@Jako8557 some follow-up from me on the earlier discussion about the requirement to close about a bearish or downthrust bar.
One of the pure price action structures I look at a lot in my work is called the Spike Low - which is simply a bar whose low is lower than the low of the bar before, and lower than the low of the bar after (and vice versa for a Spike High) - hence once the bar after closes/completes and it has a higher low, that provides confirmation that the Spike Low is a short term low.
I use that for many things but I thought after the discussion the other day, I would look at a stock on the weekly timeframe and see what happens if I look for Weekly Spike Lows which are followed within a few bars by a bar that closes above the high of the Spike Low. Got some interesting results.
I picked the weekly chart of WOW over the last 8 years, going back to 2012, mainly because it exhibits a couple of bullish runs separated by a strong bearish run - I like to test setups in both types of conditions - see chart below:
So I went through the data & identified every Spike Low and then compiled some stats on entries taken from those, where I recorded a buy entry at the close of the 1st bar that closes above the Spike Low high, with a stoploss 1c below the Spike Low low, and then close the buy trade at the close of the 1st bar that closes above the high of the entry bar, waiting as many weeks as required for a bar to close above the high of the entry bar or hit the stoploss. I also took note of variables such as how many bars after the Spike Low was the entry bar, how many bars after the entry bar was the trade closed, was the entry bar a larger or smaller range than the range of the Spike Low, was its close higher than its open, and did it close in the upper quartile of its range, or lower in its range. Trade size (# of shares purchased) was varied based on the difference between the entry and stoploss price so that the trade value at risk (if stoploss hit) was a fixed amount of $500.
Below are 2 sets of results. The results on the left are all the data points in the 8 year sample (60 trades), and the results on the right are a subset where I restricted valid entries to only those setups where (a) the entry bar was the 1st bar after the Spike Low, (b) its range was larger than the Spike Low range, and (c) it closed in the upper quartile of its range:
While both options resulted in a similar total profit, and both have a good strike rate (even 75% is good imo), it is quite clear the stricter conditions on the right produce (a) better average profit per trade (the above are before commission so assuming a basic commission of $20 per trade to open & close, the conditions on the left barely cover the commission), but the equity curve on the right is pretty consistent whereas the one on the left has a sustained drawdown that roguhly coincides with the bearish period on the WOW chart.
Below is a close-up of an area on the above chart which explains the setup in detail, and shows the difference between 2 setup that were included in the filtered trades for the equity curve on the right, versus 2 setups that were also included for the the equity curve on the left:
Pretty encouraging pilot sample and shows how to make use of that "close above" concept you shared, so many thanks.
Cheers, Sharks.
