This Simple Set-forget System Was Profitable in
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According to my backtest, this strategy has been profitable for at least two years now. The strategy itself is very simple and literally takes less then 5 minutes PER WEEK to execute. If you have been trading for a while, you’ve probably encountered this system in one version or another on forex forums. It’s a simple weekly breakout strategy. After the markets open on Sunday at 23:00 CET (17:00 EST) we wait for the first 4 Hour candle to close. This happens at 3 AM CET on Monday, or 9 PM EST. Since I know I will get this question, if your broker has different 4 Hour settings, just use the hourly chart and draw a breakout box from 23:00 to 03:00.
For longs:
Place a Buy stop order at the high of the 4 Hour breakout box + 20 pips (+2 pips added for the spread)
For shorts:
Place a Sell stop order at the low of the 4 Hour candle - 20 pips
Rules
Here are the rules I used during the backtest. I tried to keep the rules simple and robust to avoid curve-fitting the data. The stoploss is placed at the opposite side of the of the breakout channel. If we are long we exit our trade when price breaks the low of the breakout channel and we simultaneously enter a short trade. But we only take two trades per week maximum, one long, one short. If we’re stopped out of both, we’re done for the week. The take profit is at 4 times our initial risk (more on this below). I kept all trades open until either the stoploss or take profit was hit. I didn't close trades at the end of the week.
Recent Chart Example on EUR/JPY +268 pips
Before proceeding with the backtest results, let's go over a chart example. Last week showed us two great examples of the 4 Hour breakout trade, one winner and one loser. The EUR/JPY traded between a high of 133.93 and a low of 133.66 during the first four hours of the week. To construct our breakout box, we now add 20 pips to the high/low. We buy long at 134.13 (+spread), we sell at 133.46. Take a look at the chart below.
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The first signal was long at 134.13. We place our stop loss at 133.46, the lower bound of the breakout range. As we can see, this trade turned out to be a loser quickly. We then reverse for a short at 133.46, placing our stop at the high of the breakout range (+spread). This is now the final trade for the week. If this trade turns out to be a loser as well, we pack up our bags and wait for next week’s open.
Given that the risk for our trade is 67 pips, we now multiple that amount by four to get to our 4 Risk target. This would put the take profit for this trade at +268 pips or 130.78. As we can see on the next chart, the EUR/JPY fell substantially last week to 130.69. The short was a massive winner, running all the way down to our 4 Risk target. Notice that we kept our trade open after the week closed. Since I performed the backtest under this condition, I wanted to be consistent with my example. You are free to adopt different risk management but make sure to backtest any changes first.
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To simplify the backtest I used a 4 Risk target. In other words, if the initial stoploss for the trade was 100 pips, I would place the take profit at 400 pips. No breakeven or other trade management was used. It was either exit when the Stoploss was hit or exit at our TakeProfit. No time exits were used as well, so some trades stayed open for weeks at a time. I didn’t take into account rollover rates in the backtest but I would expect the impact to be minimal.
Here are the results for the last two years:
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The R above stands for initial Risk. I don't use pips in my backtests because using this measure doesn’t tell us much about the risk side of the trades. Winning 100 pips while risking 100 pips has a completely different risk profile compared to winning 100 pips with a 25 pips stoploss The R measurement aims to normalize these discrepancies by focusing on the initial Risk of the trade.
As we can see, despite having a very small win percentage of only 22.4%, the system ended up making a profit because of its fixed high R/R ratio of 4. This means that we only needed to get one win to ‘’neutralize’’ 4 previous losses.
Using R instead of pips has another positive side-effect. It allows us to immediately calculate the earning potential of this system. For example, if we risked 1 percent on each trade, we would end up with a gain of 15 percent.
This may not seem like much but consider that this system takes less then 5 minutes to execute and that’s per week. To simplify the process, many chart platforms can draw this breakout box for you and add the 20 pips buffer to it. I know MetaTrader has this. Five minutes per week translates to around 4 hours per year or 6-7 hours for the whole duration of backtest. So basically, you earned 15 percent on your money for 6 hours of work.
Important Disclaimer:
The usual disclaimers apply here as well. Past performance is not indicative of future results and this system could stop performing at any time. If you are considering trading this strategy live, do your own backtest.