SCOTT WELSH TRADING BLOG

The Best Systems are the Old Systems?

The Best Systems are the Old Systems?

Apr. 21, 2021

How do we know our trading system is going to work?

It’s the big question.

There are so many people out there telling us how our trading systems will fail.

Never use out of sample data more than once.

Never trade without a Monte Carlo test.

Never use different settings on Longs and Shorts.

Never optimize anything.

It’s easy to listen to smart people saying smart things and come to the conclusion we’re too dumb to create a trading system that will work tomorrow.

It can seem hopeless.

So, let’s look at it another way.

How do we know what book will sell over 100,000 copies next year?

Should we look at current sales?

Try to hack current trends on Amazon?

Exhaustively A/B test different focus groups?

Those don’t seem that great.

The world is changing so much, last year’s sales may not be relevant, current trends may drastically change and how do we know our testing is statistically viable?

Is it hopeless again?

No.

There’s an easy way to know what book will sell a ton of copies next year.

It’s the one that sold a ton of copies last year.

And the year before that.

And the year before that.

For example, The Great Gatsby was written in 1924. It’s been around a long time.

And it’s been selling books a long time.

Know how many copies Gatsby sells every year?

500,000.

Like clockwork.

What’s been working continues to work.

So, one one hand, we could try to re-invent the wheel and be the best tester in the world.

We could use our genius to create something brand new and magical.

[Of course, the smart people would strongly recommend not doing that.]

Or we could just use an old system that’s been working for decades.

How about 20 in 20 out? The old Donchian breakout system says we can buy a stock when it breaks above the 20-day high and sell when it breaks below the 20-day low. No stoploss, no target.

It’s a silly, boring, antiquated system that’s been around for generations.

And here’s how that ancient system would’ve done on AAPL (trading $10k of stock each time with no compounding):

It would’ve hypothetically made over 62% last year and had 5 straight winning years.

Here are some trades:

What’s been working continues to work.

Maybe old is the new “new”.

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.