In this follow-up article, Adam Lemon of DailyForex.com outlines methods the forex trader can use to enhance the profitability of this candlestick pattern and compares backtest results with those of another similar entry strategy to see what—if anything—is special about trading the Flying Buddha pattern.
In the first part of this series I explained the Flying Buddha candlestick pattern which can be used to trade forex profitably. In this second part I will explain methods you can use to enhance the profitability of this entry method. I will also compare backtest results with results of another similar entry strategy and we will see whether there is anything special about trading the Flying Buddha pattern.
Testing the Flying Buddha Pattern
Let’s start by taking a look at backtest results. A backtest was conducted from 2002 until the end of 2015, which is a total of 16 years covering many types of market conditions. The currency pairs examined were the seven major USD currency pairs. Hypothetical trades were taken following Flying Buddha candlesticks on the H4 London time chart only if the price was above its levels from three months and six months ago (for long trades) or below its levels from three months and six months ago (for short trades). Entries were placed 1 pip past the Flying Buddha candlestick, with stop losses placed just the other side of the candlestick—or if the previous candlestick extended beyond that—then just the other side of that previous candlestick.
When trading the Flying Buddha pattern, the entry candlestick was the final candlestick of the trading week, it was not taken and was excluded from the results. If a trade entry was not triggered during the very next candlestick following the Flying Buddha candlestick, then the trade was cancelled.
During the period covered by the backtest there were 5,307 hypothetical trades. The hypothetical results are shown in the table below, in total and by currency pair, in the form of expectancy per trade at different reward:risk profit targets.
It is easy to see that the method had a positive expectancy that increases with the size of the profit target all the way up to a reward:risk ratio of 100 to 1.
Comparison of Flying Buddha Pattern Results with Rough Entry Results
Let’s compare those results with the result of a backtest covering the same currency pairs and time period, but using a different entry method: just using the next candle break of any candlestick that made a low beyond the previous four candlesticks in an upwards trend or vice versa in a downwards trend. There were 6,482 hypothetical trades, i.e. about 20% more trades than there were in the Flying Buddha test. The results of this backtest are shown below:
If we compare the headline results of all of the hypothetical trades taken trading the Flying Buddha pattern, we see that this entry method was a little superior to the less discriminating entry method, but there is not really a great deal in between the two methods. This is good news, as it shows you have two different entry methods that can be used to profitably exploit trends.
Flying Buddha Pattern by Time of Day
Now let's break these results down further. Is there a great difference between the Flying Buddha entries that appeared at different times of the day? The times shown in the table below are London times:
It is clear that the three best times to enter a trade are during the 4-hour periods that begin at midnight London time (which is also midnight UTC…or very close to it) and then later at noon and 4:00PM (which correspond to the first two-thirds of the New York business hours, including the London/New York overlap).
Before we try to draw any conclusions in trading the Flying Buddha pattern from this...To see the remaining charts and to read the entire article, click here…
By Adam Lemon, Contributor, DailyForex.com