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I wanted to reach out to the community to get opinion on whether or not this system can be profitable.
About the system:
100% objective. It's coded in and run automated. Zero human input. The signals are order flow based.
Test:
I ran this for 1 ES contract from the start of the June contract until yesterday (3/08/2019-4/25/2019). It was only allowed to take signals from 9:35am EST to 15:30 or 5 minutes after the open up until 30 minutes before the close. The strategy was only allowed to trade 1 ES contract. If in a trade and another signal came in for the same direction, the strategy would not take a second contract. If in a trade and a signal came in for the opposite direction, the system would reverse (go from long 1 contract to short 1 contract).
Stops:
I specifically did NOT use stops. And for good reason. I ran this in SIM and wanted to see how far trades go in my favor and how far trades go against me.
Results:
It did lose but no stops were used so that was expected.
The picture above shows the stats:
Total net profit: ($1,725)
This ran for 34 trading days and had 80 trades Win rate: 60%
Average winning trade: $163.80
Average losing trade: ($319.58)
Average MAE (how far trade went against): $250.63
Average MFE (how far trade went in favor): $257.50
Below is where some tweaking can be made to use optimal stops and/or targets
MAE: These are trades that went against me. On the X axis you see the amount they went against. On the Y axis you see the profit. Trades that are green are winners and red losers. So green trades could have gone against me by $400 and still ended up winners.
From the pic above, you can see that most winning trades only went into a $200 to $300 draw down before they became winners. There was also one trade that went against by $1150 but still came out ahead and made over $1000. This is an exception and doesn't make up for all the losers.
This is spread out but a decent number of trades were actually up $300 before coming back and losing.
My conclusion:
From the MAE pic, it seems most trades go against by a little more than $200 and they still end up winners. Trades that start to go against by $250 or more seem to end up losing. From MFE, it seems most trades go in favor by $300. Even losing trades but since there was no stop they came back and lost.
That's my opinion. I'd love to hear feedback (good or bad) from the community. A fresh set of eyeballs is always good as someone may see something that I'm not seeing.
Thank you in advance! I look forward to hearing any and all comments.
Trading: The one I'm creating in the present....Index Futures mini/micro, ZF
Posts: 2,311 since Nov 2011
Thanks Given: 7,341
Thanks Received: 4,518
One of my thoughts is: what about limiting it to just a few morning hours..... Say 8:30-11:30 E, so an hour before the open, still plenty of trades happening, to two hours in.
First of all, I'm not an expert about optimizing an automated system (in fact, I don't know anything about it, or really, how to realistically evaluate one.) There are people who do.
One thing I do know is that any form of optimization opens you up to "curve fitting" -- getting results that only apply to the specific stretch of time that you are adjusting your strategy for. So if the market acts differently, your strategy becomes unprofitable. But this is a problem with any attempt to develop any trading method, no matter what it is. Automated system developers do try to avoid these issues, but you'd have to look elsewhere for suggestions about that. It's out of my ballpark.
What is in my ballpark is what you observed as well -- if you had stops in place, you would have reduced the amount of the losses and, in this group of trades, you could have been profitable.
I don't know if getting too precise with how to figure the stops is worth it, or is just curve-fitting for these trades. But, for example, just looking at the bar chart of your trades, if you had an arbitrary dollar loss stop at, say, $200 or $250-ish, you would have cut off all of the big losses, which were your major problem. Again, just eyeballing the chart, most of your profits were at or below about $200, and there were more of them than equivalent losses. The bigger losses tilted you into the red, on balance. If they had been limited, you probably would have swung positive.
At least, for this sample of trades, I would say that this would have made a difference. I only picked $200/250 (basically out of thin air) from quickly looking at what would keep your losses small compared to your profits. Also, you noted that some trades went profitable before becoming losers, and that some wins initially had a drawdown before turning positive, so obviously the task of choosing stops and/or targets can become more involved. Additionally, you might want a trailing stop instead of a profit target, because of the occasional very large win. But those questions could be complex and should be tested against your strategy.
With all that said,
(a) It does look like your main task is just to limit the losses, because the loss amounts, when they get large, are lopsided compared to the profits.
(b) Remember what I said about my not knowing anything about adjusting or testing automated systems.
I may have done nothing more than tell you that I pretty much agree with your observations, but that's what I've got. Others will know more about assessing automated strategies and may be of more help.
Good luck with it.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
Just wanted to make this clear as well, I'm not expert. In fact, I still feel too amateurish to express my opinions.
What bobwest and Blash said made perfect sense to me,
- limit your loss would help put you in a positive balance
- Trailing stop will help capture bigger returns
- avoid curve fitting
- minimize time in market
I'm not sure if this is helpful or if it's even the correct advice so whoever may be reading this and think otherwise, please correct me.
-2-3 trades per day sounds reasonable
- When you optimize (changing your profit target and stop loss) try to keep roughly the same # of trades only changing your avg win/loss
- test for a longer time frame
- forward test it