You have watched a ton of YouTube videos, read what seems like a million blog posts, and learned countless trading strategies.
That’s great, but now what?
This is where many traders get tripped up.
They learn a plethora of different trading systems, then they try each one out for a few days. Of course, they can’t seem to get one to work, so they give up and move on to the next one.
You just bought yourself a ticket on the Trading Silodrome.
That’s when you go around in circles for years, jumping from system to system and never really getting anywhere.
Learning to trade a technical trading strategy successfully, is a 7-step process:
- Create a trading plan
- Backtest it
- Work on your trading psychology
- Forward Test it in demo
- Work on your trading psychology more
- Trade in your live account with confidence
- Work on your trading psychology even more
Anyone who tells you that you can just grab the PDF in #1 and jump straight to #6 is either just trying to sell a course, or they forgot what it is like to actually go through the entire process.
If you really want to make it in trading, then you need to follow those steps.
But it’s easy to write a blog post or make a YouTube video about the steps. There is plenty of advice out there on the internets.
How about actually going through the entire process?
Yes, let’s do more of that.
In this blog post, I’ll give you the exact parameters of a trading system, then in later blog posts, I’ll show you the testing results.
Feel free to follow along at home 🙂
Trending Outside Bar Trading Strategy – Version 1 (Codename: Aardvark)
To make a custom plan of your own, you can download this worksheet.
In this test I’m going to use the following:
- Forex Tester
- The TH Outside Bar indicator for Forex Tester (optional, but speeds up backtesting)
- The 10 and 20 EMA (optional, but it makes it easier to see the strength of a trend)
- Candlestick chart
The Strategy Parameters
- 1% risk on each trade
- 1R profit target
- Daily chart only
Definition of an Outside Bar
The generic definition of an Outside Bar is a bar (or candle) where the high and the low of the current candle is both higher and lower than the high and low of the previous candle.
Here’s an example:
But it could also look like this…
This is the preferred type of candle, at least for this strategy. In this trading strategy, we are going to look for Outside Bars that have the following characteristics:
- The candle closes near the top for a long, near the bottom for a short.
- The two previous candles (marked as 1 and 2 above) have lower highs for a short and higher lows for a long.
- Candle 1 should have a lower high than candle 2, for a short. Candle 1 should have a higher low than candle 2 for a long.
- The body of the Outside Bar should engulf the body of the previous bar.
Here’s and example of a long Outside Bar:
There is going to be some skill and practice necessary, when it comes to identifying a good Outside Bar, so don’t feel bad if you aren’t good at identifying them right now. Your goal at this point should just be to get through one round of backtesting on one currency pair, on the daily chart.
How to Determine a Trending Market
In this strategy, we are going to only look for Outside Bars in trending markets. This is where the EMAs help.
They are totally optional, but when there is good separation between the EMAs, that is a good sign that you are in a trending market.
Again, it will take some practice to learn what a strongly trending market looks like, but the EMAs give us a good reference point.
Here’s what good separation with an Outside Bar, in a trending market, would look like.
Enter on a pending order, when the price of the next candle breaks the high of the Outside Bar (plus 5 pips) for a long, or the low of the Outside Bar (plus 5 pips), for a short. There also needs to be a support zone for a long and and resistance zone for a short. Outside Bars in between zones will not be considered.
SL goes on the other side of the Outside Bar, plus 5 pips.
Equal to the stop loss, plus 5 pips. Only looking for a 1R target in this version of the strategy.
I will only exit when the stop or take profit are hit. No closing out early.
Here’s the same chart, with all of the levels shown.
Pairs to Test This On
I will test as many pairs as I can get data for. Stay tuned to future blog posts for the results of the Aardvark.
If you want to see an Outside Bar chart analysis on the EURUSD weekly chart while you wait, read this.
Remember, backtesting does have limitations. But it is the key first step in determining if a trading system could be viable or not. If you have zero data about a system, you are flying blind.
Also keep in mind that your backtesting results may be very different from mine. That is because people see the markets differently and can interpret the same set of rules in very different ways.
That is why it is so important for you to backtest a strategy for yourself and not listen to anyone on the internet!
I will post the results from this Outside Bar trading system soon.
To learn all 7 steps in the Forex Trading Strategy Development process, sign up for our FTSD program.
If you have any questions, leave them in the comments below…
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