Naked Forex Review of The Big Shadow in Rigorous Backtests.

The book Naked Forex:  High-Probability Techniques for Trading without Indicators by Alex Nekritin and Dr. Walter Peters features a few so-called High Probability trading patterns that can result in profits.  The book elaborates in great detail about each pattern to explain when to trade the pattern and when not to trade the pattern.  The objective here is to put this method to the test with four different currency pairs, two different time frames, and following the exit instructions for Take Profit and Stop Loss.

The Testing Parameters

The Currency Pairs

• EURUSD
• USDJPY
• AUDUSD
• EURGBP

The Time Frames

• 1 Hour
• 4 Hour

How Naked Forex Describes the Big Shadow Criteria

• Big shadows are two-candlestick formations.
• The second candlestick of the formation is the big-shadow candlestick.
• The big-shadow candlestick has a higher high and a lower low than the previous candlestick.
• Big shadows must print on the zones.
• Big shadows print at extreme highs or extreme lows.
• Bearish big-shadow candlesticks have a closing price near the low.
• Bullish big-shadow candlesticks have a closing price near the high.
• Big-shadow candlesticks have wider ranges than the nearby candlesticks.
• For bullish big shadows, the stop loss is placed a few pips below the low of the big-shadow candlestick.
• For bearish big shadows, the stop loss is placed a few pips above the high of the big-shadow candlestick.
• The very best big-shadow candlesticks have room to the left.

Going into further detail, the ideal setup according to Naked Forex explains:

• There is an extreme high or low represented by the two candlestick pattern that is not reached in the previous seven candles.
• The big shadow candle has a larger range than the previous ten candlesticks.  Range means high to low.
• The buy order is placed above the high of the Big Shadow, the sell order is placed below the low.
• Looking for Marubozus, Black/White Opening Marubozus, and tall candles with the high and close not being far from each other.  This will be done on a percentage basis because it is all relative based on the time frame.  It will be a 20% of the total range threshold difference between the close and the high/low allowance.

To assist with determining the zones, there will be an indicator used.  It goes against everything the book stands for, but for the purposes of determining the Support and Resistance prices, there will be an indicator that indicates them in the code.  This indicator is called Regular Pivot and it has the typical R1, R2, R3, Pivot Point, S1, S2, and S3.  It is an indicator that adjusts itself based on the time frames.

In a nutshell, it is an extremely long engulfing reversal candle that reaches or exceeds a support or resistance zone.

The Naked Forex Big Shadow Rules of Engagement for Testing:

1. Stop Loss is 3 pips below the Open for Long Positions
2. Stop Loss is 3 pips above the Open for Short Positions
3. If the difference between the High or Low of the Big Shadow and the next zone is less than the difference between the next zone and the zone above or below (long – above, short – below), the Take Profit is the zone above or below.  If not, then the next zone is the Take Profit point.
4. The custom Support/Resistance Indicator dictates the zones.
5. The zones are dictated by the particular time frame.

EURUSD –  1 Hour

EURUSD – 4 Hour

There were only seven trades placed, which is not enough of a sample.  Six of the seven ended up profitable, but this is too small of a sample.

USDJPY – 1 Hour

USDJPY – 4 Hour

Not enough trades to form a proper sample.

AUDUSD – 1 Hour

AUDUSD – 4 Hour

Still too small of a sample size for 3 years.

EURGBP – 1 Hour

EURGBP – 4 Hour

Another case of a small sample size for trades placed, but since it is in the teens, it is worth at least showing.

Takeaways and Conclusions with Naked Forex‘s Big Shadow

This is not the most common sort of a pattern and these trading opportunities can take place frequently enough where a trader can program an Expert Advisor or Algorithm to find them across multiple currency pairs and get at least one trade per week on a Hourly Chart.

Is it the most effective though?  No.  It’s not a particularly effective pattern.  However, for the long positions on AUDUSD it had a strong winning rate of 78.57% over the past three years, but this is from a pool of 14 trades.

There are better opportunities with other patterns and there are also much worse out there.  Perhaps there would be greater effectiveness if combined with a Supply/Demand Zone Indicator, but based on Support and Resistance Zones, Naked Forex‘s Big Shadow does not live up to the expectations and does not provide enough trading opportunities.

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