Automated Trading Strategy #42
Strategy 42 made $161K in the last 12 months. It has a Profit Factor of 1.85 and an annual drawdown of -3.55%.
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.
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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
But, we’re also hunting for the attributes of “the best” strategy. It’s important to remember that the most important attribute of “the best” strategy is the one that you feel personally comfortable with. In this way, you may have different attributes for the holy grail than we do.
Strategy 42
We found Strategy 42 while researching divergence theory. In this strategy, we’ll be looking at the use of creating variables to represent a certain price based on a previous event. This allows us to compare prices and indicator values at a divergent event and then to use the outcome of that comparison as the basis for entry.
Price Divergence
A divergence is simply when the direction of the indicator diverges from the price trend. So, a divergence strategy is a strategy that looks for divergence as an indication to take an action.
Once you identify the divergence, then what? What does it mean? A price divergence generally tells you one of two things:
the price trend is about to change and go in the direction of the indicator; or,
the price trend is going to continue, but at a low rate of change (continuation pattern)
The former tends to happen quickly. It works well with a data series that is not dependent on time, like Range. With strategies 38 through 41a we exploited the “about to change” divergence scenario.
For Strategy 42, we’re looking to identify the latter divergence scenario: a price trend that is going to continue, but at low rate of change. In other words, we’re trying to identify a slow moving price trend up or down.
Let’s talk a bit about how this specific divergence is created and then we’ll show you how to recreate the strategy.