Trading strategy "Butterfly Tie"

In issue 4 of ForTrader.org we will look at a trading strategy based on паттерне «Галстук-бабочка»described by Dave Londry. The strategy is based on three moving averages (Moving Average): a simple moving average with a period of 10, and two exponential averages with periods of 20 and 30.

Trading strategy algorithm

1. Signal conditioning

A buy signal is formed when the moving average with a period of 10 becomes higher than the average with a period of 20, and the average with a period of 20 is higher than the average with a period of 30. The price should form a minimum. In order to formalize and determine the minimum, we took the Stochastic Oscillator with parameters 1,3,3. When such a combination of indicators is formed, a buy order is set at the current maximum. The sell signal is formed by analogy with the sell signal, in this case the rules should be reversed.

Fig.1. Buy signal
Fig.1. Signal to buy.

2. Position closing

We did not find a description of how to close a trade or what to do with an unfinished order in the strategy description. So we decided to delete the pending order from the previous pattern when the next signal is generated. We will close the open position when the price crosses EMA20 from top to bottom when buying, and sell when it crosses it from bottom to top.

Fig.2. Signal to sell.
Fig.2. Signal to sell.
Fig.3. Signal to close a trade.
Fig.3. Signal to close a trade.

Strategy testing

Let's test the developed rules and consider the results. The author recommends to look for patterns on the daily charts, which we have done.

Fig.4. Testing pattern on EURUSD Daily.
Fig.4. Testing pattern on EURUSD Daily.

Having tested the system with standard parameters on various financial instruments, we obtained positive results on a number of them. Now let's try to apply this method to intraday charts.

Fig.5. Testing the system on EURUSD H4.
Fig.5. Testing the system on EURUSD H4.
Fig.6. Testing the pattern on EURUSD H1.
Fig.6. Testing the pattern on EURUSD H1.

The results show that trading on intraday periods by the standard parameters of the strategy is unprofitable. Let's try to choose the most optimal parameters (periods) of moving averages for intraday charts in the period from 2007.01.01 till 2008.01.01 and then check them on the future period up to the current moment.

Having tested different combinations of parameters for EURUSD H1, we settled on the following parameters:

Fig.7. Results of strategy optimization for EURUSD H1.
Fig.7. Results of strategy optimization for EURUSD H1.

SMA with period 10, EMA with period 70 and 275. Let's see what results the optimized strategy produces.

Fig.8. Result of the operation of the selected parameters in the period from 2007.01.01 to 2008.01.01.
Fig.8. Result of the operation of the selected parameters in the period from 2007.01.01 to 2008.01.01.

Как видим, результат получился положительный, за этот период прибыль составила — $817. Проверим теперь, как данные параметры работают на будущем периоде 08.01.01 по настоящее время.

Fig.9. Operation of the system without parameter selection at the site from 2008.01.01 to 2008.03.15.
Fig.9. Operation of the system without parameter selection at the site from 2008.01.01 to 2008.03.15.

Testing showed that the parameters turned out to be workable not only on the historical data, where the original study was conducted, but also on other data. The result for two months was just over $200.

We will conduct a similar test for EURUSD H4. We will select the parameters from 2006.01.01 to 2007.06.01. Timeframes are moved apart, as the selected timeframe is higher and the period for selecting parameters needs to be longer to take into account the strategy operation at various price movements.

After obtaining the results of parameter matching, we took the average result, because the best parameters showed a small number of deals.

Fig.10. Results of strategy optimization for EURUSD H4.
Fig.10. Results of strategy optimization for EURUSD H4.

Result: SMA with a period of 25, EMA with a period of 20 and 120.

Such settings of averages (second EMA less than SMA) generate a different kind of trading algorithm, because the standard described pattern is totally inoperable on 4H.

Fig.11. Result of operation of the selected parameters in the period from 2006.01.01 to 2007.06.01.
Fig.11. Result of operation of the selected parameters in the period from 2006.01.01 to 2007.06.01.

Let's check these parameters on the section from 2007.06.01 to 2008.03.15.

Fig.12. Result of operation of the selected parameters in the period from 2007.06.01 to 2008.03.15.
Fig.12. Result of operation of the selected parameters in the period from 2007.06.01 to 2008.03.15.

As you can see, the parameters we have chosen for H4 are also workable for future periods.

Bottom line

In general, the system showed good results with 100% mechanization rules, it shows the possibility of its more effective use for non-mechanical trading. The advantage of this system is that when the conditions of our pattern appear, the discretionary trader is able to assess the overall environment to open a trading position. The mechanical approach, on the other hand, gives the opportunity to choose the most successful parameters to track a good set-up.

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