#086: MY STUDENT'S STRATEGIES (CASE STUDY #35)
When you begin with breakout strategies, it is easier and faster to build just long-biased ones. It is not optimal, it is generally better to have strategies trading both long and short, but it is a great way to start and to build your first portfolio to begin with live trading. And over time, you can either replace these long-biased ones or you can add to your portfolio some short-biased strategies to have it more balanced.
I would like to present you such a strategy today. It is a short-biased strategy for Russell 2000 (TF) market. It combines 2 timeframes, one is pretty standard, the 15-minute, and the second one is 360-minute (6 hours). It is a combination that we don't see that often, but that doesn't mean that you cannot get interesting results.
Let’s take a look at the setup:
Market: Russell 2000 (TF)
Main time frame (data1): 15-minute
Secondary time frame (data2): 360-minute
Time template: 8:30am - 4:15pm
Profit factor: 2.13
Win %: 59.76%
Avg.trade: 206.42 USD
Exit: stop-loss or ATR-based Profit Target (avg. winning trade +652.03 USD)
Stop-loss: ATR-based (avg. losing trade -455.44 USD)
One of the things that stands out in this strategy is the profit factor - it is 2.13. And that includes the commission of $10 per trade (that is still quite a lot, TradeStation will charge you less than half of that). 10-year profit is $69,700, which can look like not a lot, but the close to close drawdown is just $2,450. So you can easily trade 2 contracts and double the profit. The average annual net profit to drawdown ratio is 2.8.
Most short-biased strategies have a low number of trades and are not tradeable. This one has 338 (34 per year on average) which is just about the limit. It makes about 2 trades each 3 weeks.
Let’s take a look at the equity curve and see if it looks as good as the numbers:
When you take a look at the equity curve, you can see that there aren’t too many losing periods. The longest period without any new equity highs is less than 25 trades (which is good considering that it takes 37 weeks on average to make those 25 trades). There are a couple of drawdowns between $2,000 and $2,500, like at trades #90, #140, #305, but the strategy has usually recovered pretty quickly.
The start of the equity looks really good; in the first 100 trades, the strategy has created over $30,000 in profit. It took another 200 trades to double it to $60,000.
How does this equity look in numbers? Let’s take a look:
To recap the most important numbers - the strategy has done, in 10 years; 338 trades, 202 (59.76%) of them were winning and 136 losing. The stop-loss for losing trades is $1,000, the maximum close to close drawdown is $2,450, and the profit factor is 2.13. All of these numbers include the $10 per trade commission.
Does the system have the same performance in other markets? Let's take a look at other index markets, like E-mini S&P 500 (ES):
The 10-year profit isn’t as nice as for the TF market, $26,000 in 10 years is not much, but we can still see a steadily rising equity curve, not so big drawdowns (less than $2,000), and the number of trades is just 240, that could be a bit more, but overall really nice results.
Will E-mini NASDAQ 100 perform the same?
In this case, the overall profit is even lower, not even $18,000 in 10 years, it’s not much, but the equity curve is still rising and the maximum drawdown is still below $2,000. The number of trades is again quite low for live trading, but the number of trades is the problem of most short-biased strategies. So this is also a really nice result.
Both of these results are telling us that this strategy is likely to perform really well in live trading, but it shouldn’t be the only test that we perform.
So, even when you start with long-biased strategies in your portfolio, strategies like this one can be a nice way to add some short-selling elements to your portfolio.
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