SCOTT WELSH TRADING BLOG

Breaking the Rules

Breaking the Rules

May 19, 2021

Never seek to follow the footsteps of the wise. Seek what they sought.

Wise words.

But the experts would phrase it a little differently.

Always do what I say because I’m closed-minded and my self-worth is painfully dependent on being right (or denying truth when I’m wrong).

I like the first one better.

Years ago, I set out to try to find a way to financial independence. For me, automated trading was the key.

While I love trading, I despise sitting in front of a computer screen pushing buttons. A robot solved all that.

Plus, systematic trading is better than discretionary trading in many ways.

No emotions, perfect discipline, trustworthy research, etc.

But there was one overriding aspect of system trading that had to be followed (according to the books I’d been reading).

We have to have a positive reward to risk. In short, our profits have to be several times larger than our losses.

If we don’t do that, Paul Tudor Jones will personally come to our houses and punch us right in the face.

So, of course, I did the opposite.

First with the Hornet, and then with the Heron.

And guess what? The numbers seem to work.

And guess what else? In Kevin Davey’s latest book, he did an extremely comprehensive study on Futures instruments and found that the best strategy to use across many markets is a “negative” reward to risk.

If the profits were less than losses, it seemed to work better overall.

Kevin’s recent study backed up what I found in Forex several years ago. A small profit target with a wide stoploss is a perfectly viable trading method.

And that’s what I used on the Heron.

In fact, I went overboard.

I used a 10-pip target and a 70-pip stop. Outrageous.

But here is the Performance Report since 2014 using 1 lot each time with no compounding (2014 is about the time I developed the Heron):

Also see it here.

It made a nice hypothetical profit and had very low hypothetical drawdown. It survived 2020 and is hypothetically profitable so far this year.

Here’s the Equity Curve:

Great, right?

Well, kind of.

There’s just one problem.

Subscribe to the Newsletter to find out! [Spoiler alert: small targets are dangerous.]

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.