SCOTT WELSH TRADING BLOG

Fixing a Broken System (Step 10)

Fixing a Broken System (Step 10)

Sept. 9, 2020

We recently started a journey to beat the market. We want a system that will vastly outperform the market over time and build that 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 with our Breakout system so far:

  1. We introduced the greatest trading methodology of all time;
  2. We talked about how no one wants to trade this methodology;
  3. We learned the details of the system.
  4. We put our systems on Futures.
  5. We touched on The Great Debate (Everything or Trend-Only).
  6. We looked at breakouts on individual stocks.
  7. We looked at our system in Forex Daily charts.
  8. We looked at matching our system with the instrument.
  9. We examined if breakouts work better on smaller timeframes.

We have a few important things to discuss next.

The Turtles are probably the most famous traders in the past 50 years.

Sure, there’s a Buffett here and a Soros there. But those guys were untouchable geniuses. We can admire them but never be like them.

The Turtles, however, were just regular people off the street. Many weren’t even traders.

And they reportedly made 100% per year during their experiment. Buffett has never done that.  That’s why they’re famous.

So what has happened since? Many of the Turtles have gone on to manage funds and are still trading today.

But no one is making 100% anymore. And many Turtles say that they can’t use their original system anymore.

Why?

The system doesn’t work.

Allegedly.

The truth is, there are still many individual instruments that work just fine with the old Turtle methods.

The Turtles, though, traded many instruments, and a lot of the ones they traded in the 1980s stopped being outrageously profitable in the years since.

So, is their system broken? If so, can we fix it?

I’m not sure their system is broken. I’m also not sure that publishing the rules publicly (as they did, years later) has ruined the system.

I just don’t think it was a great system to start out with. It worked initially so no one really thought it through.

For example, why 20-day breakouts? That’s a totally arbitrary number that happened to work, so no one questioned its 4-week nature.

Or they didn’t account for whipsaws. Is it reasonable to think that getting in on a 20-day breakout and then letting it retrace 10 or 10 days was going to work forever?

It’s like buying tech on the dips. It works for a minute in a suitable market. But does anyone really think buying-and-holding tech companies on the dips will work long-term? (That’s why people write asinine “buy index funds” books. To warn us of this obvious danger and then give us a lousy alternative.)

What if we took the Turtles method and “fixed” it?

By this, I mean, what if we added some common sense?

What is the biggest reason the Turtle methods don’t work?

It’s not because breakouts don’t work. Breakouts have produced profit forever and will continue to produce profit forever more.

It’s because of the whipsaw.

When price breaks the high, goes profitable, and then retraces downward due to a news event, a winner turns into a loser.

What if that winner turned into a break-even instead?

Why bring the possibility of a winner turning into a complete loser into play? Does that make any sense?

This is a breakout system. We want to make money on the breakout. We aren’t trying to hold it as long as possible for some stubborn reason.

But what if it moves to break-even and then goes back the other way? Won’t we lose a winning trade?

Not at all.

If it goes back up, we’ll get back in!

Not having a break-even on the Turtle method seems like a colossal mistake. Logically speaking.

Is it, though?

Remember the GBPJPY we talked about in a previous newsletter? That one had no break-even and it made about $75k of profit with about $46k of drawdown. Okay, but not great. Being a victim of a market turn created a lot of drawdown.

Here’s what happened when I applied a simple break-even (50 points):

That’s a lot better. We’ve increased profit and cut drawdown in half.

We’ve fixed (or drastically improved) a “broken” Turtle system and made our System from Scratch much better.

All it took was some common sense.

We’ll see if this works on other instruments in our next newsletter.

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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.