Trend reversal trading strategy “Engulfing Bar” is designed mainly for Forex and can be used on all currency pairs on any time frames.
What is the “Engulfing Bar”
The Bullish and Bearish Engulfing Bar are reversal Price Action signals. This means that engulfing bars can be used to catch potential reversals in the market. Engulfing Bars can be played with or against the trend however they must always be traded from swing points.
For an engulfing bar to be valid it must fully engulf at least one previous bar or candle. This includes all the body and the wick. The engulfing bar can engulf more than one bar as long as it completely engulfs the previous bar.
How to trade “Engulfing Bar”
A trader should place a buy order upon an Bullish Engulfing Bar pattern during a downtrend. A sell order should be placed upon Bearish Engulfing Bar pattern during an uptrend. To define trend we have used 3 EMAs with 10, 25 and 50 periods.
To run a back-test we have coded a complete Engulfing Bar trading strategy as a MetaTrader 4 Expert Advisor. During preliminary analysis we have identified that the best time frame for Engulfing Bar trading strategy is 1 hour (H1).
We have run a back-test of Engulfing Bar trading strategy. For our test as a trade exit rule we have used a Trailing Stop of 30 pips 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 2009.01.01-2020.07.09 using Every Tick modelling on EURUSD-H1, using 1:1 leverage, without reinvestment, assuming spread equals 10 ticks. These are the main parameters of Engulfing Bar trading strategy performance at its non-optimized state:
|ROI||# of trades||Winning ratio||Max. drawdown|
Trading data analysis
After running the initial test of a simple non-filtered strategy we perform a trading data analysis that allows to identify possible filters to use to make the strategy more profitable reducing the drawdown simultaneously.
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:
Engulfing Bar can be used with other indicators to filter out losing trades and make entry signals more accurate. After analyzing trading data we have found the following insights which have helped us to make the Engulfing Bar trading strategy profitable reducing it’s drawdown in 15 times:
- The most profitable trades were opened at the middle value of DeMarker when trading “Engulfing Bar” during 2009 – 2020. DeMarker aims to assess the directional bias of the market.
(ROI increase -4.8% ->1.8 %, Drawdown reduction 54.61% ->9.3%)
- The majority of trades that were opened at a boundary state of RVI Signal were losing when trading “Engulfing Bar” trading strategy during 2009 – 2020. It is preferred to take trades at a more stable market.
(ROI increase -4.8% ->1.4 %, Drawdown reduction 54.61% ->10.65%)
- Trades that were opened at a too low and at a too high values of ADX have appeared to bring more losses when trading “Engulfing Bar” trading strategy during 2009 – 2020. ADX shows the power of the current trend. It is more reasonable to take trades at the trend start.
(ROI increase -4.8% ->0.4 %, Drawdown reduction 54.61% ->17.39%)
We have analyzed data received from a test of Engulfing Bar trading strategy during 209 — 2020 years and applied some filters such as DeMarker, RVI and ADX. As a result, the profitability of the strategy has increased from -4.8% up to 3.15% and it’s drawdown has reduced from 54.61% to 3.46% using leverage 1:1.
Reducing the drawdown has allowed us to increase the leverage that can be used while trading this strategy up to 1:50, which in turn, has resulted in annualized ROI increase up to 157.88%!
Reducing the drawdown has also allowed us to use risk based lot calculation. Below you can see the back-test results using $10,000 initial balance and 10% risk per trade:
|ROI||# of trades||Winning ratio||Max. drawdown|
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Disclaimer: Hypothetical or Simulated performance results have certain limitations, unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity.
Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.
Past performance is not necessarily indicative of future results. The customer is responsible for using the product at his or her own risk and “Nordman Algorithms” is not responsible for any possible losses caused by use of the product, including but not limited to losses.