SCOTT WELSH TRADING BLOG

Strategies That Worked in 2018

Strategies That Worked in 2018

January 2, 2019

I’m not a big fan of negativity or complaining.

It is mostly unnecessary and absolutely won’t get us where we want to go.

But 2018 was not a good year for trading.

Daytrading was choppy and disappointing. The market swooned late. And trend following was dreadful for many firms.

Trying to figure out why is pointless. Maybe it was the constant U.S. news shocks or maybe it was Brexit or maybe it was interest rates or maybe the longest bull market in history just needed to come back to earth.

Whatever the reason, a new year is a good time to take stock (haha) of what worked in such a difficult environment. An athlete’s greatness can be found during her worst day, a chain needs a solid weak link, and a trading strategy needs to be acceptable when conditions are not acceptable.

So let’s take a look at what worked in 2018.

First, though, we need to define what “worked” means. Does a return over 50% mean the strategy worked? Does 49% mean it didn’t work? That doesn’t sound right to me. We need a benchmark, and the one I like best is the market.

I don’t believe in Index Funds. I think we all can do better. I think Index Funds are high in drawdown, low in payoff, and will see even worse returns going forward due to the massive amount of investors piling in to this style of trading.

We need an escape from that so our money can grow. We need to beat the market.

So that’s my definition of “worked”. If a strategy beat the market, it was outstanding (better than millions of expert traders).

In this email we’ll look at something I personally traded. I can look up numbers from other traders but the only thing I know for sure is how a strategy traded with my own money.

The first strategy I’ll look at is my Breakout portfolio. This is a trend following portfolio, and I think you know how that went this year.

I recommend trading two currency pairs with this portfolio (EURUSD & USDJPY), and both are traded on Daily charts. The idea is to catch big trends in the Forex market, and these two historically work well together.

To see how we did, we need to know how the market did last year.

In 2018, the market (the S&P 500) was negative, coming in at -6.24%.

If we did better than -6.24%, we did very well. If we beat that number, we deserve for millions of people to give us trillions of dollars to trade.

How did the Breakout Portfolio do?

The EURUSD Breakout robot was up 11% for the year. Hooray! That’s amazing!

But that’s only half of the portfolio. Generally, trend following needs diversification to work, so I trade the USDJPY too.

And the USDJPY was down 14.1% for the year.

As a result, the portfolio was down 3.1% for the year. (You can see the actual results from my account here.)

Losing 3.1% doesn’t seem like a good results at all but it beat the market by over 3%.

Hooray?

While not desirable, if you were a big hedge fund, you could raise a lot of money if you said, “My proprietary trading strategy beat the market by 3.14% last year!”

This mediocre return also looks good when comparing it to the best trend follower in the world.

Dunn Capital is arguably the best trading fund in the world. It’s been running its trend following automated strategies for over three decades and has a track record as good as anyone, including Warren Buffett.

How did Dunn Capital do in 2018? It was down -23.03%.

Or we could look at Chesapeake Capital. The founder of this fund was an original Turtle and averaged about 100% per year while he was a trader in the famous Turtle program in the 1980s. Chesapeake is also an automated trend follower and also has been around for decades.

How did Chesapeake do in 2018? Its two funds were down -4.39% and -9.29%.

In summary, my Breakout portfolio beat the market and two of the best trend followers in the world.

That’s great (I guess). Mission accomplished (kind of).

But losing money is still losing money.

My takeaway is that there’s nothing wrong with my strategy, and I’ll definitely continue on trading it. As you know, in trend following, bad years with bad trends are usually followed by good years with good trends.

For your strategy, if you beat the market and beat these trend followers, you had a good year. You probably don’t need to change a thing.

That’s why my goal is always to beat the market. It is a worthy goal and offers perspective. A dreary year in a vacuum might make us want to change at exactly the wrong time. A dreary year that still beats the market offers the encouragement to stay the course.

We need to be there when conditions turn favorable.

In our next email, we’ll look at more strategies that beat the market.

Happy New Year!

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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.