Trading forex extremes Series - Part 2

By way of review, the RSI provides a technical filter that calibrates the strength or weakness of the trend and identifies short-term price extremes. In the evening and morning doji star price formations, the doji star becomes the signaling bar that must fall above or below the required RSI thresholds. When this candle pattern occurs at the RSI extremes, this candle reversal pattern provides a springboard for an optimal price set-up. A simple stop exit strategy both limits risk and moves the stop loss in the desired direction of the trade immediately.

TEST RESULTS
The trades generated from the 30-minute entry signals were far and away the most profitable time frame across the forex portfolio, with five of six (60/40, or "RSI Star") and four of six (70/30, or "123 Star") pairs generating a profit (see "Paired profits," page 42).

In the same 30-minute category, across both strategies, the profit factor ranged from a high of 2.07 (for all trades long and short) to a low of 0.22, an outlier statistic for the Swiss franc. However, net profit was significantly lower and, in fact, slightly negative across the portfolio for the more stringent 123 Star strategy.

Not unexpectedly, the total number of trade signals generated from this 70/30 strategy was far fewer as well. While the total number of trades was noticeably higher on the five and 15-minute time frames, the total trades generated were still low compared to the 60/40 RSI Star strategy. This was due not only to the wider RSI thresholds, but also due to the relative rarity of the evening and morning doji star price pattern within the three intra-day time frames.

It was striking to see that across all three time frames in the RSI Star strategy, the percentage of profitable trades only averaged 32.4%. In other words, just over two thirds of all trades were losing trades. Yet despite this feet, the average winning trade was 2.36 to 1.00, or nearly 2.5 times larger than the average losing trade. This positively skewed average dollar win-loss ratio seems to demonstrate that the risk management criteria largely succeeded at cutting losses short and letting profits run.

In terms of the top performing time frame and pair, the five-minute RSI Star USD/GBP pair realized the greatest net profit. The USD/EUR pair was the best overall performer, showing a profit in four of six time frames, respectively. Next was the yen, Australian dollar, Canadian dollar, pound sterling and Swiss franc. The franc was the only market that posted a net loss.

Finally, across both strategies, the importance of taking every long and short signal can not be understated. While more profits were generated on short trades relative to long trades, this reversal strategy was only in the market about 5% of the time. Thus, shorter-term traders with a psychological need for market stimulation and trading activity would likely have a difficult time applying this type of system, due to the combination of lower trade frequency and a higher percentage of net losing trades relative to winning trades.