A temporary trading pause can improve your win rate if you’re trend following a volatile market.
Here I’ll program a trading pause into a simple breakout strategy, and test its effectiveness on the Widow Maker – the GBPJPY.
If you’re a trend follower, there’s no better feeling than riding a massive trend. Regardless of your trading strategy or timeframe, you’re practically guaranteed to capture a bagful of pips.
Unfortunately, markets typically trend less than half the time. If you have reason to believe the market will enter a period of consolidation, would it be prudent to implement a trading pause?
Let’s find out!
Market volatility is often cyclical in nature. There are alternating periods of volatility and consolidation.
For this reason, the next trade after a big win is usually a loss. If you’re trading a longer-term trend following strategy that has just captured a good trend, it seems to be a good idea to pause trading.
This is actually what the Turtles famously did for one of their Donchian breakout strategies. To avoid a series of losing trades in choppy markets, they would skip entries if the last trade was a winner. The strategy would be paper traded until a simulated loss occurred.
Testing a Trend Following Trading Pause
To test the effectiveness of a pause, I’ll use a simple Bollinger Band breakout strategy with its upper/lower bands serving as inbuilt trailing stops.
Here is its performance on the 1-hour GBPJPY over the past 10+ years.
An effective pause will improve the strategy’s win rate and risk-adjusted performance.
Programming a Trading Pause
For this strategy, the pause will be activated when the previous trade has won more than 75 pips.
The pause will be for 20 bars, or about 1 trading day.
Here’s the programming logic for long entries:
The strategy goes long after a Bollinger Band upper penetration and:
- The previous trade earned 75 pips or less
- Or the previous trade earned over 75 pips, and a 20-bar pause has elapsed
I programmed these entry conditions into AlgoWizard:
Parentheses are used to create the nested IF conditions for the pause.
Is this revised strategy up to snuff?
Backtesting the Trading Pause
I redid the backtest as shown:
The trading pause removes 12% of trades, while concurrently increasing the win rate by 2%. This leads to significant improvements in expectancy and profit factor.
The flattening of the equity curves over the second half of the backtest is still a concern. Fortunately, since the original entry condition (Bollinger Band penetration) is very basic, there should be room for more entry filters without excessive risk of overfitting.
A pause is a worthy entry filter that could improve your trend strategy’s win rate.
In general, such pauses work better for short-term strategies that trade frequently. Even with a few skipped trades, you can still manage to catch a good number of trends.
If you trade longer-term strategies, like those on the daily timeframe, you need to catch every trade to add to your bottom line. A couple of trading pauses could keep you out of the market for most of the year.
Pauses can be implemented for a variety of other reasons. Extreme market volatility and losing streaks are two common examples.
Sometimes a little patience can help you win the long game.