Video Transcript:
This is what happens when you trade EMA 20 as everyone teaches it. And this is what happens when you fix it. One of the most popular trading strategies ever is trading pullbacks from the indicator called EMA 20, which is the exponential moving average. The strategy looks like this. If the price hits the EMA 20 from above, then you enter a long trade. If the price moves below the EMA and hits it from below, then you enter a short, like here. This is one of the most popular strategies among retail traders. It has only one flaw. It kind of sucks. I ran a small backtest of this strategy and here is what came out of it. In the last two months on EUR/USD, there were 138 trades, 67 winners and 71 losers, which gives us a win rate of only 48.5%. I tested it with a 10-pip take-profit and a 10-pip stop-loss. So, the risk-reward ratio was one. So, what does it tell us? It tells us that instead of using this strategy, you might as well toss a coin. All right, so the strategy sucks. Big surprise, right?
But here is a challenge. Can I make this strategy into something profitable? The starting point is to tell where the EMA 20 strategy fails and where it actually works. During testing, I noticed that it performs terribly in sideways markets, but it does okay in trends. This got me thinking, what is an easy but reliable way to tell if there is a trend? The answer is VWAP. So, I adjusted the original strategy like this. The core of the strategy remains the same. There is EMA 20 and I trade pullbacks from it. But this time I don’t trade each pullback. I trade them only if there’s a slope in the VWAP. In other words, I trade only when the VWAP shows a trend. If the price is above VWAP, I trade longs. And if the price is below VWAP, I trade shorts, like in here.
And that’s it. Now, let me show you a couple of examples. On this 30-minute chart, the price moves below the EMA and makes a couple of pullbacks to it. Remember that for a valid signal, there needs to be a slope in the VWAP. So, here is the first viable short. Then there’s another, and another one is here. After that, the VWAP starts to go sideways. So this pullback and this pullback are not viable trade entries. In this next example, the price is moving above the EMA, which means that we will be looking for longs. The first pullback to the EMA is here, but it is not a viable trade signal because at this point the VWAP does not show a trend. It goes sideways. The next pullback is here. And in this case, it is a valid signal because at this point the VWAP is already showing a trend. Now, this is just a couple of examples, but as you can see, this is clearly working.
Now let me show you the result. Here is the equity of the improved strategy. Not too bad, is it? Let me now compare it to the previous strategy. So here on the left is the original EMA 20 strategy. The one on the right is the same strategy with VWAP added. Total trades dropped significantly from 138 to 73. But what is important is that the win rate rose from 48.5% to 60%. This means that a losing strategy turned into a profitable one. The important part is how I improved it. I didn’t add more useless indicators. I didn’t change the EMA period. I didn’t play with take-profit or stop-loss or any other detail like that. Instead, I looked at the strategy itself. I found the weak spot, which was the bad performance in a sideways market, and I fixed it with VWAP. So what I want to show you here is that you need to actually think about the strategy, not try a bunch of small tweaks and hope that one random change will magically solve everything, right?
Okay. So we have a strategy that gives promising results. What do we do next? There are a couple of ways to push it further. First, I suggest testing with a higher risk-reward ratio. This strategy works best in a trend, and in trend strategies, it makes sense to aim for more. When you catch a good trade entry, you can often ride the move for a bigger profit. So, increasing your take-profit from, let’s say, 10 pips to 15 pips or more is a solid first step. Another option, which is a bit more advanced, is adding order flow for extra entry confirmation. This can filter out a lot of false signals. And if you guys want to learn more about order flow, I’ll drop a link below this video to my free order flow webinar. You can check it out.
All right. Now, before I wrap it up, I want to add a quick note about these mechanical strategies. Things like when price touches the EMA, you enter a trade stuff like that. Those are mechanical strategies. Those are simple, which obviously is nice. But the downside is that they are not very consistent. You saw it on both equities, right? There were times when the strategies did great, and then there were times when they went through long losing streaks. In my experience, that’s the main problem with those types of strategies. And that’s why I prefer my volume profile strategy. It is not as mechanical, but it delivers much more consistent results. You can see it here. This is how the volume profile strategy performed over the last three years. As you can see, it’s far more stable.
So, if you guys want to learn my volume profile strategy, just visit my website. It is at trader-dale.com. And if you click this button which says trading course and tools, it will take you to this page where you can browse my trading education and custom-made trading indicators. There’s the volume profile pack, the order flow pack, the VWAP pack, and the smart money pack. You can get those separately in here, or scroll down a bit and get them all together for a massively discounted price at the bottom of this page. All right, so that’s about that. Thanks for watching the video and I’ll be looking forward to seeing you next time, and until then, happy trading.
Comments
Post a Comment