"Mercury" fractal breakout trading system

Disclaimer: this system is not intended as financial advice. I'm purely posting this for feedback and discussion. As always, perform your own due diligence before trading.

 

I've been sitting on this system for awhile. To be honest, I'm not happy with it. The backtest results are positive, but I'll explain my thoughts towards the end.

 

I'm naming my systems after gods of trade and commerce. I dub this one "Mercury".

SUMMARY

System Type: Breakout

Trade frequency: 3.5 trades per month
Backtest sample size: 492 trades
Pairs tested: EURUSD, AUDUSD, USDCAD, USDJPY, EURJPY, EURGBP, USDCHF, GBPUSD
Dates tested: 2001 to mid-2012
Reward-to-risk: 2.75
Win rate: 32.37%
Profit Factor (after spread): 1.26
Grade: C

Equity Curve from 2001 to mid-2012 – $10,000 initial balance, 1% risk. 2.75 R:R

Profit factor from pairs tested (after spread):

 

 

 

 

SYSTEM DETAILS

 

 

System Type

 

 

Breakout

 

 

System Description

 

 

Look for the start of a ranging period where ADX(14)(High + Low / 2) is equal or less than 18. When this occurs, apply pending orders at the break of the most recent upper fractal + 5 pips, and lower fractal – 5 pips.

 

 

Stop loss will be situated at 0.75 * ATR(14) pips from the entry price.

 

 

Rationale of System

 

 

A low ADX(14) indicates a ranging period. When ADX(14) < 18, the ranging has become extreme, stops have accumulated outside the range and a breakout is imminent.

 

 

A fractal is most likely to be situated near short-term resistance and support. If a breakout is to occur, the fractal must be broken first. We apply a 5 pip buffer to our entry to increase our odds of entering a genuine breakout.

 

 

We trade the top 8 most liquid pairs only as these tend to provide the most accurate technical signals. They are:

EURUSD

USDJPY
GBPUSD
AUDUSD
USDCAD
USDCHF
EURJPY
EURGBP

Indicators Used

ATR(14) Close for stop loss

ADX(14) High + Low / 2 to filter for ranging conditions

Bill Williams' Fractals indicator

Entry

Break of the most recent upper fractal + 5 pips, or lower fractal – 5 pips

Stop Loss

If long, entry price – 0.75 * ATR(14). If short, entry price + 0.75 * ATR(14)

Take Profit

2.75R, where R = |entry point – SL|

 

Example Trade

 

(from Forex Tester 2)

 

 

Thoughts

 

The system has some weaknesses as it is.

 

#1. Sample size is around 500. I'd prefer it to be closer to 1,000, but the market history only provides 492 trade signals. On the otherhand, it has been tested on eight pairs, with seven out of eight showing positive results, so it seems robust enough.

 

#2. The system has been in drawdown since 2011. I'm really not happy with this, even though the overall equity curve is positive. I'd recommend a position size of 1% or less for this system to reduce the drawdown magnitude.

 

#3. I just get the gut feeling that there's a better entry point than just fractals. When a market's ADX(14) drops below 18, it usually doesn't stay there for long.