Picking the Right Instrument for the Right System

Picking the Right Instrument for the Right System

Apr. 10, 2024

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The system we trade matters.

But most people vastly underestimate how important it is to pick the right thing to trade.

A system can be profitable and nonetheless lose if we pick the wrong instrument.

What we trade is as important–maybe more important–as how we trade.

An easy example?

Going Long Only on indexes.

How many people do you know that are passively invested in an index fund that bets on the market going down?

The answer, of course, is zero.

No one would ever do that.

Trading indexes needs systems that go Long Only 99% of the time. Trying to find a system that Shorts the stock market is super hard and not very profitable even when it works.

The same goes for trend following.

Trying to trade breakouts with positive reward to risk ratios on things that don’t trend is a losing battle.

Literally.

In our last Newsletter, we tested a bunch of pairs from 2020-2024 on a 30M Bollinger Band™ breakout system. The only two that made acceptable hypothetical money are the GBPJPY and the EURJPY.

But we can’t stop there. We need to test to see if the instrument is a true long-term trender.

So I took the BB Breakout system and went back to 2007 on the GJPY and EJPY.

What do you think happened?

You guessed it.

Here are the Portfolio Tester results trading 1 lot from 2007-2024:

The EJPY fizzled and died when we examined it long-term. It only has done well recently.

But the GJPY has kept on performing.

Granted, trading a simple trend following system isn’t easy, even when it’s robust. Here’s the Report via Portfolio Architect:

The drawdown is fairly high and the win percentage isn’t great, but both of those are to be expected with a “good” reward to risk system.

The bigger point is: the GJPY is a hard-trending instrument.

And it’s been that way for a long time.

So, if we’re looking for profits using a breakout system, the GJPY is the place to look.

We’ll look at different big trending instruments in our next Newsletter.

Talk 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.