Pullback to EMA(20): The Worst Sharpe of Ten Rules
In a trend, price returns to the moving average and bounces off it — and that is the entry. One of the most popular constructions in swing trading.
Pullback to EMA(20): the exact condition
In an uptrend by EMA(200), go long when the bar's low touches EMA(20); mirror image in a downtrend. The position is held for one bar. The rule spends about a quarter of its time in the market.
Pullback results across 12 pairs
Run with the portal's own engine over 518 daily bars for each of 12 pairs, costs of 1 pip round turn, canonical parameters. The method and its limitations are set out in how we run backtests.
- Median return — -8.13%, profitable on 1 of 12 pairs
- Sharpe — -1.62, drawdown — 8.8%
- Trades — 32, win rate — 38%, time at risk — 28%
- Extremes: GBPJPY +0.5%, NZDUSD -21.8%
The worst Sharpe ratio of the ten rules
The worst Sharpe ratio of all ten rules and only one profitable pair out of twelve. The failure mechanism is clear: a touch of the average happens both when the trend continues and when it ends, and nothing in the rule distinguishes the two at the moment of the touch. The rule enters a pullback within a trend and the first step of a reversal with equal enthusiasm, and the second case costs more than the first earns.
The gap between the chart and the rule
This result deserves attention precisely because the setup is popular. An idea that looks compelling on a chart produces, in its literal formalisation, the worst outcome of the ten tested. The difference between the picture and the rule is that on historical charts you can see which touches turned out to be pullbacks, and at the moment of entry you cannot. For comparison: simply holding the position on the same data returned 4.79%, and this rule did not beat it — why a benchmark is not optional.
A caveat in the setup's favour
In fairness to the approach: we formalised the touch in the most literal way and held for one bar. Practising swing traders normally add reversal confirmation and hold longer. Our run refutes the literal rule, not the idea of trading pullbacks. The general limitations — a short sample, correlated pairs, a signal tested without risk management — are listed in the methodology. The data is open and the run reproduces from a script in the repository.
This material is educational and is not individual investment advice. Backtested results do not guarantee similar results in the future. Trading forex carries the risk of losing capital.
Frequently asked questions
What did Pullback to EMA(20) return in the test?
A median of -8.13% across 12 pairs over 518 daily bars, profitable on 1 of 12, with a median Sharpe of -1.62. Simply holding the position returned 4.79% on the same data.
Does this mean Pullback to EMA(20) does not work?
This result deserves attention precisely because the setup is popular. An idea that looks compelling on a chart produces, in its literal formalisation, the worst outcome of the ten tested. The difference between the picture and the rule is that on historical charts you can see which touches turned out to be pullbacks,
What is the main caveat to the Pullback to EMA(20) result?
In fairness to the approach: we formalised the touch in the most literal way and held for one bar. Practising swing traders normally add reversal confirmation and hold longer. Our run refutes the literal rule, not the idea of trading pullbacks.
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