Unveiling Toby Crabel's Up & Down Thrust Trading Patterns

Trading patterns have long been a staple in the toolkit of successful traders. Among the myriad of patterns, Toby Crabel's Up and Down Thrusts stand out as one of the robust and simple patterns. While seemingly straightforward, these patterns require a nuanced understanding to avoid pitfalls like look-ahead bias. This article delves deep into the Up and Down Thrust patterns, revealing their secrets and how to employ them in your trading strategy effectively.

Understanding Trading Patterns

Trading patterns are essential for identifying potential market movements. They offer insights into price behavior and help traders make informed decisions. By recognizing and exploiting these patterns, traders can develop robust strategies that consistently yield positive results.

The Concept of Pivots

At the heart of the Up and Down Thrust patterns lies the concept of pivots. A pivot high is a bar higher than the bars on its left and right. Conversely, a pivot low is a bar lower than the bars on its left and right. Understanding and identifying these pivots are crucial for implementing the Up and Down Thrust patterns.

Up Thrust Pattern: A Closer Look

The Up Thrust pattern is a bullish signal, indicating a potential rise in the market. The pattern is defined by the following:

Entry:

1.     High Pivot Identification: A pivot high must be identified, characterized by higher highs than the surrounding bars.

2.     Open Above Pivot High: Once high pivot identified look for a bar with Open price above the pivot high.

3.     Close Below Previous Closes: The same bar (point 2) must close below the previous two bar closes.

4.     Close in the Lower Range: The same bar's close (point 2) should be in the bottom half of its range.

Once these conditions are met, a buy order is issued on the next bar.

Exit:

The Up Thrust pattern typically uses a short-term exit strategy:

• Exit when the RSI (Relative Strength Index) of 2 periods exceeds 80.

• Alternatively, exit after a fixed number of bars, usually around 10.

  
  

Down Thrust Pattern: A Closer Look

The Down Thrust pattern, conversely, is a bearish signal, indicating a potential market decline. The pattern is defined by:

Entry:

1.     Low Pivot Identification: A pivot low must be identified, characterized by lower lows than the surrounding bars.

2.     Open Below Pivot Low: Once low pivot identified look for a bar with Open price below the pivot low.

3.     Close Above Previous Closes: The same bar (point 2) must close above the previous two closes.

4.     Close in the Upper Range: The same bar's close (point 2) should be in the top half of its range.

Upon meeting these conditions, a sell order is issued on the next bar.

Exit:

The Down Thrust pattern uses a similar short-term exit strategy:

• Exit when the RSI of 2 periods drops below 20.

• Alternatively, exit after a fixed number of bars, usually around 4 for short trades.

"The secret to consistently building robust strategies is exploiting patterns."

Avoiding Look-Ahead Bias

A critical aspect of trading these patterns is avoiding look-ahead bias. This bias occurs when future data is inadvertently used in making current trading decisions, leading to unrealistic backtest results.

Ensuring that signals are generated only after the required number of right bars have passed is essential for accurate backtesting and real-time trading.

How Far To Look Back?

When you are backtesting, you need to decide how far back to look for a pivot, I would put 10-30 bars back is a good range.

Once a pivot has been identified, you also need to decide how many bars to count until you match the other entry conditions (points 2-4). My guide is 3-21 bars.

Real-World Application of Up Thrust Pattern

Consider an example with the S&P 500 futures:

• A pivot high is identified with four bars to the left and two to the right. You can use the green histogram indicator in the pic to identify pivots.

• The next bar opens above the pivot high and closes below the previous two closes and in the lower half of its range.

Meeting these criteria, a buy order is placed on the subsequent bar.

The trade is exited when the RSI(2) exceeds 80.

Optimizing the Up Thrust Pattern

To enhance the effectiveness of the Up Thrust pattern, consider adjusting the left and right strength (the number of bars before and after the pivot), the lookback period for the pivot, and the window after the pivot. Below are the top 15 strategies sorted by Net Profit

Combining Long and Short Strategies

Combining the Up Thrust (long) and Down Thrust (short) patterns into a single strategy can enhance trading results. By balancing long and short positions, traders can achieve a smoother equity curve and reduce drawdowns, creating a more robust trading system.

