Optimizing Trading Strategy #1

We were able to achieve an annual profit of $241,190 on one futures contract with an average of 18.38 trades per day.

If you’re a subscriber, you know that we published our first set of trading strategies a few weeks ago (to read the full article click here). Now we are starting the process of optimization.

What is optimization?

Optimizing is when you change the primary inputs of a strategy until you get the best results. You can also add additional actions to the strategy like a “take profit” or a “stop loss”.

Due to the nature of the optimization process, it can take many days to optimize one strategy so we’ll be sharing these one at a time.

Again, our goal is to find the holy grail of trade strategies that can be automated.

What does the holy grail of trade strategy look like?

The holy grail of trade strategy is a strategy that never loses any money and/or makes an unlimited amount of profit with no downside. In other words, our goal is to take our best strategies (out of 500+) and minimize the downside while maximizing the upside.

We’ve defined the holy grail of trade strategy to be the following (based on annual performance):

  1. Annual drawdown less than 3%

  2. 500%+ annual return

  3. Lowest daily net profit = -$1,000

  4. Less than 5,000 trades per year

We have yet to find this illusive trade strategy, but this is the goal.

What about percent of profitable trades?

There are two ways to categorize trading strategies from a performance perspective:

  1. Highest profitability or overall return

  2. Highest percentage of profitable trades

For now, we are concentrating on #1. There are inherent trade-offs in each strategy.

For example, the use of a stop loss tends to increase the number of trades, while increasing return. This is a good thing, but it can also cost more in brokerage fees if you don’t have a flat rate commission plan. If you don’t have a flat rate commission plan, you should focus on strategies with a high profit per trade. Another way to decrease the number of trades a strategy makes is to trade different assets and/or extend the data series. For example, you can change from NQ to ES, while also increasing the time series from 5 to 15 min.

We ARE working on a separate group of trade strategies that are primarily focused on the percent of profitable trades. Many of the goals will be the same, but we will limit the use of stop loss trades and increase the use of take profit trades. Look for more on these strategies in the weeks and months to come. For now, let’s take a deeper dive into what we found when trying to optimize Strategy #1.

Optimizing Strategy #1:

We optimized strategy #1 based on varying parameters and data series type.

We were able to achieve an annual profit of $241,190 on one futures contract with an average of 18.38 trades per day, a daily profit of $659, and a profit per trade of $36. Keep in mind, the number of trades is only a consideration for traders without a flat rate commission plan.

Perhaps the best improvement for this strategy is the annual drawdown, which improved from -17.10% to -12.90%. So, not only did we double the profit per trade, but we decreased the risk level while doing so.

We are currently in the process of optimizing Strategy #2 and will report out on that shortly.

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