Contrarian Daily Breakouts and Their Risk–Reward Trade-offs

Summary

The article describes a daily contrarian strategy based on the previous session’s high and low. A break above the prior high triggers a short targeting the prior low; a break below the prior low triggers a long targeting the prior high. It presents this discretionary rule as a market-logic baseline and discusses adjustments intended to control volatile results and reduce trading activity.

In a five-year out-of-sample backtest, the original version recorded a 68% win rate but only $40 profit, as average losses exceeded average wins. An improved version reported $162 profit, a higher Sharpe ratio, fewer trades, and a lower win rate of 37%. These results use minimum lot positions and are specific to the tested setup. The article acknowledges the accuracy trade-off and suggests feedback control and further testing of human-derived rules; the reported performance does not establish robustness across markets or periods.

Key ideas

• The strategy fades the first break of the previous day’s high or low and targets the opposite extreme.
• The baseline had many winning trades, but its average loss was larger than its average gain.
• Modifications improved reported profit and Sharpe ratio while reducing trade count and win rate.
• The results motivate testing feedback control and other discretionary rules, but remain specific to the reported backtest.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.