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hey traders in today's video I'm going
to be breaking down a very simple but
profitable Channel breakout system in
Pine Scripts
now before we start this is not trading
advice I am not a financial advisor so
make sure to always do your own research
and make your own trading decisions
don't trust anyone blindly not even me
now in saying all of that this system
surprised me it's quite a simple system
but it does show potential so this
originally came from a question from
someone on my email list Neville a few
weeks ago I asked for suggestions for
content and Neville sent this in he said
I would be interested in how you would
go about coding a weekly system that
first looks back over a certain period
let's say 15 bars for the highest high
value then the close must be above a 90
EMA then the close must be higher than
it's open then there must be a 1.25
increase in volume so a rise in activity
trading activity on the instrument and
the instrument must have enough
liquidity now two things uh first
Neville didn't mention an exit reason so
I'm just going to make one up it's going
to be very simple and the second thing
is I don't know what he means by enough
liquidity that's subjective but
obviously I'll add a user input and
demonstrate a couple of methods we can
use to filter out instruments that don't
have enough liquidity to be properly
traded obviously this depends on your
account balance someone with a very
small account can trade nearly anything
but the larger your account gets the
more an issue a liquidity becomes so
let's delete this open up the pine
editor and we'll get into today's lesson
uh but before we do that I did slap this
system into realtest which is a new back
testing software I've been learning how
to code in it's primarily used for stock
Traders but here's the results of this
system using a 20 position portfolio on
the Russell 1000 so American Stock
Market Russell 1000 20 positions no
leverage we did get let me zoom in a bit
here we did get pretty much identical
return to buy and hold so this is The
Benchmark the S P 500 spy ETF if you
were to have bought spy at the beginning
of this back test and held it until
today you would have had an annual
average return of about 8.37 and a mass
drawdown of half your money you would
have lost half your money in order to
make this return on the other hand this
really simple Channel breakout system
has almost an identical rate of return
but half the drawdown so I found this
really interesting it just goes to show
that you don't need to be particularly
complex in your systems in order to beat
the market I haven't done extensive back
testing on the system this is just a
single run back test but considering I
haven't tweaked anything I haven't
optimized anything it's a good
indication that this simple system is
quite robust so that's interesting to me
but we'll come back to the real test
side of things at the end of the video
if you're interested in this stuff I'll
elaborate on it and we get a lot of
metrics here we get the monthly
breakdown Mass drawdown for each year a
lot of different um statistical metrics
to to analyze we'll go over these at the
end of the video if you're interested so
hang around for that but for now let's
jump into the pine editor and break down
the trading view source code to the
system all right so let's break down the
source code here first of all this is
obviously a strategy script I've set
overlay to true so we can draw over
price action I've set my initial Capital
to 100 000 US Dollars and my default
quantity type is a percentage of equity
and we're investing 100 of our equity on
every trade not really a risk management
system I would recommend but for back
testing purposes today and just to see
if the system has any Merit whatsoever
it will do I also haven't included
commission costs here but if you're
trading the US market commission costs
are pretty negligible and the commission
costs were included in my real test
version of the script so we'll come back
to that later at the end of the video
now for our user inputs we have a 15 bar
weekly bar Channel look back then we
have our filter EMA so when 90 weekly
bar period EMA then we have my stop loss
trailing stop exit method for today's
lesson since Neville didn't suggest a
nice reason I'm just using a really
simple 10 bar trailing stop if the
market closes below this 10 bar trailing
stop we exit our position for a loss or
a profit then we have our volume
increase so 1.25 percent is how much
volume needs to increase a minimum of
1.25 on the previous bar then we have
our liquidity filter so this uh
is spelled incorrectly for one thing so
there's a couple of ways we can go about
filtering liquidity and since Neville
asked about liquidity filters in uh
specifically I will elaborate a bit on
this part of the script so the method
I'm using right here is just to check
how many shares have been traded on this
Market on average over the past 100 days
so we're getting down here we'll get to
this in a moment but we're getting an
EMA of volume over the past hundred bars
and if that value that average 100 bar
volume traded shares traded is greater
than a million shares then we consider
this a valid setup another
filter we could use is turnover so if I
set this to say 500 000.
