A few years ago I was listening to a podcast by a trader that referred to the process of trading as the successful navigation of a Dark And Scary Forest. And the reason we’re all willing to enter the Dark And Scary Forest is because we all want to find treasure.
To put a finer point on it, the price of the asset you’re trading is “the path” and your goal as a trader is simple: just stay on the path.
We aren’t the first treasure hunters and we won’t be the last. While it is often referred to as snake oil by fundamental traders, trading is actually an ancient profession.
Munehisa Honma (本間 宗久) 1724-1803 is known as the father of rice trading.
As you can imagine, data wasn’t as easy to obtain back then, so he had a network of men spaced 6 kilometers apart for 600 kilometers to track market prices as close to real-time as possible. With this information he was able to create his own “treasure maps” which he referred to as candlestick charts.
The beauty of trading is that it can be applied to anything with a market of buyers and sellers — from rice to cowrie shells to stock — if there’s a market, it can be traded.
This is because the underlying physics behind trading is the same — auction mechanics. One of the best traders to incorporate auction mechanics into trading is Richard Demille Wyckoff (1873–1934).
At age 15, he took a job as a stock runner for a New York brokerage. This is a common theme of some of the best traders in history (e.g. Jesse Livermore). In his 20s, Wyckoff became the head of his own firm and founded The Magazine of Wall Street in which he published his own brand of “treasure map” referred to as a point and figure chart.
Like those that came before us, we are on the hunt as well. We are hunting for the “holy grail of trade strategy” and we define that strategy as having the following attributes:
Profit factor: greater than 3
Annual draw-down: less than 3%
Annual return: greater than 500%
Minimum daily net profit: -$1,000
Avg Daily profit: greater than $1,000
# of Trades: less than 5,000 trades annually
We have yet to find this illusive trade strategy, but we’re getting closer. And, we think we can get their faster together.
Along the way we’ve found some impressive strategies. While they don’t qualify as the holy grail, they do have superior performance attributes.
How do we rank strategies?
We rank our automated trading strategies according to annual profit factor. Profit factor is the ratio of gross loss and gross profit. For example, if a strategy has a profit factor of 1.2, and your gross loss is $1,000, it means you’re up $200 after losing $1,000 and making $1,200. The profit factor is 1.2 (1,200 / 1,000).
The higher the profit factor, the better the map.
On our search we have found many strategies with a profit factor of 1. This is fairly common. These strategies give no edge to the trader.
There are other strategies that do show an edge of some sort and that edge can be measured by the degree to which the profit factor is greater than 1.
The chart below provides an overview of the profit factor for each of our strategies published so far. It is our goal to add at least one strategy every month. We provide an update on how the strategies are performing every two months. Click here for the May update.
See below for a link to the description of how to duplicate the strategies in the chart above. Note: Strategies with a profit factor of 1.06 and above are locked for paid subscribers only. All other strategies are available with a free subscription.
Look for two new strategies coming out next week. Both have a profit factor greater than 1.06.