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.

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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.

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