SCOTT WELSH TRADING BLOG

How To Make Your Trading System Better

How To Make Your Trading System Better

December 6th, 2018

When searching around for systems, it’s very rare to find a system that is profitable “as-is”.

Most of the time, these systems were built a long time ago and they weren’t built thoroughly. It seemed to work at the time, so the creator just stopped trying to improve it.

Or sometimes systems were built a long time ago and the markets changed. For example, many of the original Turtle traders have said that they couldn’t use the same rules they used back in the 1980s.

Even the miracle of trend following needs a hand.

So what’s a good way to improve a system?

Do we need machine learning, high powered servers or “leading indicators”?

Probably not. Most of the time, we’ll just need one or two simple things to make a system better.

Last week we talked about a system I found on Twitter (I aptly named it “The Twitter System”). We used it on three instruments and it was profitable on all three.

The best chart, though, was on the GBPUSD Forex pair.

Can we make it better?

To try to make the GBPUSD better, I added one simple thing: a numerical profit target. [Somewhere a hard-core trend follower just screamed and passed out.]

Here are the details:

  • System: The Twitter Trend System
  • Philosophy Behind It: If we trade with the trend with a reliable indicator, good things can happen.
  • Need Special Indicators? No.
  • Chart: Daily
  • Instrument: GBPUSD
  • Long or Short? Long and Short
  • Long Entry parameters: 1) Price must close above the 100 SMA; 2) RSI (set to 2 Length) must go into extreme Oversold (set to 10); 3) Enter at Open of next bar
  • Long Exit: Get out when RSI goes into Oversold (set to 53)
  • Short Entry parameters: 1) Price must close above the 100 SMA; 2) RSI (set to 2 Length) must go into extreme Overbought (set to 80); 3) Enter at Open of next bar
  • Short Exit: Get out when RSI goes into Oversold (set to 50)
  • Numerical Profit Target: 102 pips
  • Hypothetical Profit: $46,092
  • Hypothetical Max drawdown: -$13,100
  • Trade size: 1 full lot
  • Hypothetical account size: $15,000
  • Test Period: 2003-2018
  • Number of Trades: 306

Here is the MT4 Strategy Tester Performance Report:

One quick note.

I like to do most of my testing on Tradestation because that’s my favorite. But we can’t trade this system on Tradestation, so I wanted to look at it on a platform we could trade tomorrow. That’s why I’m using MT4 results this week.

As far as the results, adding a profit target made the system better. It increased the profits and lowered the drawdown.

Here are the MT4 results if we don’t use a target:

As you can see, using a target makes it better.

Philosophically, it feels like we should “let our winners run.” And how many times have we heard that?

But adding a profit target and locking in our win is a great way to take a good trading system and make it much better. It might seem counter-intuitive, but, over the years,  I’ve seen this one change make a lot of systems better.

I would recommend trying a target out on your system if you currently don’t use one.

In our next email, we’ll add a stoploss. Every system should have a stoploss.

Right?

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.