turnover filter
we can calculate our turnover by
multiplying the closing price
by our volume and that will give us our
turnover in US dollars in this
particular case we're on a US market
we're trading USD so this would give us
how much USD volume was traded today so
if we wanted to add a turnover filter
here let me cut this out
um this next part of the code this block
here we're just getting our indicator
values and our Channel high so the
highest price that the market traded
over the past 15 bars using our default
input if I wanted to add another filter
here I could say
um let's call this let's put it up the
top we'll call it EMA volume
and this will be ta dot EMA volume
um let's just hard code it to 100 bars
but now I can copy this down into here
and we'll get to that part of the script
in a moment so now if we wanted to see
the turnover let's plot turnover with
the color of color dot purple
and have a quick look here so now you
can see the turnover for each weekly bar
remember we're on a weekly bar so this
is showing us how much money in US
dollar terms traded each week on this
particular Market which is Ford Motors
as you can see it's a pretty liquid
instrument there's a lot a lot of money
being traded in Ford generally speaking
now this will give us the current bars
turnover if we wanted to get average
turnover then we simply multiply the
current closing price
by our average volume over the past 100
bars that will give us the average
turnover in US Dollars over the past 100
weekly bars hey guys sorry to jump in
here this is editing Matt after I've
recorded this video I realized that uh
this formula for calculating the average
turnover is actually incorrect the
correct way to write this is like so we
need to get the moving average of the
volume multiplied by the close that will
give us the 100 exponential moving
average of turnover so this will be in
the corrected code Linked In the pinned
comment below and now we can add another
filter here we can say did we trade at
least a million shares over the past
hundred bars and is our average turnover
greater than let's say 500 000 US
Dollars and I've got this input here we
can we can use instead so those are two
methods for filtering out low liquidity
instruments so instruments that aren't
traded very heavily now depending on the
market capitalization of whatever stocks
you're trading or whatever Market you're
trading Bitcoin doing crypto markets
this isn't really appropriate for Forex
Trading because the volume for Forex
Trading markets is dependent on the
broker not the global markets so
currencies are the most liquid markets
in the world but most Brokers only show
the volume of their brokerage so I don't
typically use liquidity filters or
anything to do with volume in Forex
Trading systems but in stocks and crypto
it's pretty important so there's our two
liquidity filters we've got all our
important indicator values the final
thing to do is check our entry
conditions so LC stands for long
condition I could have put this all on
one line of code but that makes it
harder to read so I've put each
condition on its own line first
condition is the current close must be
greater than our Channel high if we
don't include this historical operator
then the condition will never be met
because this channel High includes the
current bar and the current bar
obviously cannot close greater than its
own high so we need to check the
previous bars is high the the previous
bars 15 period Channel high if price
closes above that we have a channel
breakout but we have some other filters
we need to check the second filter is
that the closing price must also be
above our EMA which in this case is our
90 period EMA so 90 week EMA the third
condition is that the bar must close
higher than it's open so we need a
bullish bar we can't have a gap up above
our Channel high and then a bearish
close that would not be a valid trading
setup we need a bullish breakout while
we're above this moving average so we
need momentum to the upside Channel
breakout confirmed Channel breakout and
a bullish bar kicker to use a poker term
and then finally we need to check the
volume filter so we need the current
bars volume to be greater than the
previous bars volume multiplied by and
this little equation here just converts
this user input into a decimal form so I
could have got rid of this entirely but
then our user input would need to look
like this
1.02
1.0125 would be a 1.25 increase but to
make it more intuitive to work with the
script I've included this formula which
if I pull up a calculator real quick
will look something like this so let's
say the previous Bar's volume was 10
shares we need today's bar or this
week's bar volume bar to have traded at
least 10
times
1 plus and then 1.25 divided by 100 if I
close those off
10.125 is our volume that the current
bar must have traded in order to exceed
the 1.25 increase on the previous bar so
hopefully that makes sense it's pretty
simple mathematics but it does look a
bit confusing when you're writing it out
in code if you're new to coding the
final condition here is the liquidity
filter so we need the average over the
past hundred bars
a volume to be greater than our
liquidity input so a million shares in
this case that might be a bit too high
