Before reading through this lesson, you should read through our lesson on backtesting trading strategies:
- Testing a trading strategy with backtesting software
The ten bar breakout strategy is a learning tool that you can use to learn how to trade on a longer term time frame. It allows you to learn to trade comfortably on a daily time frame, with plenty of time to make a decision.
The ten breakout strategy is a mechanical strategy
The basic rules of the strategy are mechanical. Simply put, it means that you can trade without having to exercise any form of judgement, other than applying the rules of the strategy to the market. If something happens on the chart in accordance with the rules, then you enter – if not, you wait.
As described in the preceding lesson, there can always be some discretion involved when trading any strategy. As you develop as a trader, certain market conditions or price action behaviour will repeat and you will unconsciously learn this information, leading you to make more discretionary trading decisions.
If you are relatively new to trading, then you can still trade by making sure that you stick to the rules of the strategy.
You can, as the previous lesson shows, tweak the strategy to suit how you personally trade. However you must always make sure that you test a strategy and variations of the rules before you trade using them on a live account.
We always recommend that you trade using a demo account to test a strategy or any variation, no matter how experienced you are.
When trading on a daily chart, however, you may want to backtest a strategy using a computer program, such as an Expert Advisor on Metatrader 4.
If you do not have access to such backtesting software, then you can look at the backtest results that we performed on a number of different assets.
Things to bear in mind when looking at backtesting results
There are a number of key points that you must consider when look at the backtest results of any strategy.
When you backtest a strategy, you are not looking to see how much money or what your return can be each month. You are looking to see if the principles of the strategy hold up on a particular asset class. So if the strategy is a trending strategy, i.e. it is designed to capture a trend, you are looking to see how well it does this on a particular asset class. It may be that some assets simply do not trend well, whereas other assets produce great trends and this will be highlighted in the results.
The backtesting method used
The rules of the ten bar breakout strategy are mechanical and so we developed an Expert advisor and applied this to real data ranging from the 29/4/2001 to 31/10/2012. For each of the assets that we used, we did not include a spread due to the fact that, unlike a intra-day trading method, the spread has a minimum impact on results when trading on a daily chart.
We applied the strategy to a daily chart on a number of currency pairs using two variations:
- Ten bar breakout using an 89 simple moving average to determine the direction.
- Ten bar breakout using a 118 exponential moving average to determine the direction.
The following table shows the percentage increase, or decrease, for each of the methods used:
In each case, we started with an account of $100,000 and risked 2% of the account on each trade. This means that if the stop loss was hit, exactly 2% of the account would be lost. You can see the profitability of each of the assets in real terms in the downloadable spreadsheet.
You can download the backtest results here:
We would like to remind you that past results are not indicative of future performance. The ten bar breakout strategy is a learning tool that allows you to practice trading over a longer term. We recommend that you always start using any strategy on a demo account and if you decide to apply this, or any other strategy, to a real money account, you do so at your own risk.