SCOTT WELSH TRADING BLOG

Amateurs Talk About Tactics (Step 9)

Amateurs Talk About Tactics (Step 9)

July 15, 2020

We recently decided to embark on a journey to beat the market.

To do that, we decided to start from scratch. 

Our goal is to build a system that will easily outperform the market over time and build this system step-by-step so anyone can follow along. Feel free to ask questions as we go. 

To review, here’s what we’ve done so far:

  1. We chose Forex over stocks and futures for the leverage and because we can trade any size account;
  2. We picked a system that suits our psyche (buy-low-sell-high) so we wouldn’t get discouraged, and then did a quick run-through of some numbers to see if it’s profitable;
  3. We chose one of the most popular currency pairs (EURUSD);
  4. We used ATR to build a hypothesis on how our system could work;
  5. We calculated a legitimate trade size we could use.
  6. We looked at what max drawdown means and how to manage it cautiously.
  7. We looked at how to not be so careful and manage max drawdown aggressively.
  8. Then we did a quick checkup to see if our system is beating the market. (It did by a nice margin.)

With all we’ve done, it seems like we might have a system that’s ready to trade.

Not quite.

Because, as a wise Marine Corps General once said, “Amateurs talk about tactics, but professionals study logistics.”

I want to be a professional! What does that mean?

In tennis, it means that an amateur talks about hitting big forehands while a professional examines her overall assets and makes a game-plan on how she can get into the Top 10 and stay there.

In trading, that means that an amateur talks about indicators and optimizing while a professional studies how this system is actually going to be traded for long-term profit.

It’s fun to find an indicator that looks like it will grow an account. (tactics)

It’s useless if that indicator can’t actually be traded in real life. (logistics)

What would cause a system to not work logistically?

Maybe it fires off signals that happen in the middle of the night and can’t be taken. Maybe it enters at the close of a bar and that entry can’t be executed in the live market. Maybe it creates drawdown that could never be suffered in real life.

Or maybe it’s psychologically discouraging.

For example, maybe a system goes for big wins (like ours does) but never protects open profit. What if the system allows 70 pips of profit turn into a 120-pip loss?

Tactically, a system like that makes money. Logistically, it would drive us to madness trading it in real life.

So, what’s an easy way to make our system more tradable?

The magical move-to-break-even.

For a lot of systems, moving to break-even in the middle of a trade hurts the overall results. As with most things in trading, what feels good usually makes less money.

But, we care about logistics. There’s nothing wrong with a little less profit if break-even keeps us happy and in the game.

Going back to our system, we have a 1 ATR profit target. That comes out to about 80 pips.

What if we put a break-even on it? Does it help? Hurt? Find a nice middle ground? Let’s take a look.

Using the system parameters we’ve discussed so far, here’s what the system has made from 2008-2020 using 1.42 lots each time with no compounding:

  • $72,995 profit
  • -$11,976 max drawdown

These numbers DO NOT have a move to break-even.

Now, let’s put one in. After 70 pips of profit, let’s move our stop up to our entry to trade “risk-free”. Here’s how that did over the same period:

  • $71,850 profit
  • -$11,976 max drawdown

They are almost identical, but using a break-even is slightly worse.

So, the tactic would be to take the break-even out and trade it straight up.

But how much would we spend not to ever see 70 pips of profit turn into a loser? Is that reassurance worth $1,100?

Logistically, it feels like the answer is yes. Our day-to-day life with this system would be made easier with a break-even.

So, for now, we’ll keep the break-even in.

In our next email, we’ll look at another possible way to make our system better.

Get on the email list to find out what it is.

Talk to you soon.

 

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.