Problems With My New Favorite System

Aug. 14, 2024

This week we’re talking about my new favorite system.

I’m looking for a foundational (possibly stand-alone) system that I can pour money into whether it’s rain or shine.

And here’s the Tradestation Equity Curve of this system:

It looks pretty good. That’s why I’m interested.

But what are the problems?

One, it’s a system based on a stock index, the ES. What does that mean? It means it may not do well during Bear Markets. Let’s check that out.

In the worst Bear Market since the Great Depression (2000), my system didn’t do well:

Of course, any student of the market would know that the SPY not only did awfully in 2000, it did terribly in 2001, and 2002, too. This system only had one bad year, not three. And it was good before and after 2000.

But this is important because where are we at right now? As you know, right now the market is dramatically overbought:

The last time we were above the bands, we saw a crash. We’re at the same place now.

So if I start trading my system tomorrow, I could be starting at a bad time.

However, 2008 was no problem:

It actually thrived.

And it did fine in 2018 and 2022 also:

Maybe Bear Markets are not a big deal after all.

The second problem is losing years. Guess what? This system loses. Guess what? Index funds lose too.

People claim they have no problem investing money in a down market. Why would I have a problem investing in a system during a down period?

The third problem is that I optimized a little.

And optimizing is the devil.

However, I’ve been testing RSI systems since 2012. And I’ve been trading them in one form or another since 2013.

They worked then and the research says they work now. While optimizing can be dangerous, optimizing something that has already been shown to work is much less risky.

The last problem is that the stoploss is big.

Although this system hardly ever hits the full emergency stop, if it hits it one time, it could be a really big loss–especially if I started trading it on a $15k account.

That would be rough.

That said, take a look again at the past several years:

Those are really good results. And on a sample $15k account (which is too aggressive for any human), those are outstanding hypothetical results.

In our next Newsletter, we’ll go over the details to this system.

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.