Optimizing Trading Strategy #2

We were able to achieve an annual profit of $220,035 on one futures contract with an average of 41.13 trades per day.

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

What is optimization?

Optimizing is an iterative process. Specifically, it 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 weeks to optimize one strategy so we’ll be sharing these one at a time.

Our goal is to find the holy grail of trade strategies that can be automated. As a result, we base our optimizations on a full year of data, not just the last 1,000 trades.

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 we think it’s important to share our goal with you.

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 goal.

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 #2.

Optimizing Strategy #2:

We optimized strategy #2 based on varying parameters and data series type.

We were able to achieve an annual profit of $220,035 on one futures contract with an average of 41.13 trades per day, a daily profit of $601, and a profit per trade of $14. 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 -21.07% to -14.23%. So, not only did we nearly quadruple the profit per trade, but we decreased the risk level while doing so.

One thing we weren’t happy with is the increase in trades per day, however. So we decided to optimize the parameters at a more granular level.

While the next level of optimization decreased profitability to $114,735, it greatly decreased max drawdown to 6.92% and decreased the number of trades per day to 2.81.

We also found an optimization strategy that greatly reduced profitability to $27,105, but decreased the drawdown to a staggering 1.49% and decreased trades per day to .10. So, while the profit per day is only $74, the profit per trade is a staggering $713, by far our highest yet. This strategy meets all of our requirements for the holy grail of trade strategy except profitability.

Click here for a tutorial on how to duplicate Automated Strategy #2 for your own trades. The tutorial includes both the strategy as well as an overview of the parameters required to achieve these optimization.

We are currently in the process of optimizing Strategy #3 and will report out on that shortly.

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