There are two bull bear flag strategies to trade. The one that we are going to focus today is bull bear flag momentum strategy. There are many parameters in the strategy but we are only going to optimize for two. Timeframe and momentu levels.
This strategy executes shorts when price breaks uptrendline(green line) with stochastics.
Curious about how a simple bull flag momentum strategy performs under varying conditions? In this analysis, I’ll break down the strategy and explore how different parameters impact its effectiveness.
For this experiment, I’m loading 30 days’ worth of Nasdaq data on NinjaTrader and applying a straightforward bull flag momentum strategy. To see how subtle adjustments can influence the strategy’s outcome, I’ll be modifying the following key factors:
- Time Frame: I will test three different intervals—2-minute, 1-minute, and 30-second charts—to observe how the strategy behaves across various short-term time frames.
- Stochastics Levels: I’ll experiment with different Stochastics settings, specifically focusing on levels of 60, 70, 80, and 90, to determine how shifts in overbought and oversold conditions affect momentum signals.
By tweaking these parameters, I aim to uncover how such changes can optimize or hinder the strategy’s performance. Stay tuned for insights into whether small adjustments lead to significant gains or missed opportunities.
Settings used in this strategy run:
2Min Timeframe, stoch 80/20, Take profit 40 ticks, stop loss 2 ticks below lowest/highest of the last 2 bars, MaxRisk is 30 points.
Detailes statistics of this run. As we see, strategy took 28 trades, it was 71% profitable and generated +2270. Great results.
What if you put same strategy with extreme momentum levels? like Stoch 90/10? It reduces trades drastically. We go down from 28 to only 3.
What happens when you loosen the momentum settings, such as adjusting the Stochastics to 70/30 levels? The strategy responds by doubling the number of trades it executes. However, this increase in trade volume introduces more low-probability setups, which is reflected in the results. The percentage of profitable trades drops to just 53%, and the strategy ends up with a negative net profit. This suggests that relaxing the momentum criteria leads to overtrading and reduces the overall efficiency of the strategy.
Loosening the momentum settings to Stochastics 60/40 doesn’t impact the percentage of profitable trades. However, compared to the 70/30 Stochastics levels, the key difference is that the strategy doubles the number of trades taken at 60/40. While the win rate remains the same, the increased trade frequency may expose the strategy to more low-quality setups, potentially affecting overall performance.
Now, let’s focus on time frame adjustments. We’ll shift our setup from trading on a 2-minute chart to a 1-minute chart, while keeping the same parameters as in our previous bull flag momentum strategy run, with Stochastics set at 60/40. As you can see, the number of trades jumps from just over 100 to more than 200. Despite this increase in trade volume, the percentage of profitable trades remains unchanged, staying below 70%. The strategy remains profitable, but primarily due to the sheer quantity of trades taken, rather than an improvement in trade quality.
I believe maintaining the same take profit level on the 1-minute chart as on the 2-minute chart wouldn’t align with the market dynamics. So, we’re reducing the take profit from 40 to 30 ticks, while still keeping Stochastics at 60/40. Interestingly, this adjustment slightly improved the percentage of profitable trades, but the net profit nearly halved. This suggests that, for the 1-minute time frame, take profit levels between 30 and 40 ticks seem to be the most reasonable for the bull flag momentum strategy.
I’m tightening the momentum settings by adjusting the Stochastics levels from 60/40 to 70/30 while keeping the take profit at 30 ticks. As you can see, the percentage of profitable trades remains around 50%, which is quite low for a scalping strategy. This indicates that both the 60/40 and 70/30 Stochastics levels are insufficient for capturing strong momentum. Once the price reaches a Stochastics level of 70, for instance, sellers tend to step in and drive the price down, limiting the strategy’s effectiveness.
Stochastis of 80/20. What a difference between 2Min and 1Min outcomes with high momentum.
Stochastis 90/10. Few trades
Bull flag momentum strategy is a winner on 2 minute timeframe with Stochastics set at 80/20. Over a 30-day period, the strategy produced 28 trades, averaging about 1.3 trades per day. While the trade frequency is relatively low, the high percentage of profitable trades and the net positive result highlight the strategy’s effectiveness under these conditions. Like I mentioned earlier there are many parameters to optmize the strategy but these were only two.
Author: Boris Tkachev
trader