Trade strategy on volatility compression

In the fifth issue of ForTrader.org we will look at a very simple trading strategy that can serve as a basis for developing what we think is a good profitable system.

The system is based on compression volatility. The entry signal is formed when the market forms the smallest candle in a certain number of bars.

Rules of formation of a signal to enter a position

- At the formation of the next candle, the last 8 bars are calculated, starting from the penultimate one, and the minimum value is found.

- If the first bar in size takes on a value smaller than the minimum, then are set:

• order to buy at the maximum value of the candle + 1 point;
• order to sell at the minimum value of the bar -1 point.

In Figure 1, the minimum value for 8 bars is 8 points.

- When a bar appears, the minimum value requires recalculation: if the first bar becomes less than the minimum value, it means a compression of volatility, and we place a buy order at High+1 and a sell order at Low-1.

The important point is that pending pending orders are not deleted. In this case if, say, the order on sale remained not triggered, it remains, and before its triggering the installation of orders only on purchase is made. The same rule is valid for sale in case when the order on purchase does not trigger.

Testing the strategy

We have been testing the strategy since 2007.06.01. The last sell order was set at the level of 1.3208, after which it remained there, and the system continued to work only on buying. And as we can see in Figure 2, it did it correctly. Note how the strategy bypasses the deep correction areas from 2007.11.28 to 2008.02.01.

The external parameters of the system are the levels of StopLoss and TakeProfit. The system selects the entry point adaptively depending on the current volatility.

Optimizing your trading strategy

We have optimized the StopLoss and TakeProfit parameters for the period 2007.06.01 to 2008.01.01 and got the following result.

Checking the strategy for future periods

For EURUSD H1 the best parameters for the strategy are TakeProfit -70 pips and StopLoss - 65 pips. Let's check how these parameters will work in the future in the period from 2007.06.01 to the present.

Results

In general, as can be seen from the results, the system is worthy of attention. The advantages of the tactic are are a small number of optimizable parameters, adaptability to the current market movement, filtering transactions to buy or sell through the effect of "order freeze".