What the Perfect Trading System Looks Like

What the Perfect Trading System Looks Like

October 18, 2017

We’re all looking for the perfect everything.

The perfect job. The perfect partner. The perfect trading system.

But do we really know what perfect is?

How many jobs looked great on paper and then turned out to be duds? How many perfect relationships have we seen in Hollywood (or had in our lives) that turned out to be nightmares? How many trading systems looked like perfect life-savers and ended up being garbage?

The opposite is also true.

Temporary side-jobs can turn out to be fulfilling careers. That annoying person can end up being our soul-mate. The boring trading system can become the vehicle that lets us retire early.

We think we know what “perfect” is, but we end up being all wrong.

So what is a perfect trading system?

The first characteristic we all can agree on is durability. The perfect system will last for a long time. No one is disputing the robust nature of an Index Fund, for example. An Index Fund isn’t a flash-in-the-pan. An Index Fund has held up for a century and will probably hold up for a century more.

After that, though, agreement becomes more difficult. So let’s trust an industry veteran to help us figure it out.

According to this famous trader who’s been around over thirty years, a perfect system is one that:

  1. Doesn’t use different settings for Long & Short trades.
  2. Is extraordinarily simple.
  3. Uses timeless principles that never change.
  4. Is mechanical (no discretionary trading).

If we accept those tenets and take all of those guidelines into account, what does a perfect system look like on paper?

Our industry veteran just came out with a new book. In it, he presented updated results for the systems he talked about in his previous book (written about a decade earlier in 2006).

In other words, he checked in to see how his systems have held up over the past decade. He was very pleased.

I bought his new book and took one of the best-performing systems and coded it into Tradestation (he generously provides the code for all of his methodologies).

Sure enough, his claims were right. His systems have held up.

Let’s review a few things real quick. This system comes from a famous industry veteran who’s been trading over thirty years. He’s seen it all. He’s traded it all. He’s coded presumably hundreds of systems. He knows what works. He knows what a great system looks like.

So what does it look like? Remember, this comes from an experienced, reliable source, and this data comes from an untouched, un-tweaked system over the past ten years.

Trading the @ES (he trades Futures) using one contract per trade on a Daily chart, here’s what his revert-to-the-mean-type system did from 2006-2017:


Important things to note:

  • It created nice profits of $35,413.
  • The max drawdown was $17,890, giving us about a 2:1 profit to drawdown ration (the goal is always 2:1 or better).
  • It trades often for a Daily chart (about once a week or more).

One final important note, if we keep the max drawdown percentage the same as it is for the stock market, this system averages 12.3% per year during this time.

The stock market only averaged 9.3% per year.

It’s easy to say this system has it all: fundamental principles, un-manipulated forward-tested data, and performance that beats an Index Fund.

Let me show you one more thing. Here are the Annual Returns for this system:


As you can see, there are three losing years (2007, 2013, and 2017).

How do you feel about that?

Here we have a system that has several characteristics of a perfect system (if not all). And it beats the market significantly, making it better than an Index Fund.

But it has losing years. Three of them, in fact.

That’s what perfection can look like.

We all want the system that makes a million dollars and wins 90% of the time and never draws down. Just like we want the supermodel or the house in Beverly Hills.

But here’s a system that beats the market and has live results we can believe in.

Maybe our vision of perfection needs to be dramatically altered.

To be the best, we have to know exactly what being the best looks like. This system gives us a great view.