Since the S&P500 market has a big bias to the long side, I tested the short pattern in a long signal, and not surprised it performed very well.

We can then have three signals into one strategy on a single instrument and single timeframe.

"The beauty of algo trading is once you program it, you don't need to think about it"

Below is the equity curve for the 3 signals:

• Signal: left Strength, Right Strength, Lookback, Window

• Long (high pivot): 4, 2, 20, 15

• Long (low pivot): 1, 2, 10, 13

• Short (low pivot): 1, 1, 10, 15

The same signals trade analysis

Below is exactly the same strategy and parameters on the Nasdaq daily session

Portfolio Considerations

Incorporating multiple strategies into a portfolio can further enhance performance. By diversifying across different patterns and markets, traders can reduce risk and improve overall returns. For instance, combining two long patterns and one short pattern in the S&P 500 futures market has shown significant improvements in performance metrics.

There are many way to code this type of strategy, below is my take using  EasyLanguage/Power Language code for long entry/exit signals with comments to follow along and learn:

inputs:

PivotLStrength(4), // how many bars on the left of pivot

PivotRStrength(2), // how many bars on the right of pivot

lookback(21), // how many bars back to look for pivot

Window (21); // how many bars to look for other entry conditions once a pivot is identified

vars:// variables needed

vWindow (0),

Lcounter (0);

vWindow = window ;

// Long Entry signal

value1 = PivotHighVS (1,high,PivotLStrength,PivotRStrength,lookback) ; // identify high pivot and store value in value1

value2 = PivotHighVSBar (1,high,PivotLStrength,PivotRStrength,lookback) ; // save bar number when pivot identified in value2

if value1 <> value1[1] and value1 <> -1 then Lcounter = 0 ; // when pivot identified, reset counter (to be used for Window)

Lcounter = Lcounter +1 ; // start counting

if value1 <> -1 and value2 <> -1 // if we have a valid pivot

       and Lcounter >= PivotRStrength // we wait for minimum number of right bars (no look ahead bias)

       and open > value1[0 ] // we look for other conditions of entry signals

       and close < close[1] and close < close[2]

       and Close <= ((0.5 * Range) + Low)

       and value2 < vWindow

       then buy next bar at market ; // if all is true, then buy next bar

// Long Exit signal

if mp = 1 and barssinceentry >= 10 OR RSI(C,2) > 80

       then sell next bar at market ; // if RSI2 above 80 or we are 10 bars in the trade then exit next bar

FAQs

What is a pivot in trading patterns? A pivot is a bar that is either higher or lower than the surrounding bars, indicating a potential reversal point in the market.

How do I identify an Up Thrust pattern? An Up Thrust pattern is identified by a pivot high, followed by a bar that opens above the pivot high, closes below the previous two closes, and finishes in the lower half of its range.

What is the importance of avoiding look-ahead bias? Avoiding look-ahead bias ensures that trading signals are based on past data only, leading to realistic backtest results and reliable real-time trading.

Can I use the Up Thrust pattern in markets other than S&P 500 futures? Yes, the Up Thrust pattern can be applied to various markets, but it may require parameter adjustments to suit different market conditions.

How can I optimize the Up Thrust pattern? Optimization involves adjusting parameters like the left and right bar strengths, look-back periods, window period for the other conditions and exit criteria to improve the pattern's performance.

What are the benefits of combining long and short strategies? Combining long and short strategies balances market exposure, reduces drawdowns, and creates a smoother equity curve, leading to more consistent trading results.

Conclusion

Toby Crabel's Up and Down Thrust patterns are powerful tools for traders seeking robust and reliable trading strategies. By understanding the intricacies of these patterns and optimizing their parameters, traders can enhance their market performance. Combining these patterns into a diversified portfolio further reduces risk and improves overall returns, making them invaluable in any trader's arsenal.

To enhance your understanding of Toby Crabel's Up and Down Thrust trading patterns, I have created an in-depth video that you can watch on my YouTube channel. Check it out at https://youtu.be/gdZ_1P6ImeI to see these concepts in action and learn how to effectively apply them in your trading strategy.