Daily Fractals Strategy
Daily fractals approach is one of my first forex strategies that works with daily fractals (combinated with m15 fractals) and therefore can be suitable for short-term along with long-term (intraday) traders from any timezones.
Background
The strategy was developed by me in late 2007 year and backtested over history since 2001 year. Live trading it since beginning of 2008. The idea came up while I been trading m15, 1h and 4h fractals already, I wanted to see how price behave on bigger timeframe and it turned out to be very profitable idea. in late 2009 I backtested this strategy for GBP/USD pair as well and started trading over both EUR/USD and GBP/USD pairs.
Its both ways strategy: breakout and bounce, therefore can be profitable in both: ranging and trending markets conditions.
Concept
In general all my strategies approaches are simple and not complicated, but require strong discipline to follow the rules. This strategy is not expection, its very simple, yet very profitable (if you dont break the rules). You do place breakout orders on daily fractals and if price continues, you just follow the price trailing the stop by daily fractals (let the profit run till the market stops you), and if price bounces off daily fractal, you do reverse as expecting it to be ranging market and yet again exiting when market tells you.
Indicators to use
First of all for those of you who don’t know what fractal means in technical forex trading, let me explain:
- Upside fractal is a middle candle with 2 previous and 2 next candles having lower high.
- Downside fractal is a middle candle with 2 previous and 2 next candles having higher low.
You can trade without any indicators at all, but to make it simpler, I would recommend you to use built-in fractals indicator in MetaTrader. You can find it at MT menu: Insert > Indicators > Bill Williams > fractals.
Money Management
Before I gets to the entry rules, I would like to discuss the money management I use for this approach. The SLs are very small (-20/-25 for breakout and -40/-50 pips for bounce orders) and DD over tested period been considerable small (around -1090 pips for EUR/USD and -1400 pips for GBP/USD – but at different dates!).
Therefore my risk for this approach is 2-5% which means 20 pips is 2% of the deposit (that means with deposit of $10,000 USD I do open position of 10 mini-lots (100,000 unit size at oanda for example)). With this money management you should not get below -50-65% loss with expected DD (-1000-1500pips).
Video tutorial
Entry Rules
- Breakout: As soon as new daily fractal forms (if you are not in-trade already) you place breakout orders +-10 pips above/below it (not includes spread, if its bid price platform like alpari, you have to place +10+spread at upside fractals and -10 pips at downside fractals).
SL -20 pips for EUR/USD and -25 pips for GBP/USD.
- Bounce: When price hits the fractal level (yes, fractal level, not breakout order and 1 pip miss is considered as a hit) you go to m15 timeframe chart and look for last formed m15 fractal (have to be formed before the price hits the fractal) and place reverse order (inside the range) +-10 pips above/below that m15 fractal.
SL -40 pips for EUR/USD and -50 pips for GBP/USD.
Nuance: If price did hit the fractal, but not breakout, and then after some time hit the breakout order, you update your bounce order over last m15 fractal before breakout position opening.
Exit Rules
Breakeven: You move SL to breakeven when daily candle’s high/low is outside the range of opening price (often do happen in 2 days after opening if position is in profit). Moving SL to breakeven is for breakout positions only, for bounce positions you do use trail only.
Trail: You trail your positions (both breakout and bounce) by daily fractals +-10 pips with reverse order (new breakout position).
Backtested results
There are many fores strategies over internet, but only very few of them are provided with real backtested results for your considerable, most don’t provide any tested data at all or some minor (short-term periods) results. Before I started using my strategies in real account trading, I have backtested them all over 11 years period using Forex Tester program, actually it was a process of strategy development and based on those results I made dicisions to start trading strategy in real account or not. My results do not vary from backtesting to realtime trading since I’m using very strict rules with 100% execution (discipline is a must here or you will end up losing an granny winner).
Yearly backtested + live results:
| Year: | GBP/USD | EUR/USD | ||||
| 1999 | -42 | |||||
| 2000 | +880 | |||||
| 2001 | -700 | -55 | ||||
| 2002 | +693 | +1132 | ||||
| 2003 | +1456 | +1766 | ||||
| 2004 | +1828 | +1654 | ||||
| 2005 | +157 | +182 | ||||
| 2006 | +1480 | +1307 | ||||
| 2007 | -815 | +978 | ||||
| 2008 | +4412 | +1403 | ||||
| 2009 | -730 | +802 | ||||
| 2010 | -1902 | +3009 | ||||
| Total: | +6717 pips | +12178 pips |
As you can see combinated the strategy gave only 1 negative year of 2001 with around -750 pips results, while all other years been profitable (tho EUR/USD generated x2 more profit then GBP/USD pair). Average yearly profit is 860 pips considering the risk of 10 pips = 1% and the progressive percent money management its around +100% profit annually.
Conclusion
This is very simple and yet very profitable trading strategy, as you can see above you can expect around +100% annually profit with it, but some drawdown (number of losses positions in the row) periods can last pretty long (even an year it happened at 2001 year). Therefore you have to be very disciplined and patient trading this strategy and using proper money management risk (no more then 10 pips = 1% lot size). Following those guidelines you should be successful with this approach as I do for several years now. Hopefully this will help your forex trading. Good luck and feel free to post comments, feedback or any questions at comments section below.
Soon I will share my other trading strategies. Stay tuned.
Ye, its profitable. Just needs iron-dicipline to go though those long periods of no-winners, like last 1 years with GBP. But backtesting helps to see the coming winners…
Yes, it’s very profitable indeed. Am waiting for other trading strategies also.
Thanks for the sharing.