Automated Trading Strategy: 40
Strategy 40 made $76K in the last 12 months. It has a Profit Factor of 1.62 and an annual drawdown of only 2.79%.
There is no guarantee that these strategies will have the same performance in the future. Some may perform worse and some may perform better. We use backtests to compare historical strategy performance. Backtests are based on historical data, not live data. There are no guarantees that this performance will continue in the future. Trading futures is extremely risky. If you trade futures live, be prepared to lose your entire account. We recommend using our strategies in simulated trading until you/we find the holy grail of trade strategy.
For a link to all strategies and the most recent chart, click here.
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We found Strategy 40 while researching divergence theory — it builds on Strategy 39. To be clear, a divergence is simply when the direction of the indicator diverges from the price trend.
As a quick reminder, our goal is to find the holy grail of automated trade strategy, but we’re also hunting for the attributes of a high performing strategy. So, a secondary goal is to see if we can increase profitability and/or reduce risk by building onto a previous strategy. For Strategy 40, we’re seeing what happens when we build on Strategy 39.
What we created as Strategy 40 has a much better performance than Strategy 39.
We saw:
a decrease in max drawdown from -3.24% to -2.79%
an increase in return on max drawdown from 648% to 927%
an increase in % of winning trades from 54% to 63% (Note: Strategy 40 has the second highest % of profitable or winning trades of all strategies.)
an increase in net profit from $64K to $76K
an increase in the cumulative net income low from $20 to $1,315 (read: the account value never fell below $1,315 from its original account value)
an increase in profit factor from 1.52 to 1.62
Later on in the post we’ll continue this analysis with a few visuals. Specifically, we’ll look at what income distribution by:
day (cumulative)
day-of-week (net profit)
hour-of-day (net profit)
weekly (net profit)
can tell us about the performance of the strategy.
Perhaps the most interesting attribute of Strategy 40, as you will see in the weekly income distribution chart, is that there’s always a trend for profitable weeks, at least over the backtest period. In other words, the first profitable week after an unprofitable week was always followed by a second profitable week.
This is an example of how, when combined with a day-of-week income distribution chart, we can greatly improve our timing for entry. You can use this as a way to identify the best weeks to trade or you can use it to find the “ideal time” for starting a strategy.
What is the “ideal time” to enter a strategy? The ideal strategy is one that never drops below the account value on the first day of trading. It starts making a profit on Day 1. The “ideal time” is a start time (day) that helps to achieve this.
We use the metric ‘cumulative net income low’ as a way to measure the strength of a strategy’s day of entry. We like to see strategies with a cumulative net income no lower than $0. Indeed, the low for Strategy 40 is $1,315. As you can see from the chart below, this means that the value of the account, regardless of the starting account value, never fell below $1,315.
Again, this is due to timing or entry point more so than the strength of the strategy itself, but it shows the importance of timing in building account value. In the same way that it might be possible for a slower tennis player with a good serve to beat an agile tennis player with a mediocre serve, a good entry point is one of the most deterministic variables in the performance of an automated strategy.
Before getting into how you can use performance charts to help find the optimal day of entry, let’s review how to create Strategy 40. We’ll also provide a link to download the strategy (C#).