategy programmed by Craig Consulting on EurUsd. As usual, we do not simply want to marvel at the results a system can obtain on one currency pair and in one single version. We need to check parameter stability and currency pair performance. And that is exactly what we proceeded to do next.

The Profit Factor chart illustrates the relative performance stability of the Pullback system, across various permutations and various currency pairs. Here are the actual statistics of the original method. Something that the Breakout system and Pullback system have in common, which may not yet be evident, is that both systems require the market to be in a trend , in order for the system to work. We have already discussed the overriding importance of the market state trend or range compared to any entry or exit tactics of a system but it is always worth restating.

The better you become at filtering a trending market state, the better your results will be, whether you trade breakouts, pullbacks or both of them. It is very true that some currency pairs react differently than others. It is the reason why certain strategies work so well on the EurUsd, for example, and not on UsdCad. So without optimizing strategies, or adding extra filters, a solid approach might very well be to exploit the inherent characteristics some currency pairs seem to have always possessed and still do, to this day.

This way, trend systems can be applied to currency pairs that demonstrate strong trends, whereas range systems can be applied to currency pairs that demonstrate more of a range bound behaviour. In the chart above we once again highlight the profit factor of a breakout system that attempts to replicate the exact rules of the Turtle Traders.

Once again we find that when applying systematic rules:. Why is this? Is there any explanation for this recurring behaviour? Of course, many people have asked this question before us, and some analysts at Citigroup attempted to offer an answer many years ago. Here are the main conclusions:. And that is exactly what we see with our models as well — and the behavioural traits continue to this day. So for example, whether you use our own Channel Breakout System, Pullback System or Turtle System, or any other system for that matter, here are general practices to help you use them wisely:.

In this article, we have demonstrated how Systematic Channel Breakouts and Systematic Pullbacks are still, to this day, fully functional strategies that can allow for profitable trading, whilst remaining light on the number of inputs necessary. Understand your edge, filter your currency pairs and rank them according to the background criteria that can bring fourth your edge, and execute with confidence.

And as always, if you get stuck somewhere along the way, get in touch and hopefully, with the experience of our members here at FXRenew, we will be able to guide you towards a more consistent performance. Justin Paolini is a Forex trader and co-owner at www. com , a provider of Forex signals from ex-bank and hedge fund traders get a free trial , or get FREE access to the Advanced Forex Course for Smart Traders.

If you like his writing you can subscribe to the newsletter for free. Systematic Breakouts and Pullbacks in Forex Trading: Two Strategies That Work by Justin Paolini. Too often, traders fall into a cycle that goes something like this: Study a method for an inordinate amount of time Perfect it and test it Take it live Achieve consistent results for some period of time Look for ways of pushing the limits of the method using it on multiple time frames, looking for trades instead of waiting for the most evident, etc.

Examples of Pullback Trades in an uptrend The premise is that each system is meant to capture a particular aspect of market behaviour. Successful system traders know exactly what their edge is, and have programmed that edge into the system, so that: There are no forced trades, only top quality trades The background conditions are most favourable So read on, and see our proprietary Channel Breakout and Pullback Expert Advisors programmed by our resident programmer Craig and understand the principles behind their success.

Example of Channel Breakout Trade in a downtrend Breakout vs. Pullback: is there a winner? We have already covered a variant of breakout trades extensively in a previous article so here we will just summarize the main points that allow a channel breakout system to be successful: Play breakouts from a given range which is determined by the length of channel.

The length of the range is not as important as you think. Diversification: seek to incorporate multiple asset classes into your portfolio.

Position sizing: seek to keep each position small and sized based on volatility, so the portfolio is never overly exposed to one trade. Time horizon: which trends are you seeking to capture? Perhaps combining multiple time-frames can help to smooth the equity curve. Capitalization: evidently, managing a professional diversified trend following strategy requires a decent sized trading account. Fortunately, brokers nowadays are becoming one-stop shops, giving retail traders access to multiple instruments at once.

Stated simply: A pullback, on any time frame, starts when price moves in the opposite direction of the prevailing trend, and finishes when price starts moving in the direction of the prevailing trend again.

Once again, to remain faithful to our principles of robustness, and building on a classic trend-trade risk management rule detailed in a previous article, our objective is simple: We want to buy pullbacks where classic trend trading rules will most likely throw in the towel. The Equity Curve performed by our non-optimized Pullback strategy programmed by Craig Consulting on EurUsd EurUsd Daily Chart with our trend filter and Pullback trades illustrated As usual, we do not simply want to marvel at the results a system can obtain on one currency pair and in one single version.

Once again we find that when applying systematic rules: EurUsd, UsdJpy, Gold, Silver tend to trend UsdCad, NzdUsd but also EurGbp, AudNzd end to not trend Why is this? Here are the main conclusions: Historically, long term trends are displayed in currency pairs which are the exchange rates between disparate economies UsdJpy, EurUsd, etc Historically, those currencies which have not trended are the pairs which are the exchange rates between closely linked economies EurChf, GbpUsd, AudNzd, etc.

Is it feasible to Trade with EAs? So for example, whether you use our own Channel Breakout System, Pullback System or Turtle System, or any other system for that matter, here are general practices to help you use them wisely: Never overleverage — ever! When trading any kind of system, you need to make sure you can withstand twice the historical drawdown of the system, along with any technical glitches that cause hiccups like internet issues, computer issues, slippage, etc.

This means understanding, each and every year, what the system did, where it traded and why it was successful or unsuccessful. We have discussed Pullbacks and Breakouts, but there are other edges to be exploited. Diversify intelligently. Some years, there are great trends in some markets and no trends in others. Some years there is excellent volatility read opportunity in some markets and there is none in other markets. Do not force trades , and do not be tempted to tweak the system.

Over To You In this article, we have demonstrated how Systematic Channel Breakouts and Systematic Pullbacks are still, to this day, fully functional strategies that can allow for profitable trading, whilst remaining light on the number of inputs necessary.

About the Author Justin Paolini is a Forex trader and co-owner at www. Search the Forex Blog Search for:. Join the Blog Weekly Trading Psychology and Thought Leadership. Join the Newsletter for Updates!

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All it identifies are numbers, levels, stop losses and margins. Skip to content The term, systematic trading refers to a unique trading approach. Instead, you go for middle-level ones like day average and wait for crossovers if any with even slower ones like day averages. The primary trigger, in this case, can be anything from economic factors to stock-specific issues. Just like pricing, here the volume becomes the indicator of sentiment around the particular entity. Would love your thoughts, please comment. There is a slightly more conservative take on it too.

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