#078: MY STUDENT'S STRATEGIES (CASE STUDY #31)
For a couple of weeks, we didn’t have any Crude Oil (CL) strategy. The crude oil market is also quite popular between my students. Sometimes it requires a stop-loss that’s a bit higher, as it tends to be quite volatile from time to time, but it is comparable to strategies developed for some of the emini index markets (like Russell 2000).
Since the crude oil market can get volatile, sometimes a fixed-amount stop-loss isn't the best solution. When the market gets volatile, the fixed amount might not be sufficient, and when the market calms down, the fixed amount might be too much. What might work better is a stop-loss that is based on some indicator, like ATR, to make sure that the stop-loss is adequate to the current market situation. The disadvantage is that you never know in advance what your maximum loss might be, but you can always combine it with a fixed-amount stop-loss to make sure your loss will never exceed certain limit.
Let’s take a look at the basic setup:
Market: Crude Oil (CL)
Main time frame (data1): 15-minute
Secondary time frame (data2): 180-minute
Time template: 8:30am - 2:30pm
Profit factor: 1.64
Win %: 23.56%
Avg.trade: 109.65 USD
Exit: stop-loss or at 4:15pm exchange time (avg. winning trade +1,196.22 USD)
Stop-loss: ATR-based (avg. losing trade -225.25 USD)
As you have probably noticed, this system has quite a low percentage of profitable trades. Usually we have 45-65%, whereas this one only has 23.56%. But even with such a low value, you can still be profitable in the long run. You only need your average win to be more than 4x of your average loss. And in this case it is 5.3x.
And with such a ratio of winning to losing trades, it has earned $62,830 in 10 years, with a maximum close-to-close drawdown of $5,710. That is an average annual profit to maximum drawdown ratio of 1.1:1. The strategy uses two timeframes. One is 15-minute and the second one is 180-minute. With a trading session lasting six hours, that is two bars per day.
Let’s take a look at the chart now:
The trade distribution is not perfect; the strategy has done almost half of the total profit in the first 30 trades, you would like to see the profits to be distributed throughout the whole lifetime. But the following performance isn’t bad and it is rising in a constant pace.
There are three major drawdowns. The biggest one, reaching $5,710, is right in the beginning, at about trade number 50; the next occurred about 100 trades later; and the most recent one is at about trade number 425. The recovery takes up to 70 trades. And since the strategy makes on average about 57 trades per year, it can take over a year to recovery from the drawdown.
Here are all the details in the TradeStation performance summary:
The strategy trades both long and short and the ratio between the trade numbers is almost 50/50. Also the percentage of profitable trades is similar to the average net profit from long trades, at about $123, which is about 27% more than the average net profit from short trades. This is one of the reasons why overall the net profit from long trades is about $9,000 higher than profit from short trades.
How about other markets? The strategy also works fine on other energy markets, like Heating Oil (OH) and Gasoline (RB). But in both cases, the stop-loss needs to be adjusted.
In the beginning, I mentioned that the strategy uses an ATR-based stop-loss. If you want to use a similar technique, here is the Easylanguage code (used by TradeStation and Multicharts):
setstoploss(X*(AvgTrueRange(Y)*Bigpointvalue));
Where X and Y are optimizable parameters, the big point value is explained here. As you can see, nothing really difficult.
Even though it is better to aim for a higher percentage of profitable trades, so that you don’t have to rely on a couple of big winners, this different approach helps you to diversify your portfolio.
You can learn how to build similar strategies here.
Happy trading!
Tomas
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