Research Request Update: MCL, Crypto, Renko, Slippage, Choppy Markets, Tips For Newbies & What Can We Learn From Strategies With a Profit Factor of 1?
July 7 Update Postponed to July 21
Every two months we like to take a look at how our top strategies are performing and update you on our key findings, highlights, takeaways and what’s in the pipeline. The good news is that we are updating our systems, the bad news is that we need to push our two month update to the 21st.
Meanwhile, I can still share updates on research requests. I’d also like to remind everyone that micro crude oil futures (MCL) will start to trade on July 12. Product specifications are below.
What’s the difference between MCL and CL? The major difference is that MCL only costs a dollar per tick rather than $10. So if you normally trade with a stop of 40 ticks ($400), your new stop will only cost ($40).
We have many different agendas among us, but the one common goal is the search for the holy grail of trade strategy. We’ve defined the holy grail of trade strategy to be the following (based on annual performance):
Profit factor greater than 3
Annual drawdown less than 3%
Annual return greater than 500%
Minimum daily net profit of -$1,000
Avg Daily profit greater than $1,000
Less than 5,000 trades annually
One thing we do for all subscribers of the “the hunt” is answer questions. Some of those questions require additional research and we’re going to respond to them all, but I want to take a minute to explain our process.
Our goal is to find the holy grail of automated trade strategy (as outlined above). If your request lends itself to that goal, we will notify you immediately and let you know our plan of action on it. If it doesn’t, you may find that it takes longer for us to answer. In terms of research, the following requests are in the queue. If a publication date has been established, it will be included in the update:
1) Do your strategies work on cryptocurrencies?
This is perhaps the most common question we get asked. The short answer is “they should”, especially those in the top 10 in terms of market-share. Our strategies are based on NQ and we chose NQ for its volatility so they should work well on cryptos with a healthy (read: high liquidity) market. That said, I haven’t studied the market structure of cryptos other than BTC. BTC appears to have the same market structure and works well with all strategies.
In addition to changing up hardware, we are also updating to NT8, which has a plug-in from Coinmarketcap.com. We won’t be able to provide any hard data until this happens, so please give us about a month to provide you with that info, i.e., profit factor, net profit, etc. We’re shooting for August 13 publication.
2) What are you doing about overfitting?
Outside of cryptocurrency, this is the most commonly asked question we get. Please see the following posts: Overfitting: What is it and what can we do about it and What Are We Doing To Ensure Backtest Accuracy?
3) What is the difference between Total Investment & Reinvestment:
About three months ago we received a question regarding total investment. They wanted to know how much a trader had to invest in each strategy, not just net profit. In other words, if we say we’ve found a strategy that makes $100K a year, how much did it take to make $100K in one year? Did it take $50K or did it take $1 million? This is our answer: Reinvestment Vs Total Investment.
4) Do your strategies work with Renko?
Renko and Range are two types of bar calculations. We were drawn to this question because we use Range, and like Range, Renko is a bar calculation that is independent of time. In general, Renko bars are used to smooth out noise and keep you in a trending market for a longer period of time. You might even use Renko to spot a trend and Range to trade on it. Here’s a look at the difference between the two charts across the same time period:
So we created backtests for all strategies using Renko. The results were amazing.
Backtest results for Renko were better on almost all strategies. When we say better, we mean higher net profitability, higher profit factors and lower drawdowns. For example, net income for Strategy 3 was $834K with a 1.74 profit factor and a max drawdown of only -2.64% for the year. Net income for Strategy 10 was $495K with a 2.8 profit factor and a drawdown of less than -.92%. Again, this is on one contract. This is holy grail worthy stuff!
Here’s a chart with the full backtest results
Renko Results - 5/3/2020 - 5/3/2021
Subscribers can click here for the full post.
Indeed, we were so happy with the results that we decided to run them through market replay, which had mixed results and prompted a full investigation of our process. That in turn led to a hardware update, an upgrade to NT8 and a review of several other platforms (Multicharts, Refinitive, and Futuresbacktest). In other words, the Renko results were so good (in comparison to Range) that we decided to get better glasses and adjust our hearing aids. We will provide more detail on this request once we validate with the new system, which should take about a month. Publication date: tbd
5) Are certain trading days/periods better for automated strategies (earnings season, economic data releases, FOMC announcements, triple witching hour). If so, can we take advantage of these days in the future?
In general, trading days with more action are marked by days with more economic announcements/events. These are the two calendars we use:
Anything that’s predictable will be exposed by the market until any advantage is gone. That’s how the market works. But, the one thing that we can all count on is higher volatility and volume. Does it also follow that our strategies operate better on these days? We’re going to see by looking at the returns over the last 5 years. We’re hoping to have some definitive research on this by September 13.
6) Can we develop a strategy that does better in the lunchtime lull?
We will be testing all strategies to see if some perform better in the morning hours (high vol) or lunchtime lull (low vol).
