#021: MY STUDENT'S STRATEGIES (CASE STUDY #6)
Another strategy that was created by one of my students is E-mini S&P MidCap 400 (EMD) strategy. This system is a little different from the previous ones as it uses light asymmetry for opening long and short positions. The logic is the same, yet one of the parameters is different for each direction. This approach is also acceptable (if the strategy passes the robustness tests!), I use it for some of my strategies, too. All you have to do in the code is to create one parameter for short and one parameter for long and optimize the strategy to get the best possible (but still robust) results.
Let's take a look at the system more in detail:
Market: E-mini S&P MidCap 400 (EMD)
Main time frame (data1): 15-minute
Secondary time frame (data2): Daily
Time template: Regular session
Exit: stop-loss or at 15:00 exchange time (avg. winning trade +651 USD)
Stop-loss: 3,500 USD - only protective, never hit. (avg. losing trade -597 USD)
In the the last 11 years the strategy went through its ups and downs, but it managed to earn over 100,000 USD during this period, which gives the average profit over 9,000 USD. The longest drawdown period, on the Out-Of-Sample based equity curve, is approximately between trades #200 and #290 (see the chart below). That can be quite a long period for some of the traders, but once the system passes all robustness tests, you need to believe in it. This is one of the reasons why you should have a portfolio of low correlated systems. As you already know from previous Success Stories, similar moments are not unusual, but thanks to other systems in your portfolio, the equity of the portfolio can be rising even in a moment like this one. And it really pays off not to switch this system off in the bad times - looking at the next 100 trades you can see almost constantly rising equity curve and the system got from 40,000 USD to over 70,000 USD! The drawdowns have always been part of the trading.
Now let's take a look at the equity and the overall performance of the system more in detail:
From these numbers I would like to point out the 1.72 profit factor (notice also 2.01 PF for all short trades), over 60% of profitable trades and average trade value over 165 USD. The drawdown 6,140 USD can be a little too much for some of the traders, especially when it takes almost 100 trades to recover from the drawdown, but as I have mentioned before, it really pays off. Just believe in your systems and let them show you what they are capable of. Sometimes they will give you really nice surprise.
As you already know, part of my robustness testing is also strategy verification with the same parameters in other markets as an extended version of Out-Of-Sample testing. Well, this one works also in ES and YM markets. The system is not tradeable under current conditions, but all I want to see here is that it works pretty much and that it still creates new equity high. And if you put some additional effort into the optimization, there is a high probability that you would get a nice, profitable and robust system for ES. This is how it looks like with the current setup in EMD market:
For YM market, the equity is slightly worse than for ES, but you can see that the system still makes new equity high. Again, it is just to verify that with the current setup it roughly works in other markets:
The important lesson we have learned today is that even though the system is in the drawdown, and it takes some time to recover from it, we should be patient and shouldn't make any rash decisions. Of course, when the drawdown gets too big, you should turn the system off, but as long as the drawdown is still acceptable and within the expectations that are based on Monte Carlo Analysis, you should fully believe your system and avoid switching one for another.
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