The Professional Reversal Trading System is a Forex automated strategy designed to take advantage of days when the price on eur-usd starts to move strongly on one direction and then reverses and closes near open or the opposite peak (bottom). Below you could see examples of that type of market behavior:
The system has been created after we realized that we want a system which logic is quite the opposite of the logic of Professional Breakout Trading System. Actually we invented it a 1 year after we had been trading with Breakout strategy. We began asking ourselves what would happen if we apply the opposite approach to eur-usd compared to Breakout rules. Then we added an entry trigger and the system has been completed.
Here is how exactly the strategy works:
Get our Weekly Commitment of Traders Report: - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.
Get Our Free Metatrader 4 Indicators - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter
- It waits for a significant move inonedirection. We demand form price to make a big move in order to consider that it is worth starting to monitor a sign for a trend reversal.
The price must reach a predetermined level which depends entirely on price action and most recent volatility on Daily Timeframe. Every day we recalculate two levels for both directions.
If the price does not touch one of the levels we do not trade. The first step is not completed and thus we are patiently waiting for the next trading day. Look at some examples:
- Once the price has reached one of the targets described in step one it time to monitor for a trend reversal. We don’t jump into the market immediately after step 1 is completed. It would be too early. So we applied our ProfessionalTrend indicator which would give us a warning when the price has changed its direction. So we wait for trigger. See below:
The set up of the indicator is done so that it won’t change its direction after a small correction against the trend. we give the price leeway to correct and to continue its former movement. We monitor only for a decisive trend change.
ProfessionalTrend a custom trend indicator, which can be set up to track short-term trends. It has two options – bullish and bearish. When a blue dot is appearing on the last closed candle we want to go long on the bar and vice versa for a short position. The trick here is that the indicator takes into consideration the most recent volatility and we demand bigger moves against the trend for its change during volatile times and smaller moves when eur-usd is in a quiet mode. It adapts automatically to the everchanging Forex conditions.
- Once we are in a position it`s time to set up our Stop Loss order. The system always uses on market placed SL, whose level is known at the moment of entering the market. We want to preserve our capital and to be confident in our trading. The question here is how wide or narrow the SL should be? The answer is: it depends on the most recent volatility. See the graph below:
As you can see sometimes we need to use a very narrow SL when the market is quiet and very big one during the wild times like 2008. There can be a 10 fold difference between the sizes of the stops in both occasions. So we should pay attention to the most recent volatility in order to be in sync with the market.
- It is time to exit our position. Usually it is done by the end of the day. But sometimes the strategy holds the positions for another day when certain conditions are met.
As you can see the strategy is very simple, it is not complicated with a lot of trading rules incorporated in it. Simple systems are not subject to overfitting. You won’t see a chart with a dozen fancy indicators with long names. Simple stuff is much better for long-term trading success.
Professional Reversal Trading System is backtested on Metatrader 4 for a 16 years period. We believe that the more time a system shows a profit and good performance, the more likely it is to be successful in the future. During these 16 years eur-usd has gone through lots of different market conditions like trending and non trending cycles, volatile and quiet market and so on. A robust system must survive all market tests before being considered for real trading.
As a final test we change the system`s inputs a lot in order to see if it will continue to be profitable or not. Usually if you have found a good market pattern to trade, around which you have created a mechanical system, you have to see profitability with different settings. If changing the systems inputs cause a deterioration of the equity curve, then you have a classic example of curvefitted strategy which won’t be profitable in real time trading.
The system has a relatively high winning percent rate – 63% with win to loss ratio of 1. It also trades very rarely – less that a trade per week. You won’t see the systems jumping in and out of the market.