Can a Trading Pause Improve Your Trend Following Results?

Aug 8, 2021

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!

Volatility Cycles

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.

Wrapping Up

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.

Want to develop a portfolio of automated trading strategies?

Supercharge your strategy development with StrategyQuant

Access 14-day FREE trial here!

Get up to USD 300 discount!

Strategies need improvement?

Use QuantAnalyzer’s powerful analysis tools

Try the FREE version here!

Get 20% Discount here!

FXVM Forex VPS
Follow Us

Popular Posts

Laguerre RSI Trend Following Strategy

The Laguerre RSI attempts to improve the responsiveness of the regular RSI, whilst keeping whipsaw trades to a minimum. Let’s see how well it detects short-term pullbacks for a trend following strategy!

read more

What is Fixed Ratio Money Management?

Have you heard of fixed ratio money management? How does it compare to the popular fixed fractional approach? Here I’ll explain how fixed ratio works, and see how it stacks up against fixed fractional money management.

read more

Build a Diversified Portfolio With QuantAnalyzer

The ability to efficiently trade a diversified portfolio of strategies is one of the biggest advantages of algorithmic trading. Here we will use QuantAnalyzer’s Portfolio Master to build a portfolio consisting of high performing, uncorrelated strategies.

read more

What Is the QQE Indicator?

The QQE is a mysterious indicator that sometimes pops up in trading forums. Does it deserve a place alongside the more traditional momentum indicators like the RSI and CCI? Let’s add it to a trend following strategy to find out!

read more

Hey there, Wayne here! I’m on a mission to develop robust algorithmic trading strategies for the forex markets. Trading Tact is where I share my trading methods and insights.

Follow Us
Have a Question?

Comments

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *

Want to develop a portfolio of automated trading strategies?

Supercharge your strategy development with StrategyQuant

Access 14-day FREE trial here!

Get up to USD 300 discount!

Strategies need improvement?

Use QuantAnalyzer’s powerful analysis tools

Try the FREE version here!

Get 20% Discount here!

FXVM Forex VPS

Recent Posts

Should You Use the Kelly Criterion for Forex Trading?

Should You Use the Kelly Criterion for Forex Trading?

The Kelly criterion is a famous mathematical formula that attempts to maximize your long-term capital growth. In this post, I’ll apply it to a EURUSD breakout strategy and explain some of its potential shortcomings when applied to forex trading.

read more

Hey there, Wayne here! I’m on a mission to develop robust algorithmic trading strategies for the forex markets. Trading Tact is where I share my trading methods and insights.

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Make your money work for you!

Make your money work for you!

 

Get trading ideas and strategy development tips delivered to your inbox!

Thanks for subscribing!

Pin It on Pinterest

Share This