Breakout trading strategy “Fractal Support & Resistance Breakout” is designed mainly for Forex and can be used on all currency pairs on any time frames.
What is the “Support & Resistance”
Support is a price level where a downtrend can be expected to pause due to a concentration of demand or buying interest. As the price of assets or securities drops, demand for the shares increases, thus forming the support line.1 Meanwhile, resistance zones arise due to selling interest when prices have increased.
How to trade “Fractal Support & Resistance Breakout”
A trader should place a buy order when price breaks through a resistance level. A sell order should be placed when price breaks through a support level. Support and Resistance levels are defined by the last UP/DOWN Fractal.
To run a back-test we have coded a complete Fractal Support & Resistance Breakout trading strategy as a MetaTrader 4 Expert Advisor. During preliminary analysis we have identified that the best time frame for Fractal Support & Resistance Breakout trading strategy is 1 hour (H1).
We have run a back-test of Fractal Support & Resistance Breakout 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 2009.01.01-2020.09.25 using Every Tick modelling on EURUSD-H1, using 1:1 leverage, without reinvestment, assuming spread equals 10 ticks. These are the main parameters of Fractal Support & Resistance Breakout 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:
“Fractal Support & Resistance Breakout can be used with other indicators to filter out losing trades and make entry signals more accurate. After analysing trading data we have found the following insights which have helped us to make the “Fractal Support & Resistance Breakout trading strategy profitable reducing it’s drawdown in 20 times:
- Trades that were opened at a too low and at a too high values of ADX have appeared to bring more losses when trading “Fractal Support & Resistance Breakout” 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 -7.9% -> 0.7%, Drawdown reduction 83.47% -> 17.93%)
- The majority of trades that were opened at a too low value of Stochastic and the majority of trades that were opened at a too high value of Stochastic were losing when trading “Fractal Support & Resistance Breakout” trading strategy during 2009 – 2020. It is risky to take trades in the overbought and oversold zones.
(ROI increase -7.9% -> 0.03%, Drawdown reduction 83.47% -> 15.39%)
- Most of the trades that were opened at a too high and a too low values of RSI were losing when trading “Fractal Support & Resistance Breakout” trading strategy during 2009 – 2020. RSI measures the magnitude of most recent price changes to evaluate the overbought and oversold zones.
(ROI increase -7.9% -> 2.1%, Drawdown reduction 83.47% -> 13.00%)
- The majority of trades that were opened at a boundary state of RVI Signal were losing when trading “Fractal Support & Resistance Breakout” trading strategy during 2009 – 2020. It is preferred to take trades at a more stable market.
(ROI increase -7.9% -> 4.5%, Drawdown reduction 83.47% -> 6.58%)
We have analysed data received from a test of Fractal Support & Resistance Breakout trading strategy during 2009 — 2020 years and applied some filters such as ADX, RSI, Stochastic and RVI. As a result, the profitability of the strategy has increased from -7.9% up to 2.9% and it’s drawdown has reduced from 83.47% to 4.26% using leverage 1:1.
Reducing the drawdown has allowed us to increase the leverage that can be used while trading this strategy up to 1:30, which in turn, has resulted in annualized ROI increase up to 134.70%!
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 5% risk per trade:
|ROI||# of trades||Winning ratio||Max. drawdown|
Analyze your trading strategy!
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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.