Automated Trading Strategy #58
Strategy 58b is my third attempt at automating my own personal trading strategy. Over the last 3 weeks, it made $7K on 35 trades and 94% of those trades were profitable (backtest).
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.
As a quick reminder, our goal is to find the holy grail of automated trade strategy as defined below:
Profit factor greater than 3
Annual drawdown less than 3%
Annual return on max drawdown greater than 500%
Maximum daily net loss of -$1,000
Avg Daily profit greater than $1,000
Less than 5,000 trades annually
More than 253 trades annually
We haven’t found the holy grail yet, but we get closer with every strategy. For links to all strategies click here.
For this strategy we’re taking a slight detour from our goal as defined above.
The challenge: create a strategy that can pass a funding evaluation.
While I have no interest in re-tooling the hunt for the holy grail of automated trading strategies to a hunt for a strategy that will pass a funding evaluation, I think it’s fair to say that our paths tend to cross. Though the evaluation is more restrictive, and the profit split increases the profit factor required to break-even, we share common goals. Furthermore, there’s no regulation or legal requirement involved in the funding agreement, which is fairly standardized and accessible regardless of your geographic location or background.
I think it’s also fair to say that funding programs are growing in number and the competition is changing the landscape. The natural progression is a loosening of rules.
So, why are funding evaluations so challenging?
Most funding programs use your peak (fluid) account value instead of your end-of-day account value to measure drawdown, which has the effect of penalizing you for not taking profit. It also penalizes you for market volatility. So a volatile market like NQ is going to be much harder to pass the evaluation with than a less volatile market like RTY. You may also want to restrict your trading to certain times of day when prices are naturally less volatile and/or only use micro contracts.
Now, we attempted to answer this question/challenge from one of our subscribers last year and I wrote this post in response:
I wish I could say that I passed the evaluation because I used one of our strategies, but I didn’t. I passed the evaluation using my own very manual day trading strategy. I’ve tried to automate this strategy many times, but to no avail. So we walked away from the subject of funding evaluations and did not return until around September of this year. Why did we return?
I think we’re ready to trade a strategy live, but I’m still very hesitant. So, we decided to look for ways to mitigate the risk with the use of a funding partner.
I think it’s important to say that the funding partner game has changed a lot in the last year. There are more funders and less rules. I predict the landscape will become more and more competitive throughout the coming year, which is great for traders like you. I’m even seeing programs with static (instead of trailing) drawdowns and end-of-day trailing drawdowns — which is equivalent to our current model for strategies with an end-of-day close.
We’re currently testing several strategies out using the Apex funding program. Two strategies blew up in the first week, however, both of the micro contract strategies were still in play. This is where we were after Week 3:
I’ll provide an update to subscribers in the Week 11 Mudder Report coming out on 12/4. Now that Substack’s new chat feature is available for both Android and Apple users, I’ll also be starting a thread dedicated to passing the funding evaluation shortly. I also want to thank Damien for his input on this — it has been very helpful. Indeed, I got the idea for a hybrid (manual/automated) strategy from his latest comment, which I’ve copied to the bottom of this post. Subscribers can read all of Damien’s deft comments in the Week 8 Mudder Report. If you have anything to share or add re: evaluations, this is the place to do it.
Still, and maybe it’s just because of my nature, but I’m disappointed. We can do better. I can do better. Our goal is to create the holy grail of automated trade strategy, not a newsletter with 100+ strategies.
So, I’m going to give it another shot. I know my personal strategy works (for both our hunt and the evaluation), it’s just a matter of figuring out a way to automate it.
Strategy 58: Third Time’s The Charm
This is my personal strategy. And, this is my third attempt at automating it on ATS.
If you’re a trader, this won’t be anything new in terms of strategy, but it will provide a shared framework. If you’re not a trader, my hope is to provide a quick tutorial that will inspire you to develop your own version of this strategy.
Let’s get started…
If you’re not familiar with trading, the average price chart looks like this:
This is a 60 minute price chart for the RTY contract and it represents approximately 36 trading days.The vertical lines represent a new trading day or session that begins at 6pm EST and ends at 5pm EST.
If you trade, however, you see much more than the novice trader. In the same way that a tracker looks for clues along a trail, traders instinctively start looking for price patterns. We define these price patterns with trend lines and price levels. So the chart above becomes the following with price levels:
Can you see the five additional blue lines?
The additional blue lines represent price levels. You can think of these lines as traffic lights that are prone to congestion. Money/orders get stuck in these areas. Pivots and price reversals are common along these levels.
And this is what it looks like if you add a trend line:
Suddenly, something that looked random, takes shape. This is the trader’s pollen path. And, these are some of the best places along that path to find what we’re looking for:
This is an RTY chart, but this process works for every instrument. In other words, market structure exists for every instrument that’s traded via dutch auction in the market. To learn more about how and why that is, click here.
The question is, how can you write an automated strategy that can take advantage of these opportunities? You have to have a way to determine your own price levels or pivots.
How To Determine Price Levels
I like to create my own levels like you see above. You can also use indicators like the ones below to help do this for you: