# Automated Trading Strategy #49

### Strategy 49 made $101K based on a one year backtest period and has a profit factor of 1.88.

*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.

Click on the table to enlarge.

I’m obsessed with trading metrics. They help to quickly give each strategy a profile for comparison. For example, Strategy 49 made $101,760 in a one year backtest. This isn’t the first strategy on our list to make over $100K, but most strategies that make over $100K also require a large reinvestment of capital.

Some traders view reinvestment cost as the cost of doing business; it’s almost impossible for a day trader not to. For example, if you make $200, that’s great. $200 is your net profit between your gross loss and your gross profit, but this doesn’t tell you how many trades it took to get there. It *could *have taken 11 trades with a gross loss of $1,000 and a gross profit of $1,200. So you lost $200 on 5 trades and made $200 on 6 trades, which put you up $200 on the day. Your gross loss is $1,000 and your gross profit is $1,200, so net / net you made $200 on the day.

One way that traders measure reinvestment is with the profit factor. Profit factor is the ratio of gross loss and gross profit. Going back to our example, if you’re up $200 after losing $1,000 and making $1,200, the profit factor is 1.2 (1,200 / 1,000).

When we first started this, we didn’t care about profit factor. We didn’t care about the number of trades we had to make as long as we made money on each trade. After testing many of our earlier strategies we realized they weren’t practical. We still wanted a strategy that made over $100K a year, but didn’t want to reinvest $1 million to do it. In other words, we know it’s possible to make $100K off of a $1 million investment, but what about a $200K investment? Strategy 49 does just that — it makes $101K (A) off of a $217K reinvestment.

The other metric we like to look at it is max drawdown. Max drawdown is the most cumulative net income has fallen from its high. This is why we use max drawdown as a minimum for account size. The average max drawdown for our strategies is $41K. Strategy 49 has a max drawdown of only $10K.

Now, this next part might get a little confusing, but it’s important. In addition to trying to minimize reinvestment and drawdown, we’re also trying to maximize return. Since we use max drawdown as a proxy for minimum account size, this is also how we measure return. In other words, we like to measure return based on how much we’ve made on the minimum account size. It’s important to look at both profit factor (return on reinvestment) and return on max drawdown to understand how the strategy performs. Profit factor gives you a reinvestment profile, while return on max drawdown gives you a return profile. The higher, the better for both. Strategy 49 has a profit factor of 1.88 (B) and a return on max drawdown of 983% (average return on max drawdown for our strategies is 255%).

Those of you on the hunt with us already know how we use these metrics, but I’ve never discussed a metric that I personally use as a return measure — the Sortino ratio. I’ve come to rely on it even more in the current market.

The Sortino ratio is like the Sharpe ratio — both are considered to be measures of risk adjusted return. There’s no need to get into the weeds on these ratios. There’s extensive material on the difference between the two on the web and you can read about how NinjaTrader defines them here. Ultimately, both are a measure of return based on risk and risk is defined as the standard deviation of your return profile. Higher standard deviation equates to higher risk.

Why do I prefer the Sortino ratio? Unlike Sharpe, the Sortino ratio does not consider the *total* volatility of the investment. The Sortino ratio is more concerned with negative volatility or downside risk than total volatility. In the same way that all slippage isn’t bad, all volatility isn’t bad either. The Sortino ratio only factors in the downside standard deviation in its calculation and is therefore better to evaluate high-volatility strategies, whereas the Sharpe ratio is good for evaluating low-volatility portfolios.

A negative Sortino ratio is bad. It means that the risk-free rate is higher than the portfolio's return — yikes. A ratio between 0 and 1 is considered sub-optimal; higher than 2 is considered very good; and, higher than 3.0 is considered excellent. There’s no getting around the inherent risk involved in trading highly volatile markets like the one we’re in now, but you can improve your performance by looking for strategies that reward you for taking on that risk. While Strategy 49 only has a Sharpe ratio of .83, it has a Sortino ratio of 14.92 (C).

The performance table below provides an overview of these metrics as well:

One thing I want to point out is that only 35% (D) of Strategy 49’s trades are profitable, but the ratio of the average winning trade over the average losing trade is 3.39 (E). So the average winning trade is 3.39x more than the average losing trade, which is how the strategy makes money. The largest winning trade is $13,860, while the largest losing trade is -$790 (F).

### Strategy 49 Performance Charts

This is the cumulative profit of Strategy 49 over a 1 year period. It never falls lower than $3,160 and has a nice upward trend over the year.

This is how the strategy breaks down on a day-of-week basis. Based on historical trades, Thursday is the best day to trade and/or start this strategy.

This is the **weekly** profile of Strategy 49. The quantity and magnitude of weekly net income is more positive than negative. That is, there are more positive weeks than negative weeks.

This is what the strategy looks like by hour of day:

Almost all net income is made on session close. This is because the strategy closes every day at the end of the session. What happens if you don’t close the strategy at the end of the session? This is the new breakdown:

While the new breakdown is different, the profit factor is roughly the same. We prefer strategies that close at the end the session because margin requirements are lower, but it’s good to know that the strategy has a similar performance regardless. To read more about the impact of futures margin click here.

Now, let’s talk about how to recreate Strategy 49.

Strategy 49 is based on a very popular strategy referred to as “the pullback”. Now, I’ve heard traders like Peter Davies say that they never trade pullbacks, but I love them. Also referred to as a flag, shakeout or a market test/retest, pullbacks, by definition, occur more frequently than breakouts. Some would say that it’s one of the most reliable trading opportunities that you’ll find on the hunt.

### Strategy 49 Description, Command Structure & Download (C#)

Strategy 49 uses five different indicators: