Richard Wyckoff – Mean Reversion | Trading Strategy (Time Exits)

I. Trading Strategy

Developer: Richard Wyckoff. Concept: Trading strategy based on false breakouts. Research Goal: (1) Strategy performance with time exits; (2) Benchmarking against alternative entry methods. Specification: Table 1. Results: Figure 1, Figure 3. Trade Setup: Long Trades: Price moves below a trading range and reverses back into the range (“Bear Trap”). Short Trades: Price moves above a trading range and reverses back into the range (“Bull Trap”; Figure 2). Portfolio: 42 futures markets from four major market sectors (commodities, currencies, interest rates, and equity indexes). Data: 33 years since 1980. Testing Platform: MATLAB®.

II. Sensitivity Test

All 3-D charts are followed by 2-D contour charts for Profit Factor, Sharpe Ratio, Ulcer Performance Index, CAGR, Maximum Drawdown, Percent Profitable Trades, and Avg. Win / Avg. Loss Ratio. The final picture shows sensitivity of Equity Curve.

Tested Variables: Pattern_Size & Time_Index (Definitions: Table 1):

Figure 1 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $0).

STRATEGY	SPECIFICATION	PARAMETERS
Auxiliary Variables:	N/A
Pattern:	Figure 2 | A “Bull Trap” is a setup for short trades. (A “Bear Trap” is a mirror image of a “Bull Trap”). Price(A), Price(B), Price(C), and Price(D) are prices at points A, B, C, and D.
Setup:	Short Trades: Price moves above a trading range and reverses back into the range (“Bull Trap”; Figure 2 shows Correction, Cancel_Level, and Entry_Level). There are two conditions: 1. Correction ≥ Pattern_Size; 2. Price(D) ≤ Cancel_Level, where: Cancel_Level = Price(B) + |Price(B) − Price(C)| * Cancel_Index. Long Trades: Price moves below a trading range and reverses back into the range (“Bear Trap”). There are two conditions: 1. Correction ≥ Pattern_Size; 2. Price(D) ≥ Cancel_Level, where: Cancel_Level = Price(B) − |Price(B) − Price(C)| * Cancel_Index.	Pattern_Size = [10, 100], Step = 2 (bars); Cancel_Index = 1;
Filter:	N/A
Entry:	Long Trades: A buy stop is placed one tick above the Entry_Level, where: Entry_Level = Price(B) + |Price(B) − Price(C)| * Entry_Index. Short Trades: A sell stop is placed one tick below the Entry_Level, where: Entry_Level = Price(B) − |Price(B) − Price(C)| * Entry_Index; (Figure 2).	Entry_Index = 1;
Exit:	Time Exit: nth day at the close, n = Time_Index.	Time_Index = [1, 40], Step = 1;
Sensitivity Test:	Pattern_Size = [10, 100], Step = 2 (bars) Time_Index = [1, 40], Step = 1
Position Sizing:	Initial_Capital = $1,000,000 Fixed_Fractional = 1% Portfolio = 42 US Futures ATR_Stop = 6 (ATR ~ Average True Range) ATR_Length = 20
Data:	42 futures markets; 33 years (1980/01/01−2013/06/30)

Table 1 | Specification: Trading Strategy.

III. Sensitivity Test with Commission & Slippage

Tested Variables: Pattern_Size & Time_Index (Definitions: Table 1):

Figure 3 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $100 Round Turn).

IV. Rating: Richard Wyckoff – Mean Reversion | Trading Strategy

A/B/C/D

Related Entries: Richard Wyckoff – Mean Reversion (Entry) | Richard Wyckoff – Mean Reversion (Risk-Reward) | False Breakout (Setup & Exit 1) | False Breakout (Setup & Exit 2)
Related Topics: (Public) Trading Strategies

CFTC RULE 4.41: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

RISK DISCLOSURE: U.S. GOVERNMENT REQUIRED DISCLAIMER | CFTC RULE 4.41

Codes: matlab/wyckoff/1/