Trading Extremes

Dec. 18, 2019

In the 1989 movie Dead Poets Society, Robin Williams is a teacher trying to help students become better writers.

And he does that by trying to make them become better thinkers.

In a famous scene, Williams’ character John Keating encouraged the class to stand on a desk. Why? Anytime you have a problem, look at it from a completely different angle.

When you do that, answers you never thought of come to mind.

We’re going to do the same thing for trading systems.

We all get in a rut when it comes to creating and evaluating systems, at least I do.

From time to time, it’s good to look at extreme systems to see if: a) They’re really not extreme; or b) We can adopt something from an extreme system to make our current system better.

The first extreme we’ll look at is positive winning percentage.

Everyone likes to win and we’d all love a system that made money won 90% of the time. But, of course, that’s just a dream.

We can’t have a winning percentage that high in real life. We have to learn to accept a modest win percentage.

Or do we?

What’s the most extreme we can go? 90% 95%?

How about 100%? Can we trade a system with a stoploss that wins 100% of the time? That seems extreme.

Here’s a system like that. We’ve mentioned it before, and it’s still going.

This system is on the 15M chart and trades the ES futures contract (Emini S&P).

Here are the details:

1. Go Long Only and only take trades when price is above the 56 SMA.
2. Only start taking trades after 16:00.
3. Trade only 1 contract.
4. Enter Long when CCI (21) goes into Oversold (-100).
5. Profit target: $87.50.
6. Stoploss: $870.

I tested this back to 2007, and it’s never lost a trade.

Here is the Performance Report:

It doesn’t trade a lot and doesn’t make a ton of money. For example, this system has made a hypothetical $635.06 in 2019. We need about $6,300 in our account to trade 1 contract, so that means about 10% for the year. That’s less than buy-and-hold, at least this year. And I don’t know for sure how it would take trades in real life.

But, still. It’s never lost a trade. Would we trade something as a part of our portfolio that never loses?

The takeaway? If we widen our stoploss to extreme levels, we may just find that the instrument we’re looking at performs incredibly well. If our system isn’t doing as well as we’d like, maybe our stop is too close.

In our next email, we’ll look at another extreme system.

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.