for certain markets you might want to
swap these around you might want a
hundred thousand shares traded but at
least a million in turnover that
probably makes more sense but I'll leave
that to you guys to play around with for
today's demonstration purposes this is
fine so we're combining our two filters
here our share our
um
share filter and our turnover filter
these are combined into one condition
and then long entry combines all five
conditions
um to give us our entry signal and if
long entry is true then we enter a long
trade we give the long trade an ID of
long I've already specified in the
strategy default parameters how much I'm
risking on each trade we're risking well
we're not risking we're investing 100 of
our equity on each trade but because we
have such a tight stop loss if I zoom in
here you can see once we enter a trade
once we get that confirmed Breakout
over the previous bars 15 bar High the
10 period EMA starts drawing and once we
get a close below that 10 period EMA we
exit on the next bar is open so that's
our stop loss slash trailing stop profit
system for this script and this is where
we exit the trade if the current Buzz
close is less than our 10 bar EMA so we
don't discriminate between profit or
loss we just exit so this is kind of
like a trend following system where our
all momentum system we're just trying to
capture breakouts ride them for the
short term and as soon as momentum
um sort of slows down or reverses like
we did here on this big red bar that's a
good time to get out of our trade
obviously it'd be nice to exit up here
but good luck finding a method that can
see into the future and tell you when
you're going to have a big red bar I've
never found one in all the years I've
been trading in and researching systems
there are some techniques you can use to
to lock in profit once you
um into profit but in my experience
don't take my word for it but in my
experience trying to lock in profits
trying to get too creative with locking
in profits really doesn't tend to add
much to the bottom line simple exits
tend to work best and for every time you
give back all this profit you'll find
another 10 trades where this red bar
didn't close below the stop loss and the
market continued much higher and so
there's pros and cons to all exit
reasons all exit methods we'll cover
that in future lessons I did get a
request to cover how exit reasons affect
certain systems that is an interesting
topic that we could do a deep dive into
but for today's lesson that's it we're
done we have our system written out very
simple but profitable Channel breakout
system finally down here we draw the
channel High our blue EMA filter and if
our position size is not equal to zero
meaning we have an open trade then we
draw our exit EMA the red EMA otherwise
if we're flat you can see we exited a
trade here and we didn't open a new
trade until here
so we don't need the 10 bar EMA being
drawn
and cluttering up our chart in between
these two trades
so we just stopped drawing it once we
exit our trade we don't draw the 10 bar
EMA until we enter a new trade
um just like a normal stop loss would
work so as always the source code to
this script will be in the link in the
pin comment below if you want to go and
play around with this system just
quickly we'll have a quick look at how
it performed on different markets now
remember we're investing 100 of our
Capital into each trade which is not how
a portfolio-based system would normally
trade for me personally I can't give
advice to you guys because I don't know
your situation but for me personally I'm
comfortable trading large percentages of
my account balance on a trade if I know
that I'm going to be exiting that trade
very quickly if things go against me now
if we're using high amounts of Leverage
or trading a lower time frame that
changes things entirely but for a weekly
market system or daily daily bar system
I'm usually pretty comfortable investing
maybe not 100 percent but you know 20 of
my account balance into a trade because
I know that even if I lose fifty percent
of my money on that trade that's only
going to equate to a 10 loss on my
portfolio level account balance and if
you're running multiple systems on
multiple markets on multiple time frames
all of that tends to balance out your
Equity curve and it's not as scary as it
sounds on paper so anyway with that said
let's wrap up this lesson by having a
quick look at how this looks in real
test all right so this is real test if
you haven't seen this before it'll look
very very different to plan script but
for those of you who have been on my
mailing list for a while where I send
out my Weekly Newsletter which is
completely free by the way go and check
that out if you haven't already you can
find the sign up form at the art of
trading.com those of you on the list
would know that I've been playing around
with real tests a little bit over the
past year or so and it's a very
interesting piece of software to my
surprise it's not particularly widely
known own on the uh on the internet in
in the trading Niche software like Amy
broker and um what is it tradestation
those sorts of platforms are way more
commonly discussed and used but I've
really really taken a liking to real
tests specifically for stock trading
