#071: REDUCING DRAWDOWN BY ALMOST 70% IN 7 MINUTES

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#071: REDUCING DRAWDOWN BY ALMOST 70% IN 7 MINUTES

In today’s article, I will show you, step by step, how effective work with Market Internals can lead to drawdown reduction by up to 70%, taking just seven minutes of work (on a regular PC - using a laptop would take a little more time). So, let’s get to it.

 

In this example, we will work with an extremely simple idea, which is to buy EMD.D (15-minute chart), when the first bar closes above yesterday’s close (i.e. breakout at 8:45 Exchange time or rather at 15:45 local time for me in Spain).

 

The code looks like this:

 

 

This simple idea doesn’t look bad at all; it seems like it has a decent potential – although there is still a long way to go in order to reach a completed, successful system:

 

There is definitely a need to decrease the number of trades, filter out “the bad ones”, increase average profit per trade and, what is most important, to substantially reduce the drawdown. It isn’t even important to present complete statistics – the first look at equity already shows what we are talking about. And how do we accomplish such an improvement? That is exactly the task for Market Internals!

 

First of all, I have put the above code in my Market Internals smart code and I have prepared a special chart/workspace for such purpose:

 

 

This MI smart code contains a few of my own MI conditions (it took me 6 months to put all of them together) and now I let TradeStation run all these conditions and let it find the one that is the most suitable one. To avoid the danger of over-optimization right from the beginning, we need to apply this process on 70% of In-Sample data and we keep the remaining 30% as Out-Of-Sample data:

 

 

Now we run optimization, which will take around 2 minutes on an average PC (around 6 minutes on a laptop):

 

 

As soon as optimization finishes, I arrange the In-Sample data by using the fitness function. In this case, it was a TS Index:

 

 

Now it is time to choose only one from the TOP solutions. Most of the time there is more than one usable solution. One that we can find roughly in the top 5-10 of the best outcomes (this isn’t a classical optimization of systems, but moreso a search for the most suitable switches – i.e. Market Internals conditions – there is quite a lot of these conditions in smart code, therefore more than one can work really well). In this case, the solution I like the most is in row number two. Therefore I will choose this solution and I have a look at the In-Sample data:

 

 

The outcome looks great, so I will verify it in the Out-Of-Sample data:

 

 

Everything looks fine here as well, so let’s quickly check the overall equity:

 

 

A look at the overall equity tells us that OOS isn’t much too different from IS. This means that everything is perfectly fine. Of course, I could carry out some more robustness testing etc. – but that is up to each and every trader individually.

 

The whole procedure took me less than 7 minutes – and I am done.

 

Below is the comparison of the system outcome BEFORE and AFTER I applied the MI condition:

 

Drawdown improved by 69%, NP/DD ratio improved 120%, AVG Trade improvement was 65% - what else can you wish for after just 7 minutes of work?

 

This is just another demonstration of the application and power of Market Internals. If you want to learn more about Market Internals, get the FREE Market Internals Starter Kit on www.tradingmarketinternals.com.

 

Happy Trading!

 

Tomas

 

 

 

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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.