SCOTT WELSH TRADING BLOG

Can A Classic System Take Us To Hawaii?

Can A Classic System Take Us To Hawaii?

January 30, 2019

Before we start, I’ve got a quick story.

Several months ago, I was talking to one of my old students.

By any metric, he would be considered successful at what he does (and he’s one of my favorite people to boot).

As we were chatting, he mentioned that one of his clients had just gotten back from a luxurious trip in Hawaii.

“Must be nice,” he said, in a wistful, that-will-never-happen-to-me way.

Which got me thinking.

Why are luxurious trips to Hawaii only for other people?

How come “regular” people can’t have their money make money so they can go on trips whenever they want?

It made me sad. I want him to be able to go to Hawaii.

It made me angry. How come investing knowledge is a secret only for the chosen few?

That’s why I write this newsletter.

I want to find trading systems that beat the market, allowing our money make money.

I want 10 emails from people who beat the market constantly. Or 100. Or 1,000.

Then maybe I’ll stop being sad and angry.

[I know. It sounds like a sales pitch is coming. No sales pitch is coming.]

So let’s look at a system that might get us to Hawaii.

Last week, we examined a trend following system based on the original Turtle rules. We looked at what would happen if we traded a portfolio of such instruments.

Today we’re going to go into detail on just one instrument, the most profitable one.

Here are the details on the EURUSD Breakout:

  • System: The Turtle Breakout System
  • Philosophy Behind It: Trend following is the most robust trading system ever invented.
  • Need Special Indicator? No.
  • Chart: Daily
  • Instrument: EURUSD
  • Long or Short? Both
  • Entry: 1) Price must break above the high of the past 75 bars or break below the low of the past 75 bars
  • Hypothetical Portfolio Profit: $248,011
  • Hypothetical Portfolio Max Drawdown Percent: -48.09%
  • Trailing Stop: High or low of past 10 bars
  • Stop loss: Multiply default ATR (length 20) by 1.0 and set a hard stop
  • Trade size: risk 5% on each trade (compounding as the account grows)
  • Hypothetical account size: $20,000
  • Test Period: 2004-2019
  • Number of Trades: 86

Here is the MT4 Report:

There are a number of important takeaways.

First, we’re talking about big numbers here. Big numbers tend to make us a little loony.

For example, that’s a lot of hypothetical profit from just a hypothetical 20k account. But it’s also a lot of drawdown.

Our worst drawdown would’ve lost almost 50% of our account. If we somehow made it up to 200k, that means we could see a 100k drop. That’s a really big number.

At the same time, how will we ever be able to see our money grow if we panic as soon as we take some losses? It’s a tricky situation. We want our money to grow while our drawdowns decrease. It doesn’t usually work that way.

Also, notice that the modeling quality of this test is at 99%. That’s as high as it goes. MT4 data can be sketchy, so I haven’t liked testing on it in the past. But I just bought some high-quality data, so these numbers are as trustworthy as we can make them.

Last, this robot compounded returns as we went. It risked $1,000 per trade when we started and risked $10,000 per trade when we got to $200,000.

In short, this robot had a compounded annual growth rate (CAGR) of 18.8% per year. That’s a very nice hypothetical number.

And this system could be traded manually. I used a robot for testing but anyone could do it without automation.

I don’t know how expensive your trip to Hawaii would be, but I think that would pay for mine. The problem lies in our ability to take big wins and big losses.

And also in our trust in the testing.

Later this week, we’ll look to see if we can do even better with this system.

Maybe we can hypothetically take two trips.

Talk 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.