SCOTT WELSH TRADING BLOG

Putting It All Together (Step 13)

Putting It All Together (Step 13)

Sept. 16, 2020

We recently started a journey to beat the market. We want a system that will vastly outperform the market over time and build that system step-by-step so anyone can follow along. Feel free to ask questions as we go. 

To review, here’s what we’ve done with our Breakout system so far:

  1. We introduced the greatest trading methodology of all time;
  2. We talked about how no one wants to trade this methodology;
  3. We learned the details of the system.
  4. We put our systems on Futures.
  5. We touched on The Great Debate (Everything or Trend-Only).
  6. We looked at breakouts on individual stocks.
  7. We looked at our system in Forex Daily charts.
  8. We looked at matching our system with the instrument.
  9. We examined if breakouts work better on smaller timeframes.
  10. We used common sense and put a break-even in.
  11. We tried a break-even buffer.
  12. We examined variable trade size.

It’s time to see what this system can do.

Keep in mind, a breakout strategy is nearly impossible to trade.

A highly-profitable breakout trade is not common. Most of the time, breakouts fail. Most traders just lost interest.

And because it only works sparingly, breakout strategies have monstrous winning years…and losing years. If you’re thinking of trading breakouts, you’re going to have to accept a losing year now and then.

It’s part of the deal.

In fact, it’s exactly what you want to see. Experienced trend followers don’t trust the system unless there is a wide discrepancy between yearly returns.

That rules out the rest of the traders.

Like I said, it’s nearly impossible.

And highly profitable.

But is there anything we can do to help ourselves?

Yes, we can trade a portfolio of breakout charts. That’s how trend followers get around the issue. Sure, it will still have feast and famine, but less so.

Or so the theory goes.

Let’s take a look.

I ran tests on our system on Daily charts using several instruments. I used 1 full lot each time and a hypothetical $50,000 account. I used no compounding. [Note: these numbers were not optimized or analyzed. I just made a quick, best guess at where to start. You could almost certainly do some research and do better than this.]

Here’s that Fx portfolio:

From 2008-2020, this portfolio returned a total return of 337%.

For comparison, the S&P 500 had a total return of either 149% or 223%, depending on whether you took dividends or not.

Our simple portfolio more than doubled the market without dividends.

I don’t even want to talk about what our portfolio does if you automatically compound gains. Okay, I will

It makes $713,569.

The catch? You guessed it. This portfolio had small losing years in 2010, 2011, and 2018.

It also had 100% returns in 2008 and 2012.

It looked just like breakout portfolios usually look: big winning years, some losing years, and returns that beat the crap out of an index fund.

But that’s Forex. Does our simple system work on other instruments?

We’ll look at other portfolios in our next newsletter.

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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.