Trying to Fix a Broken 800% Strategy

Trying to Fix a Broken 800% Strategy

Feb. 14, 2024

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This week we’re breaking down a system that reportedly made 800% for its author over a decade or so.

By following the rules laid out in the book, we got this from 1997-2016:

Everything looked good.

And then we saw the nightmare that happened when we moved out-of-sample (the book was from 2017). From 2017-2024, it fell off a cliff:

Why did it plummet? The obvious reason was Short trades.

I don’t love taking trades with the same settings for Longs and Shorts. Sometimes I hate it.

And look what happens when you take out the Short trades from 2017-2024:

Only using the Short signal for exits and not a new entry improved the strategy mightily, but it’s still nowhere good enough to trade.

Are we stuck? Is the whole idea a bad one?

Remember, the author told us we can’t trade it as-is. We were told we had to employ “money management” techniques.

So, that’s what we’ll do.

First, we’ll eliminate all Short trades. Going Short is a bad idea.

And going Long Only on an index is an idea that’s been around for centuries and is the backbone of every financial advisor’s advice to everyone. No problems there.

Next, we’ll optimize the ATR % that we use for getting in and we’ll add a target and a stoploss.

We’ll just optimize in the 1997-2016 period, like the book does.

And here’s what we get.

Instead of getting in when price moved 33% above the open after closing below the SMA, we’ll get in when price moves 85% of the ATR. Oh, we changed the SMA to a Length of 3, too.

Next, we’ll get out at a $700 target (per contract), and we’ll use a $550 stop (per contract). That’s it.

Doing that, here’s the Curve from 1997-2017 using 1 contract each time:

While I’m not sure how we’d get that to be an 800% win, it’s still an optimistic curve that I would consider trading in real life.

And it beats the market over that period.

But we know that the OOS (out of sample) results from this system in its original form was a dumpster fire.

And we did optimize for the best results, which, of course, leads to curve-fitting.

Will our changes hold up?

We’ll take a look 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.