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Trend reversal trading strategy “Engulfing Bar” is designed mainly for Forex and can be used on all currency pairs on any time frames. Its rules state that:
A trader should place a buy stop order at a high of the signal candle upon an Bullish Engulfing Bar pattern during a downtrend. A sell stop should be placed at a low of the signal candle upon Bearish Engulfing Bar pattern during an uptrend. The stop loss should be placed at the high/low of the signal candle with 1:2 Risk-to-Reward ratio. To define trend we have used a combination of Fractals indicator and 3 EMAs with 10, 25 and 50 periods.
For more information please refer to https://www.tradeciety.com/how-to-trade-the-engulfing-bar-price-action-signal/.
For our test, we have used a Trailing Stop which is launched after a trade has started and is modified each new 1 pip of profit. From our point of view, such approach allows to maximize profit and minimize drawdown. We have run the test for 2010.01.01-2019.06.03 using Control Points modelling on EURUSD-H1, with no leverage, without reinvestment, assuming spread equals 10 ticks, with starting balance 10000. These are the main parameters of financial performance, that may allow you to evaluate whether this strategy worth your attention or not:
|ROI||# of trades||Winning ratio||Max. drawdown|
The following charts may give some possible insights on which filters to apply (time sessions, day of week limitation, trend strength threshold, overbought/oversold conditions, volatility range) to turn this strategy profitable should you decide to use this strategy in your investment portfolio:
1. Our analysis of “Engulfing Bar” trading strategy during 2010–2019 has shown that the closer the price was to the Upper Band, the more profitable buy trades were opened, while the closer the price was to the lower band, the more profitable sell trades were opened. “Engulfing Bar” is a trend reversal strategy and so it is more probably that a trend will change its direction when the price is within the Bands.
2. Our analysis of “Engulfing Bar” trading strategy during 2010–2019 has shown that more profitable sell trades were opened when the distance between the price and PSAR was bigger in a downtrend (vice versa for buy trades). Indeed PSAR shows the maximum distance between price and its value when the trend changes its direction. While “Engulfing Bar” is a trend reversal strategy, it is logical to use this filter to confirm trade entry signals.
3. Despite Our analysis of “Engulfing Bar” trading strategy during 2010–2019 has shown that more profitable sell trades were opened at a lower RSI value and more profitable buy trades were opened at a higher RSI value. This is contradictory to generally accepted rules: to buy when RSI shows oversold market state and to sell when RSI shows overbought market state.
4. Despite the fact that a large number of patterns were found, our analysis of popular trading strategy “Engulfing Bar” during 2010-2019 has shown that it is unprofitable on most of major currency FX pairs, such as EURUSD ,GBPUSD, USDJPY, EURGBP, EURJPY, GBPJPY.
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