First, a huge “Thank you!” to all who helped me out with my HLHB Makeover last week. I’m sure y’all will be glad to hear that the results are in, and that the winner is… drum roll, please… Makeover Option 1!
Under that option, I planned to replace Stochastic with the Average Directional Index (ADX) and reduce my 30-pip filter to just 20 pips. Here’s a brief rundown of the changes that I’m going to implement:
1. Apply the ADX indicator with a length of 12 (I know I said 18 initially, but I want the system to generate more signals), which is equivalent to 2 days, on the EUR/USD 4-hour chart. Since the ADX measures the strength of the trend, I’ll be able to use that as a confirmation indicator after the EMAs have crossed.
If the ADX is less than 25, that would mean the price is ranging and I won’t take any trades. If the ADX is higher than 25, it means that the price is trending and I could enter a trade using my new 20-pip filter.
2. If the pair is trending up, I’ll set my buy order 20 pips above the high of the crossover candle. If the pair is trending down, I’ll set my sell order 20 pips below the low of the crossover candle.
3. For my stops, I’ll set them 10 pips below the low of the candle before the crossover candle if I’m long. I’ll place them 10 pips above the high of the candle before the crossover candle if I’m short. I will limit my stops to 150 pips though. I’ll risk 1% of my account, calculating my position size based on my stop.
To make things even clearer, here are two sample setups:
The first setup was a valid one, as there was a crossover, ADX was above 25, and the next candle fell 20 pips below the crossover candle. As you can see, the first trade turned out to be very profitable.
The second one was also a valid one, but the HLHB system wouldn’t have caught it. This is because the candle after the signal was generated wasn’t able to rally 20 pips above the high of the crossover candle.
Now, of course I’m not going to trade this right away! So, for the next two weeks, I’ll be backtesting my system to see if HLHB version 2.0 is feasible.
Will the HLHB version 2.0 end up being more profitable than the first? What do you think?