We’ll be publishing this research on August 29.
7) Can you create a correlation heat map for your strategies?
This is a great idea. We are going to push this until we've completed all system updates and switched to NT8. Then we're going to rerun all strategies before looking at correlations. Publication date: tbd
8) What is slippage and how are we accounting for it?
Slippage is anything that contributes to receiving a different price than you wanted on the trade execution. In other words, the trader receives a different execution price than he wanted. It can be positive or negative. Everyone is aware of negative slippage, but few consider positive slippage, which is just as common. Positive slippage is when the price you receive is better than the one you were attempting to buy/sell at.
We use NQ because we feel it is less prone to slippage — it’s high liquidity, but some feel that it is more prone slippage due to its volatility. If you don’t trade NQ, and you’re trying to avoid negative slippage, you’ll want to avoid trading assets with low liquidity.
Ultimately, slippage, along with other costs such as spreads, fees, and commissions are why we like strategies with a high profit factor. The holy grail of trade strategy has a profit factor greater than 3.
One of the main ways to avoid the pitfalls that come with slippage is to make use of limit orders instead of market orders. This is because a limit order should only be filled at your desired price.
We are also installing and using virtual private servers (VPSs) on our computers and I’ve been told that should also help with slippage, but as I’ve already said, I have no idea how and I don’t care to know. I’m just glad we have someone that does care (and know) on our team.
9) Is there a way to discern a choppy, high volume session from a normal, high volume session?
The main sign for me is longer tails. The longer the tail, the choppier the water. The question is, how can we program this; that is, how can we put it into a strategy?
I reached out to a friend that surfs for help with this. This may sound odd, but the market moves in waves and I’ve found that surfers have a natural proclivity for trading. He said, the best thing to do in choppy waves is referred to as “tacking”. He described it as the same movement you use when moving a skateboard - back and fourth movements. This translates into the use of limit orders, stops and take profits. So instead of using a strategy that is looking for long waves, you’ll need a strategy that uses limit orders to get in, longer stops and shorter take profits. These markets tend to be characterized by high volume so there’s a lot of orders waiting at every price. In this way, high volume or high winds can be the cause of both smooth waves and choppy waves, depending on the strength of the trend.
10) Can you teach me how to trade?
A word to all newbie traders: I’ve spoken with some of you offline. While I appreciate all the questions regarding trading, and hope to teach this subject one day, that is not our primary goal. Teaching is more of a personal goal. The goal of Automated Trading Strategies (ATS) is to find the holy grail of trading strategy. Please understand that we are only accepting research questions that help to achieve this end. And, none of us are giving classes. (I am personally working on a tutorial, but that will take time — maybe years — and it is not a part of this endeavor in any way)
Meanwhile, before you do anything else, read this: Trading Is A Dark And Scary Forest. This tells you a little about my personal journey and what you can expect as a trader. Then you may want to read this: We Are Treasure Hunters Searching For The Holy Grail Of Automated Trade Strategy to find out a little more about our goal at ATS. I also want to suggest going through all of the TopStep videos on Youtube. Use their Youtube channel as a place to learn. You don’t need to buy anything to listen to their morning call and/or review all of their videos. This will help with the lingo, etc. It will seem difficult at first, but the more you listen, the more it will sink in and the more you’ll understand. I believe they also have a free group class on Wednesdays given by Hoag — don’t take any classes unless it’s with Hoag.
11) What’s your favorite platform?
Our favorite platform is NinjaTrader, though we are trying out several others. If you don’t know how to use Ninjatrader, they also have some great tutorials and live events for free. They also have free data from Kenetic. The data is not live (I believe there’s a one day delay), but you can practice on it. Again, you don’t have to buy anything.
12) What can we learn from strategies with a profit factor of 1?
We started this research with the post: Can We Maximize The Profit Factor By Focusing On Timing?
We found that timing can increase the profit factor by 15-20% on our strategies and we wanted to continue the research.
Specifically, we wanted to know:
If profit margin on all strategies tends to trend toward 0 or a profit factor of 1, is there a way to capitalize on this truth?
Is it possible to achieve a higher profit factor using strategies based on reversion to the mean theory?
Follow up: we looked at Bollinger Bands, but had no success. Currently we are looking at divergence theory, however, we are finding the most success with strategies that “flip” under certain conditions. In other words, if the strategy has a profit factor of 1 it means 50% of the time it’s right and 50% of the time it’s wrong (in general). Is it possible to identify the conditional that flips the trade signal? This is a hard one, but we’re working on it. Again, this is our most promising strategy idea, but we don’t expect to publish any research on it until the end of September.
There’s a lot in the pipeline. If you don’t see your question here and haven’t received an answer to your question, please respond to this email or email us directly at email@example.com.
As a final note, our subscription price is set to increase on July 9 (pushed back one day because this is going out late), however, all current subscribers will be grandfathered in at the current price. To read more about this click here.
Click here for links to all strategies.