systems for Forex and stuff like that
trading viewers still my number one
choice but for stock trading I do very
much prefer real test because it allows
a portfolio level back testing so we can
see how our systems perform when traded
in this case on 20 stocks simultaneously
so in this script we can have up to 20
positions open at any time and yeah
let's quickly break down the code so I
won't bother breaking down this part
here if you guys are interested in real
test and want me to do a sort of
beginner guide to how to get this set up
how to get it running let me know in the
comments section because I'm very
curious to see if there's any demand for
this at all if there is uh I'll take
some time out to show you guys the ropes
I'm also planning to do more Pine
connector content automated systems
through metatrader and pinescript
there's a lot of demand for that I know
that's on my to-do list to do another
Deep dive but for those of you who are
curious about how to use realtest to
make portfolio level back tests in the
stock markets let me know in the
comments section one of the other cool
things about this software is that you
can actually run multiple strategies on
a single portfolio so we have a hundred
thousand US dollars here as our account
size and we're trading this example
lesson that I just broke down in Pine
script but we could also include a short
selling system or a system that doesn't
trade breakouts maybe it trades some
sort of other entry reason and you can
split your Capital across those two
systems and see how those two system
systems perform together how that
influences your Equity curve you know if
you're trading a trend following system
simultaneously with a counter Trend or
mean reversion system sometimes that can
really even out your Equity curve and
reduce your max drawdown because you've
you're attacking the markets from two
different directions simultaneously so
when one system's not working very well
the other one makes up for it and yeah
you get the idea it's very powerful
stuff so anyway here's our system code
it's exactly the same as Pine script
except the syntax is slightly different
so we're checking if the closing price
of the current bar is greater than the
highest high over the past 15 bars this
syntax is very similar to pine script
which is also nice
the layout of the script is obviously
very different but again if you guys are
interested in having me explain
um how the scripting language in real
test works let me know in the comments
but anyway here are our five conditions
I don't have the turnover condition
um added to this the turnover filter but
everything else is the same as the
default settings in the other script the
major difference between the script and
the other script is that I've added a
regime filter I've gone over regime
filters multiple times in the past I'll
leave some links to those in the video
description and pin comment as well I've
got lessons on how to create a regime
filter in pinescript using the security
function this is the same thing but in
real tests so here we're getting the
um 200 day moving average from the S P
500
ETF the Spy ETF from the S P 500 Index
and that's one of our filters so we need
all of our regular filters that we just
went over to be met and we also need the
S P 500 to be trading above its 200d
moving average if those conditions are
met then we have a valid breakout trade
now when you're trading multiple
positions in this case is 20 we need a
way to rank which trades to take because
some days we're going to get well more
than 20 trading setups that meet these
conditions here so we need to tell real
test what order to take our trades in
that's where score comes in set up score
and for this we're just using the rate
of change over the past five bars so
that's just a percentage change over the
past five bars so we're favoring
companies that have stronger momentum
than other candidates then we're just
making sure that the company the stock
we're looking to trade is currently a
constituent of the Russell 1000 this is
important to avoid survivorship bias if
we're testing this system all the way
back to 1991 like we are here then we
need to make sure that we're including
in our back test every stock that came
and went from the Russell 1000 index
over the past few decades because some
of those companies have gone bankrupt
some companies have left this index and
we need to make sure that we would have
traded them when they were in the
Russell 1000 so that's very important
that's why we are importing the Russell
1000 list that includes the current and
past constituents of the Russell 1000 uh
then there's our stop-loss exit here if
the bar closes below our EMA then we
exit our trade here's where we plug all
of these um conditions into our strategy
sort of commands to tell real tests when
to enter in exit trades and I also have
the commission here this is the
Interactive Broker default standard
commission structure here's where we
plot our information to the Chart I
won't go over that we'll do that in a
future lesson if you guys are interested
in this and here's our Benchmark so
we're just comparing how the system
performs to buy and hold on the S P 500
if I click test we'll run a quick test
over every Market in the Russell 1000
since 1991.
