Automated Trading Strategy: 41 & 41a
Strategy 41a (G) made $69K in the last 12 months. It has a Profit Factor of 3.11 and an annual drawdown of only 1.85%. We are close...
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 41 while researching divergence theory — it builds on Strategy 40. A divergence is simply when the direction of the indicator diverges from the price trend. So, a divergence strategy is a strategy that looks for divergence as an indication to take an action.
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 “the best” strategy. It’s important to remember that the most important attribute of “the best” strategy is the one that you feel personally comfortable with. We were reminded of this by the following comment from a subscriber:
This is so true. After all, comfort is indirectly correlated with risk, but some portion of that risk can be allayed with high performing risk metrics. So, instead of focusing on premium, we’re doing a deep dive into risk by looking at what happens to trade statistics when we add a stop loss to Strategy 40. We’re also going to restrict the number of days that we can enter a trade to the best performing days of the week. The following risk metrics will be used to discuss and compare the performance of Strategy 41 with its predecessor:
lowest daily net profit (largest daily drop in net profit)
cumulative daily low (largest drop from starting account value — when this is positive it means the account value never dropped below the starting account value)
max drawdown (largest drop from highest account value)
These risk metrics can be confusing and even misleading if you don’t know how they apply to the strategy. We use them as a way to quickly:
develop a tangible narrative around the strategy’s performance
understand the impact of small changes in strategy formulation
I’m going to do my best to relate our findings to you in a way that gives these stats body.
Strategy 41: Risk Mitigation Stats
Strategy 41 has some of the best risk mitigation stats we’ve seen. When thinking about risk metrics, the most important consideration is where you’re starting from. This is often a point of confusion for traders. For example:
the daily net profit loss low for Strategy 41 was -$1,015. In other words, the daily account balance (the one that resets to $0 at the end of each trading day) never dropped more than -$1,015 on any given day.
Strategy 41 also has a cumulative net income low of -$1,225, which means that the value of the total account never dropped more than -$1,225 from its starting account value.
the max drawdown for Strategy 41 is also one of the lowest at 2.15% or $5,645, which means that the account value never dropped more than $5,645 from its account high.
If our starting account value is $50K, that means the daily account balance never dropped below $48,775 ($50,000 - $1,225) and on any given day it is unlikely that a loss will be more than $1,015 (daily loss low). We also know that the most the account value ever fell from an account high is $5,645 so if the account high after six months is $65K, it is unlikely that it will ever fall below $59,355 ($65,000 - $5,645) going forward. Again, this is my attempt at putting a story around the statistics to make them easier to digest.
The amount you need to trade is also inextricably linked to the riskiness of the strategy. So, when we’re thinking about how much we need to trade a strategy, we’re looking at max drawdown (plus a certain amount as a proxy for slippage and commissions). This is because max drawdown is looking at the most the strategy dropped from its cumulative high, rather than its starting value. The former is for the duration of the backtest, the latter is in relation to a single point in time—the starting value. They are both important, but in different ways.
In terms of trading the strategy for a year, because the daily cumulative low never went below -$1,225 from its starting value, you can start off with less than the max drawdown in your account, but you need to build your net profit to at least the max drawdown ($5,645 with a buffer for commissions and slippage) before you withdraw money from the account. In this way, you can look at max drawdown as a proxy for breakeven. This is also why we measure return based on max drawdown as opposed to max cumulative loss or starting account value.
Now let’s review Strategy 41 and 41a. As a quick reminder, when we created Strategy 40, we tightened parameters to increase performance variables across the board.
a decrease in max drawdown from -3.24% to -2.79%
an increase in % of winning trades from 54% to 63%
an increase in net profit from $64K to $76K
an increase in profit factor from 1.52 to 1.62
Strategy 41 is a risk optimization of Strategy 40, and Strategy 41a is essentially a risk optimization of Strategy 41.
It is important to note that we did not optimize the hyper-parameters within the indicators. That would result in overfitting. Instead, we optimized the best place for the strategy to take trades. That is, we didn’t optimize the forest, we optimized the path. Only time will tell if our logic holds, but Strategies 41 and 41a have narrowed the target area for the hunt (especially 41a G & H variation).
Strategy 41a (G) made $69K in the last 12 months. It has a Profit Factor of 3.11 and an annual drawdown of only 1.85%.
Strategy 41a (H) made $129K in the last 12 months. It only has 85 trades, but has a Profit Factor of 2.92 and an annual drawdown of 3.63%.
We’ll provide a performance chart with comparison metrics for all variations below.
Now let’s describe how to create each strategy and its variations. We’ll also provide a link to download both Strategies 41 and 41a (C#). All other strategy variations referenced here are based on these two strategies.