SCOTT WELSH TRADING BLOG

Fixing the Weak Spots

Fixing the Weak Spots

Sept. 18th, 2019

Let’s say a friend of mine has a system he really loves.

Maybe it’s a cousin.

Anyway, he really loves this one system. And he loves it specifically one just one instrument.

The system has shown high marks in backtesting and real life.

He even made 100% on it in one year. He traded one robot on one currency pair on a small account and doubled it in twelve months.

That’s probably why he loves it.

Furthermore, he’s tested several versions of it, and they all seem to come out pretty well. Every variation is profitable, in fact, but some are obviously more profitable than others.

This has only increased his confidence.

So what’s the problem? Why has he been complaining lately?

Well, there’s a dirty hidden secret to trading just one thing.

When it has a dull period, it’s rough.

My cousin knows it isn’t perfect all the time. He sees the backtesting that shows that some years are a lot better than others. He sees the testing that mediocre years can even happen back to back.

But it’s one thing to look at testing and another thing entirely to go through the mediocre results in real time. A year of blah results seems to last a lifetime.

“That’s the problem with trading just one thing,” I tell him. “There is no back-up when things get lousy.”

Trading just one thing is incredible, though, when it goes up. Being that concentrated in the good times beats everything.

Have you ever just owned one stock when it goes on a flyer? There aren’t three things on earth more fun than that.

But, of course, trading just one thing in the sour times is not fun at all.

So is there anything my cousin can do?

Yes. He could trade more than one thing!

That’s why very smart people tell us to diversify. It evens out the bad periods.

For example, the system he’s trading is weak in 2014. In fact, every currency pair he’s tested with this system is weak in 2014. The market that year just doesn’t like this particular system.

On his favorite currency pair, the year before (2013) is 5 times more profitable and the year after (2015) is more than twice as profitable. But 2014 just is a bad time.

To fix this weak spot, what could my cousin do?

One, he could use a completely different system. The key to diversifying effectively is to find something that’s not very correlated. Most likely, another system doesn’t trade the same way and will have different profitable times.

But what if he doesn’t have a different system?

Then he could keep the same system, but take it to a different timeframe. The exact same system on a different timeframe trades very differently.

Here’s an example.

My cousin’s system, trading 1 lot, returns only $1,154 in 2014. If we keep the same system but switch the timeframe to Daily and use a similar instrument, the profit turns out to be $4,865.

Same system, completely different results. That seems like an effective way to fill in the weak spots.

So the rest of the week, we’re going to look at some long-term systems with the idea that they might improve a daytrading portfolio that needs help in a few places.

For my cousin, of course.

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.