test is done you can see it's very very
quick the software is insane
now if I click show trade list we can
have a quick look to see make sure the
system is doing what we wanted to and it
is so we bought on this bars open after
we had a confirmed breakout and we
exited when we go to close below our 10
bar moving average so that looks good if
we go to show summary report
here we can get a breakdown of all the
metrics so we took 2790 trades we had a
43 win rate average win was 11 average
loss is five percent
um we have a bunch of other metrics here
that we can use to analyze the system we
have a monthly breakdown of p l
we have our correlations between the
Benchmark as you can see here the green
line is my simple Channel breakout
system the red line is the s p 500.
notice that it flat lines a couple of
times here for quite a while so here we
have the tech bust the uh.com bubble
bursting so from 2002 to 2004 we didn't
take any trades now keep in mind this is
on the weekly chart so this was a 200
week EMA that we're using as our filter
normally you would use something like a
200-day EMA so if we tweak the system a
bit we could probably increase its
return and maintain a low drawdown but
anyway here is the 2008 financial crisis
where the markets fell off a cliff our
system went to cash and stayed in cash
until things turned around a couple of
years later now I know a couple of you
are thinking what this didn't take any
trades for a few years that's ridiculous
why would you trade A system that
doesn't take any trades for years at a
time
well what's the point for this
particular system these periods of time
were not profitable now obviously
writing this recovery would have been
very nice and we can make the regime
filter more sensitive for example let's
have a quick look at what would happen
if we changed our regime filter to be a
20-week moving average instead of a 200
just out of curiosity let's see how
sensitive this system is to the regime
filter there you go you can see that
didn't really affect our metrics much at
all in fact we have a less a lesser rate
of return and a slightly less drawdown
but this kind of negligible numbers
there so yeah now we have a 20-week EMA
we only stayed in cash for about six
months at a time in these examples
and we still only wound up with a
slightly less return so sometimes in
trading more work does not mean more
profit so valuable lesson now for those
of you who off put by systems that don't
take a lot of Trades sometimes that is
not beneficial to the system I get that
it's get it's boring when you're not
taking trades I understand that
completely and that is where the value
of having multiple systems comes into
play you wouldn't just trade a single
system like this if you're a
professional Trader you would have
multiple uh strategies and systems
running simultaneously for example I
have a system that trades every day it
takes up to 20 trades a day in the stock
market and I also have a system that
only takes five trades a month and
sometimes it sits in cash for months at
a time and so I never get bored because
I'm always trading the daily system and
that system's a high frequency it's very
small profits but very high win rate and
the monthly system is much much lower
win rate but very big profits it rides
Trends long-term trends so anyway just
some food for thought for those of you
who are freaking out when you see a
system that doesn't trade for for a
prolonged period of time sometimes in
trading the best offense is a good
defense like it's a bit
counter-intuitive but the main goal as
Traders is to protect our Capital so
defensive measures are important in all
trading systems but especially longer
term systems and just while editing this
video I just noticed that the the system
actually didn't take any trades until
1994 because
uh it's using a 200 week regime filter
and the script couldn't calculate the
value of the 200 week moving average for
the S P 500 until 1994 because at 52
weeks per year with a 200 week moving
average means we need about four years
of press information to be able to
calculate the regime filter so if we run
our back test from 1995 from January
1995 the system actually outperforms the
S P 500 we got this I mean these numbers
are negligible but but if we want to
compare these fairly from when they
started trading this system actually
ends up ahead of the S P 500 quite
significantly especially during the 2008
financial crisis sure there was a long
period of consolidation here where we
did not make new Equity highs and we
went to cash for quite a while but we
avoided this catastrophe and that's one
of the major benefits of a regime filter
but anyway just thought I'd mention that
so again this isn't a spectacular system
it's not something I would personally
trade but it's a good foundation for a
very simple weekly low maintenance
training system you only need to check
your trades at the end of each week and
in doing so you get the same return as
Buy and Hold but half the drawdown
pretty cool stuff I hope you guys found
that interesting if you did let me know
in the comments section if you want more
real test stuff I'd love to show you
guys but if there's no interest in it
then I'm not going to waste my time but
yeah anyway the pine script code will be
in the pin comment below as always best
of luck with your training thank you for
watching this video I appreciate each
and every one of you and I will speak
with you in the next lesson take care
have a great week
goodbye