#101: MY STUDENT'S STRATEGIES (CASE STUDY #42)

Russell 2000 market is one of my favorite markets - that is no secret, but this is also true for most of my students. So today, we have another strategy for this market. The timeframe combination isn’t anything new, it’s actually quite popular; 15-minute with a daily. The strategy is trading both long and short, the ratio between long and short trades are roughly 3.7:1, but when it comes to net profit, it is just 1.6:1. This is quite usual when it comes to breakout strategies - you have less short ones than long ones, but they mostly have a higher profit factor, avg. trade, and percentage of profitable trades.

But let’s get back to today’s strategy:

Market: Russell (TF)
Main time frame (data1): 15-minute
Secondary time frame (data2): daily
Time template: 8:30am - 4:15pm
Profit factor: 1.69
Win %: 54.30%
Avg.trade: 153.08 USD
Exit: Stop-loss or Profit Target (avg. winning trade +692.20 USD)
Stop-loss: Variable (avg. losing trade -487.43 USD)

The net profit of this strategy is $73,020 and it has done it in 12.5 years (2004 to mid-2016), which is $5,840 per year on average. Maximum close-to-close drawdown is $4,860, so the avg. annual net profit to max DD is 1.2. It would be better if it’s closer to 2.

Let’s take a look at the distribution of profits on the equity curve:

The total number of trades the strategy has done in 12.5 years is 477. The average annual number of trades is 38.2, which is rather low, but still acceptable.

On the equity curve, we can see a constant rise and about six $3,000-$5,000 drawdowns, with the biggest one on trade number 390 ($4,860). The longer drawdowns took about 50 trades to recover (which can be a little over a year), but in some cases it took just about 20 trades, like the one in the beginning or the one around trade number 250. Additionally, the author of this strategy managed to further improve this strategy by using Market Internals.

In the beginning, there is a steeper part when the equity went almost from zero to over $20,000 in 20 trades, but the rest of the profits are evenly distributed, which is a good sign for the future.

How does this equity look in the table? Let’s take a look now:

In the table, we can clearly see the comparison of long and short trades. And it is no surprise - the long trades have achieved a higher profit, more trades, but bigger maximum drawdown, lower profit factor, and avg. net profit per trade (almost 2.4x). The percentage of profitable trades is pretty much the same for both sides (54.26% vs. 54.46%).

Can we expect similar numbers on other timeframes as well? A 20-minute timeframe should give us similar results:

Indeed, we have a net profit close to $73,000, the total number of trades around 480, all look really similar to the original equity. Just the maximum drawdown seems to be a bit bigger, about $6,000.

Now, how about a 30-minute timeframe; will it also look that good?

The number of trades is similar (just slightly higher), but the net profit is just $40,000. And we would like to see more in 12 years. In addition, drawdowns are close to $8,000.But the strategy is still rising and it creates a new equity high time to time.

Let’s take a look at other index markets, like EMD, ES, and YM. The first one is 15-minute EMD:

The performance is not too bad. About $64,000 in little over 500 trades is not a bad result. What can be a bit better is the maximum drawdown, which is over $5,000. However, overall it looks really good.

The next one is ES, also a 15-minute timeframe with daily:

The beginning of this equity is quite wild - it gets from zero to $6,000, falls down to almost zero, and then goes to $17,000 and falls back to $14,000. All this in 150 trades. Since then, the equity has stabilized and there is a constant rise and just about $2,000 - $3,000 drawdowns. The overall net profit is close to $48,000, and the number of trades over 550 looks really good.

The last one is YM:

The equity looks similar to the one for ES, after going through a couple of drawdowns and a steep rise to $17,000, the strategy starts slowly, almost constantly rising, with about $4,000 drawdowns.

So, you see again that the TF market is one of my favorites for a reason. It is not too difficult to find nice, robust strategies that perform well in other markets - so you can trade one system in multiple markets (or timeframes) and have a solid foundation for your portfolio.

Click here to learn how to build similar (and even better) strategies.

Happy Trading,

Tomas