Trend Trading Entries – Pullbacks Or Breakouts?

I have written a lot about how trend trading can be a great way to put the odds in your favor when trading Forex (or anything else). Even though it is a style which is subject to draw downs, identifying and following trends has been found to be a consistently successful trading methodology, and can be followed by anyone, even novice traders.

I have looked at various entry methodologies and have tended to favor entering after pull backs which then return to the prevailing trend. However, I would like to present new research which suggests that a breakout entry style can be even more effective.

Identifying a Trend

All kinds of weird and wonderful methods exist for identifying trends, but it does not have to be complicated to be effective. I have found that simply determining whether the price is above or below its levels from 1, 3 or 6 months previously is enough to provide a statistical edge that the price will continue in that direction. The best results are obtained by using both 3 months and 6 months, although using 3 months alone has been very successful over recent years.

Pullback Entries

Continuing to keep things as simple as possible, I found that identifying pullbacks as occurring when the price makes a new 1 day low price in an upwards trend, or new 1 day high price in a downwards trend, can be very effective. I defined trend as above both the prices of 3 months and 6 months, or below both. The 4-hour Japanese candlestick making the price should have a range greater than the 30-period average true range (ATR), to show momentum in the direction of a prevailing trend. An entry is triggered if the price reaches 1 pip beyond the trend end of the candlestick during the next 4 hours. A stop loss is placed 1 pip beyond the other end of the candlestick.

Back testing this entry method against the four major Forex currency pairs over the last fifteen and a half years and considering a reasonable broker’s spread, showed it had a profitable expectancy per trade at all profit targets based upon reward to risk ratios. This is a good indication of a solid strategy: