#074: MY STUDENT'S STRATEGIES (CASE STUDY #29)
One of the disadvantages of automated trading, when compared to discretionary trading, is that you need to often use a stop-loss that is too large. It is not exceptional when it gets over $1,000 and some of the systems I have presented earlier have stop-losses even bigger than $2,000. I explained why you should avoid stop-losses that are too small in this article. But even with automated strategies you can find a strategy with a stop-loss that is quite reasonable. Usually, you will find these when building a strategy for e-mini index markets like E-mini Russell 2000, E-mini S&P MidCap 400, and others (as I explain in this course). But also other markets have a lot to offer - like the soybeans market.
The system that I would like to present you today, is for the soybeans market, it is short-biased, and the 7-year profit is $38,625 and the stop-loss is just $550. The close-to-close drawdown is just $2,512.50. Those are really nice numbers and it is a great system to start with.
Let's take a look at the setup:
Market: Soybeans (S)
Main time frame (data1): 60-minute
Secondary time frame (data2): Daily
Time template: 9:30am - 1:15pm
Profit factor: 1.94
Win %: 55.86%
Avg.trade: 119.21 USD
Exit: stop-loss or at 1:15pm exchange time (avg. winning trade +440.26 USD)
Stop-loss: 550 USD(avg. losing trade -293.30 USD)
A lower stop-loss usually means higher percentage of losing trades (as the stop-loss is hit more often), but this is not the case - almost 56% of trades are profitable. Also, the 1.94 profit factor is quite high. So the strategy does not rely on several “lucky” trades that would make all the profit, but it is distributed evenly throughout the years:
The equity curve covers the period from 2009 to 2015; it is composed of 10 out-of-sample periods (from about trade #80), the biggest drawdown ($2,500) is at about trade #130 and from that moment on there is just a rising equity with some flat periods.
As mentioned earlier - all trades are evenly distributed throughout the 7-year period. Each year it makes 40 to 60 trades, each year is profitable, and the annual net profits are relatively stable.
The net profit is $38,625 over 7 years, which makes an average annual profit of slightly over $5,500. And with the close-to-close drawdown of $2,500, the annual profit-to-drawdown ratio is almost 2.2.
The 1.94 profit factor is also really nice and so is the $119 average trade and almost 56% profitability - especially when considering the $550 stop-loss.
More numbers are in the table below:
Part of my robustness testing is the performance of a strategy in other markets. This strategy is, however, working only on the soybean market (30- and 60-minute timeframe) and it doesn't really perform well in other markets.
Overall, this strategy is really great to start with, as you only need a small account to trade it and you don’t need to worry too much about the drawdowns. Also, since it is easier to build a long-biased strategy, it is good to have it in a portfolio for bigger diversification. And it isn’t too complicated - as it uses just 3 conditions and 10 lines of Easylanguage code. You don't need to overcomplicate things to build robust profitable strategies.
Click here to learn more about the workflow I teach and start creating similar systems by yourself today.
Happy trading!
Tomas
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