#056: MY STUDENT'S STRATEGIES (CASE STUDY #20)
The previous 19 strategies created by my students, that I have presented in this series, were strategies for several different markets - lots of them were created for index markets, like e-mini Russell 2000, e-mini S&P 500 (ES) or e-mini Dow Jones Futures (YM). Some of them were for crude oil (CL), or soybeans (S), even, but we have never had a strategy for lean hogs.
Lean hogs isn’t a typical market for automated trading strategies, but as you will see today, it doesn’t mean that you should stay away from it and that you can’t create a profitable automated trading system for this market.
Just how profitable? In a little over 15 years, this system has generated over $70,000 profit, with a steadily rising equity curve, minimum of flat periods and with the biggest drawdown just slightly over $3,500.
Want to see more numbers regarding this system? Here they are:
Market: Lean Hogs (LH)
Main time frame (data1): 15-minute
Secondary time frame (data2): Daily
Time template: 8.30-15.15
Profit factor: 1.51
Win %: 32.5%
Avg.trade: 83.05 USD
Exit: stop-loss or at 15:15 exchange time (avg. winning trade +756.13 USD)
Stop-loss: 1,300 USD-only protective, barely hit (avg. losing trade -242.40 USD)
What is worth mentioning is the percentage of profitable trades - just 32.5%. When the average profitable trade is 3x more than the average losing trade, you can have two losing trades out of three and still be profitable. In this case from every profitable trade that is $756, deduct two losing trades ($242*2) and you still have space for a nice profit. You just need to be ready to deal with the fact that the number of consecutive losing trades can be a little higher; in this case it was 14. But in the future, it can be even more. Therefore, you should use the Monte Carlo Analysis, to get ready for the worst possible scenarios.
As I already mentioned, the equity of these systems is almost steadily rising, with not so many drawdowns from which the system promptly recovered.
On the equity you can see a slow start, when the system achieved about $10,000 profit in the first 200 trades (which represents approx. three years), but the second half looks really promising. With such a low percentage of profitable trades, you can’t expect a straight line, there will be some losing periods, but they shouldn’t make big drawdowns as the average loss is just ⅓ of the average profit.
The total number of trades is almost equally divided between long (420) and short (439), which is good; and so is the profit: $32,000 for long and $39,000 for short. Another important system characteristic is the profit factor, which is 1.51 and average trade $83.05. For more numbers review the below table:
All these data were for a 15-minute timeframe. How about other timeframes? Let’s take a look at 30-minute:
You can clearly see at first sight, that the curve between trade number 550 and 750 isn’t exactly perfect, but the rest of the equity looks pretty good. And the strategy was still able to recover from the drawdown and make the new equity high.
Usually, we don’t work with timeframes below 15-minute, as on higher timeframes it is easier to find a robust system, but this one works even on a 10-minute timeframe.
The total profit is approximately $55,000 and the maximum drawdown can be around $5,000, but there is still a rising tendency with not too many flat periods, which is promising.
Now let’s take a look at another market, like 15-minute Soybean:
Again, you can see quite a lot of small losses, so the percentage of profitable trades as well as the profit factor will be similar to the original system for 15-minute Lean Hogs. There is quite a high number of trades, almost 1,100, so adding a filter could probably increase the number of profitable trades and improve the overall profitability of the system.
This system has a pretty high number of trades in all four cases, about 60 per year, so adding one more filter could reduce the number of trades to 45-50, which is still acceptable and it could be the right way to improve the system even further. But even in the current setup, it is a nice system that can bring really nice profits to the developer.
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