Richard Wyckoff – Mean Reversion | Trading Strategy (Risk-Reward)

I. Trading Strategy

Developer: Richard Wyckoff. Concept: Trading strategy based on false breakouts. Research Goal: Risk-reward sensitivity of Wyckoff patterns. 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: Reward_Index & Risk_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; Pattern_Size = 10 bars (Default value). 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; Pattern_Size = 10 bars (Default value). 2. Price(D) ≥ Cancel_Level, where: Cancel_Level = Price(B) − |Price(B) − Price(C)| * Cancel_Index.	Pattern_Size = 10 (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:	Risk Exit: Long Trades: A sell stop is placed at: Entry_Level − |Price(B) − Price(C)| * Risk_Index. Short Trades: A buy stop is placed at: Entry_Level + |Price(B) − Price(C)| * Risk_Index. Reward Exit: Long Trades: A sell limit is placed at: Entry_Level + |Price(B) − Price(C)| * Reward_Index. Short Trades: A buy limit is placed at: Entry_Level − |Price(B) − Price(C)| * Reward_Index. Stop Loss Exit: ATR(ATR_Length) is the Average True Range over a period of ATR_Length. ATR_Stop is a multiple of ATR(ATR_Length). Long Trades: A sell stop is placed at [Entry − ATR(ATR_Length) * ATR_Stop]. Short Trades: A buy stop is placed at [Entry + ATR(ATR_Length) * ATR_Stop].	Risk_Index = [0.5, 3.0], Step = 0.1; Reward_Index = [0.5, 3.0], Step = 0.1; ATR_Length = 20; ATR_Stop = 6;
Sensitivity Test:	Risk_Index = [0.5, 3.0], Step = 0.1 Reward_Index = [0.5, 3.0], Step = 0.1
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: Reward_Index & Risk_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) | 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/2/