31 Jan More Filters, More Profit?
More Filters, More Profit?
Jan. 31, 2024
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Sometimes, too many times, a tennis pro won’t stop talking.
They see a kid hit a big forehand, and they get all excited. They start babbling about “open your stance here” and “follow through there”, and the big forehand immediately gets confused.
Then pros see the same kid miss a forehand and it’s “turn your shoulders here” and “bend your knees there”, and now the big forehand is gone. It’s buried in an avalanche of muddy nonsense.
If one tip is good, twelve tips must be better.
If simple works, then complicated must be better.
It’s the same for trading.
So often we take a simple, profitable system that’s based on sound principles, and we start piling on more rules.
We can get rid of the drawdowns if we add more filters!
But can we?
In our last Newsletter, we looked at a simple system on the E-Mini Nasdaq (NQ.D). It had a massively negative reward to risk ratio and tried to piggyback on the idea that the market goes up over time.
That simple idea created this hypothetical Curve from 2001-2024:
Let’s find out.
Here’s that same system on the NQ.D if we only buy on Monday if price is above the 50-period SMA:
The desire for extra coaching ruined something fun.
But that doesn’t mean coaching is bad. It’s just that the more simple the coaching, the better.
For example, the most benign filter to use is the 200-period simple moving average. It catches most trades while only filtering out anything when things are dramatically bad.
If we use simple, good coaching, here’s that Equity Curve:
Filters don’t always produce better results. Many times filtering ruins it entirely.
But a little coaching and some simple, logical filters can do quite well.
Talk to you soon.
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.