Suppose you backtest the EUR/USD (or GBP/USD) forex pair with this system on the 1min timeframe:
1) Enter the market at any time n: go long if the "future" bar n+1 has a higher close as the close than bar n; go short otherwise
2) Place a stop loss of 50 pips and a take profit target of 25 pips
Clearly, with this "cheating" system you get good results. Now assume you restrict the distance on the closes of bar n and n+1 to the interval [0 0.0002]. In this case you also get good results but clearly not as good as in the first case.
In the real world, if you could filter to take only trades where next bar is in the direction of your entry you would be the richest man in the world.
The question is, if there is a reasonable strategy what to do about the "bad" trades, where the next bar is in the opposite direction of your entry.
I tested this with the same system as above but this time the system only trades those "bad" trades so that the trade is in a loosing position right after the first bar.
Clearly, this system ends up as a loosing system. I wondered if it is possible to "optimize" those bad trades with a higher stop of 100 pips and a higher take profit of 10 pips.
To my surprise all attempts on the SL and TP parameters failed, there was no improvement on whatever settings. All I could achieve was that the loosing range of this system was somehow less choppy.
If only the very first bar after your entry bar goes in the wrong direction, there is nothing you can do about it(at least with my dumb backtesting). Why is this? You cannot decrease/increase the SL; you cannot decrease/increase the TP. Does this mean that one can see bad trades right after the first bar, even if your SL is still far away from it?