MY STUDENT'S STRATEGIES #25
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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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#066: MY STUDENT'S STRATEGIES (CASE STUDY #25)

Quite a lot of traders who start with automated trading strategies, first create systems for index markets like Russell 2000, S&P MidCap 400 or others. It is easier to find strategies for these markets and it is faster to build your first portfolio. But with time, when the portfolio contains more systems, it is not so easy to find a new, low-correlated strategy that would improve the overall performance of the portfolio and reduce the drawdown. This is, as I describe in this article, one of the best ways to make your portfolio’s equity smoother, and reduce your drawdown - by adding new, low-correlated strategies. What you should do is start looking for systems trading markets from different categories.

 

When you have a portfolio for index markets, you can develop a system for US 30-year treasury bond (US). For this market, it is not so easy to build a strategy, you need to be persistent. But it can be done. Like the following strategy that is using a combination of 15 and 240-minute timeframes. It has done 1,248 trades in 10 years which have generated $87,000 profit. Trade close to trade close drawdown is still an acceptable $6,718. That is giving us an annual net profit to drawdown of approx 1.3.

 

More details are in this table:

 

  • Market:                                               US 30-year treasury bond (US)

  • Main time frame (data1):               15-minute

  • Secondary time frame (data2):     240-minute

  • Time template:                                 9.30 - 16.15

  • Profit factor:                                      1.56

  • Win %:                                                54.57%

  • Avg.trade:                                           69.69 USD

  • Exit:                                                     stop-loss or at 16:15 exchange                                                                       time (avg. winning trade                                                                               +357.15 USD)

  • Stop-loss:                                           1,218 USD - only protective,                                                                             barely hit(avg. losing trade                                                                           -310.64 USD)

 

Average trade could be little bit higher, as the slippage can really take some of your profits. Single tick represents in this market more than $30. That can reduce your profit by almost a half. So you need to have a really good internet connection and have your trading computer located close to the stock exchange to have a good trade execution.

 

 

The strategy had a slow start. In the first almost 150 trades (little over one year) it didn’t make any significant profit. This slow beginning was followed by steady rise to about trade number 700 when it reached $70,000 profit. Then the drawdown came - $6,700. The recovery didn’t take long, it took less than 50 trades to recover from it and then there was another rise to the $87,000.

 

Let’s take a look at more details:

 

Over 1,200 trades in 10 years is a really nice number and it gives us some space to filter out some of the losing trades using an additional filter. All trades are equally divided between long and short, and almost 55% of all trades is profitable.

 

What about other markets? The system is also profitable on 10-year US Treasury notes (TY), gold (GC), and oil (CL). But the biggest benefit of this system for its creator was when he added it to the portfolio. Adding this strategy to his existing portfolio, containing strategies for index markets, reduced the portfolio drawdown by over 40%! You can see how powerful this method of adding low-correlated strategies is. Therefore, you really shouldn’t focus on the drawdown of an individual strategy, but investigate what impact the strategy will have on your portfolio.

 

You can learn more about the workflow I teach by clicking here to start creating similar systems by yourself today.

 

Happy trading!

 

Tomas

 

Click here to read more success stories.

 

 

 

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