MY STUDENT'S STRATEGIES #24
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DISCLAIMER:  Futures trading systems and commodity trading bear a high degree of risk. People can and do lose money.
Hypothetical results have many inherent limitations. Past performance does not guarantee future results. 

 

ACTUAL RESULTS SHOULD BE VIEWED WITH CAUTION, BECAUSE PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

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#064: MY STUDENT'S STRATEGIES (CASE STUDY #24)

In general, it is easier to create strategies to trade only by going long. But if you want to have a balanced portfolio that can withstand unfavorable market conditions, the number of long-biased strategies and short-biased strategies should be evened (unless you create strategies trading both long and short).

 

One of the short-biased strategies I would like to present you is a strategy trading in the natural gas (NG) which combines 2 timeframes - 15-minute and daily. Usually, for energies you need a slightly bigger trading account, as the drawdowns can be quite high, but this is not the case. It is just $4,680. And some other characteristics are also quite interesting; let’s take a look at the them:

 

  • Market:                                               Natural Gas (NG)

  • Main time frame (data1):               15-minute

  • Secondary time frame (data2):     Daily

  • Time template:                                 8.30 - 14.30

  • Profit factor:                                      1.80

  • Win %:                                                60.97%

  • Avg.trade:                                           164.33 USD

  • Exit:                                                     stop-loss or at 14:30 exchange
                                                                 time (avg. winning trade                                                                               +605.42 USD)

  • Stop-loss:                                           1,800 USD - only protective,                                                                          barely hit(avg. losing trade                                                                             -536.42 USD)

 

Usually short-biased systems make a low number of trades. And this example is no exception to the case. In almost 10 years, the system has done 351 trades, making it about 35 per year (about 2 trades every 3 weeks on average). I prefer to have a slightly larger amount of trades per year (about 40), but if other characteristics are looking good (and of course it passes all robustness tests), there is no reason why this system shouldn’t make the cut and be part of your portfolio.

 

Let’s take a look at the equity curve:

 

 

The beginning looks really promising, almost $30,000 profit in the first 50 trades is a good start, but the rest of the equity curve is a little bit more flat and every 100 trades it is making about $10,000. And since it makes 35 trades per year, its average annual profit is about $3,000. This is not a lot, especially with a $5,000 drawdown, but at least the recovery from the drawdown was pretty quick and it is a good way to diversify your portfolio.

 

Now let’s see how this system looks in numbers:

 

The overall net profit of this system is almost $60,000 in 10 years, with quite a nice profit factor of 1.80. The number of trades of 351 in 10 years could be a little bit higher, but it is still acceptable. In energies you usually don’t have problems with the average trade value. This system has an average trade of $164, which is enough to cover transaction costs. Usually in energies you will struggle with drawdowns that are too big, though it is not the case for this system.

 

At this point, I usually share with you the performance of the system in other markets, as a good cross-market performance maximizes the probability that the past backtest performance of the strategy is not just a result of over-optimization (or sheer luck). This system was tested on crude oil (CL) and gold (GC) and didn’t really perform well. This could be a small warning sign that the system is not that robust. But performance in other markets is not the only robustness test there is, so as long as it passes all the others, you can happily add similar systems to your portfolio.

 

Click here to learn more about the workflow I teach and start creating similar systems by yourself today.

 

Happy trading!

 

Tomas

 

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