Repository for my ongoing research
Under this chapter I collect some results applying the well know three bars reversal pattern. For a longer explanation please refer to this link.
The underlying asset is the SP&500 index, starting from the turmoil of global financial markets during August 2015. My focus is to simulate an intraday trading with a 5 minutes time frame, LONG only, so the pattern is used to buy a position and sell it at a higher price (hopefully). All simulations are tested with my software libraries written in R.
The second case (ii) uses the same pattern, and in addition adds a filter signal looking for an underlying "momentum" of the trend, in order to avoid entering a long position when a downward price movement is occurring. As many momentum indicators (RSI, MACD, etc.) this creates a lag of the responsiveness of the system, and during sideways period, may be ineffective.
My view about this pattern is negative at least for the bearish - sideways scenario of the SP&500 index. Used for an intraday trading system, in particular with a short period (5 minutes) implies negative returns on the long run. Using a momentum indicator to filter out bad downward movements can help the overall result, but in a real trading environment with a slippage and commissions it's not enough. Where this pattern really shines is with an upward movement of the underlying trend, and in such a case it works. In particular adding a filter based on the momentum makes the difference. In addition, a trailing stop placed to the previous lows seems to be the best way to manage each trade.