Systems Over Indexing

June 26, 2024

This week we’re looking to see if we can do better than Dollar Cost Averaging (DCA) an index fund.

And, as we mentioned last time, we’re going to use a very simple trading system.

Here’s that system again:

The Buy on Monday 5-Minute YM.D (E-Mini Dow) System 

• Buy on Monday at 13:50 pm ET.
• Close out at the same time as entry on Wednesday if we haven’t hit our target.
• Target is 1.5x the ATR.
• Stop is 20x the ATR.

But we’re only starting with $1,000. So we have to use the Micro version of the YM. The margin requirement for the YM is less than $1,000, so we should be okay:

And the interesting thing about using DCA is that we don’t have to worry much about the maximum drawdown. Do index funders worry about adding money when a Bear Market hits?

No, they love bragging about how they add more in bad times.

So we’ll do the same.

And here’s the real advantage of using trading systems: we can add to our position.

We’re starting our research with only 1 micro lot each time. That fits in our starting amount of $1k.

Then at the end of every year, we’ll see how we’ve done. If our account goes up 2x, then we’ll increase our micro contract size 2x. However much our account grows, we’ll match it with size growth. But we’ll put a cap on our increases when we get to around 20 micro contracts.

Here’s the first year trading 1 micro lot of MYM.D. We began in 2019:

The strategy made $673 on its own and we added $4,800 ($400 per month). So at the end of the year we have our profit of $673 plus our DCA chunk of $4,800 for a total of $6,474. We’ll now switch our contracts to 6 micros and trade that for the whole year.

Here are the first two years:

We made $7,142 ($1,190 x 6) the second year and we added money so now we’re up to $18,416. Now we’ll use 18 micros.

Here is 2019-2024:

We topped $20k in 2021 so we used 22 micros the next year and every year after that. No more increases once we got to 22.

We see some losing years but we end up with over $52k.

How did the index fund DCA end?

Only $39k.

By using a simple system and compounding very conservatively, we beat an index fund by a nice margin.

Hmm.

Then why wouldn’t anyone just stop what they’re doing and start something like this?

We’ll talk about that in the 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.