#076: MY STUDENT'S STRATEGIES (CASE STUDY #30)
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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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#076: MY STUDENT'S STRATEGIES (CASE STUDY #30)

Most of the strategies we have here work with the 15- to 60-minute main timeframe (mostly in combination with the daily timeframe). But I encourage every one of my students to not be afraid to experiment. It is a great way to diversify your portfolio. Instead of a 15-, 30-, or 60-minute timeframe, you can use a 120-minute timeframe and combine it with a daily one.

 

Even if you have the rest of your portfolio built for a single market, this change will still bring a new element to your portfolio.

 

Many people are afraid that timeframes that are above 120-minutes usually need a bigger stop-loss, way over $1,000, and have a drawdown that is beyond their comfort zone. But this strategy proves that it doesn't have be so. The stop-loss of today’s strategy is only $700, which is less than most of the strategies for 15-minute timeframes and the close-to-close drawdown is just $3,550.

 

Let’s take a look at more details:

 

  • Market:                                               Russell 2000 (TF)

  • Main time frame (data1):                120-minute

  • Secondary time frame (data2):       Daily

  • Time template:                                  9:30am - 4:15pm

  • Profit factor:                                       1.64

  • Win %:                                                 58.56%

  • Avg.trade:                                            102.56 USD

  • Exit:                                                      stop-loss or at 4:15pm exchange
                                                                  time (avg. winning trade                                                                                +447.34 USD)

  • Stop-loss:                                            700 USD (avg. losing trade                                                                              -394.99 USD)

 

The system trades both sides (long & short) and has a remarkably similar percentage of profitable trades for both sides. It has 58.56% for long and 58.54% for short. What is also worth mentioning is that the system has a very high percentage of profitable trades on a 120-minute timeframe, despite using such a low stop-loss.

 

The overall 13-year profit is of $85,640, which is $6,587 on average per year. And since the close-to-close drawdown is only $3,550, the annual net profit-to-drawdown ratio is 1.85, which is a really nice number.

 

How does the distribution of profits looks like? Let’s take a look at the equity curve:

 

 

As you can see on the chart above, the equity curve starts in the year 2004 and covers the whole period to the year 2016. We can see the $3,550 drawdown at about trade #350, where the equity curve goes from about $44,000 to slightly above the $40,000 mark. There are several other drawdowns that are around $2,000 to $3,000, but in general the equity curve is still rising and we cannot see many flat periods. The longest flat period is between trades #675 to #740, which is about 65 trades (about 1 year), but the system still managed to create a new equity high in the middle of this period. And then, after this period, we can see a nice rise from trade number 800 to the end, making a nice $12,000 profit in about 40 trades.

 

Here are all the numbers in the TradeStation performance summary:

 

 

The average trade is over $100 (which is nice for this market), the sample size has over 800 trades, profitability is close to 60% - all the numbers are looking really promising. But before we add this strategy to our portfolio, we should also check how this system performs in other markets. Usually all Russell 2000 systems perform well also in the E-mini S&P MidCap 400 (EMD) market. Is this also the case?

 

 

Despite some flat periods when the system hasn’t bought any significant profits, like about 150 trades between trade #320 and #470, we can still see a rising tendency.

 

How about S&P 500 (ES) market? Will it be even better?

 

  

The equity curve is much better. There is still a flat period between trades #400 and #500, but it looks much better. And most of the time the system steadily rises and creates new equity highs.

 

The last of the e-mini markets is the E-mini Dow $5 (YM) market.

 

 

There are more flat periods, the equity is far from a tradeable system, but overall it is still making money and still making new equity highs.

 

You can see that even with a small trading account, you don’t have to be afraid of higher timeframes, like the 120-minute one. You can still get an acceptable stop-loss and drawdown. Not much higher than using a 15- or 30-minute timeframe.

 

Since the system makes about 65 trades per year (on average), there is space to filter out some of the losing trades using the Market Internals technique. It would be interesting to see the results, to see just how much can this strategy be further improved.

 

Happy trading!

 

Tomas

 

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