Automated Trading Strategy #43 made $186K in a 1 year NQ backtest

It has a Profit Factor of 1.93 and an annual drawdown of -5.63%. In variation 43a, we were able to boost the Profit Factor to 2.16.

Risk Disclaimer: 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.

Strategy Performance Chart

We’ve had to split the performance chart into two parts. Click here for the PDF version of this Performance Chart. Click here for the most recent Performance Chart and a link to all strategy descriptions.

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

We haven’t found the holy grail, but we get closer with every strategy. It’s also important to note that while we define the holy grail with the attributes above, your holy grail could be different. For example, one of our subscribers told us that he was only interested in the average profit per trade. Your holy grail may require a certain daily net profit or that a certain number of trades be profitable. Currently, the strategy with the highest average profit per trade and the highest percentage of profitable trades is Strategy 41a(H) at 64%. On March 1, we’ll be introducing a strategy that is profitable 95% of the time (Strategy 44b). From the average profit per trade to the percent of profitable trades, we provide you with 16 metrics to help define and find your own holy grail as well. For an explanation of each metric, scroll to the bottom of the strategy descriptions page here.

Now let’s move on to strategy performance.

Strategy Performance

Strategies 43, 43a, 44, 44a and 44b are all based on a command structure that is similar to Strategy 42. We’ve already posted the performance metrics for each strategy in the performance chart above so you can see how each strategy differs in performance. I’m also going to take a moment to discuss the merits of each strategy below. Before discussing the individual performance of each strategy, let’s review where we were with Strategy 42.

The strength of Strategy 42 is its high net income given its low number of trades. In backtests, it made $161K from January 1, 2021 to January 1, 2022 and had a profit factor of 1.85 on 334 trades and one contract. What’s the downside? The downside was the drawdown at $19,270.

As a quick reminder, this does not mean that the account value dropped to -$19,270. This means that the account value dropped $19,270 from its high. In other words, the max drawdown is not the account value low, it’s the most the account value dropped from its high. If you’re looking for the account value low, you want to look at the “lowest daily cumulative profit” which never fell below $4,900. This means that the strategy made $4,900 on the first day it traded, which is a testament to when the strategy was started more so than its profitability. That said, when a strategy has a large drawdown, you want to make sure the profitability is there so you can use the gains to fund the drawdown. This is why when you start is so important. I’ll provide you with our thoughts on the best time (day/week) to enter this strategy in a moment.

At the end of Strategy 42 we told you that we were working on some ways to maximize the strategy. That’s what we did. While Strategies 42, 43 and 44 have a similar command structure, they are all slightly different and I’m going to explain exactly what that difference is in a moment. First, let’s look at the difference in performance:

  • Strategy 43 — with Strategy 43 we were able to achieve a higher net income than Strategy 42 at $186K. It also has a better drawdown at -$15,705 and a higher profit factor at 1.93. Finally, it boasts the highest return on max drawdown of its cohort at 1,186%. As a quick reminder, return on max drawdown is a metric we use to measure return on capital investment. In this case, that investment is the max drawdown because that’s how much capital you need (at a minimum) to trade the strategy based on backtest results. It is calculated by dividing net profit by the max drawdown. The higher the return on max drawdown, the better the strategy is in terms of risk/reward.
  • Strategy 43a — Strategy 43 has a slightly lower net income at $184K, but a higher profit factor at 2.16, which means it’s more efficient than Strategy 43, but that efficiency has a cost. This is why the return on max drawdown falls to 985%.
  • Strategy 44 — with Strategy 44 we were able to achieve a higher net income than Strategy 42, at $187K, and a lower max drawdown at $16,865. It also has the highest profit factor in its cohort at 2.28, and a return on max drawdown of 1,110% on 297 trades.
  • Strategy 44a — while Strategy 44a has a slightly lower net income at $185K and a slightly higher drawdown at $19,145, it also has a profit factor of 2.16 and a return on max drawdown of 966% on 318 trades.
  • Strategy 44b — finally, we come to 44b. We created 44b with the specific request of a subscriber in mind. His holy grail was more about safety than profitability. So, while Strategy 44b has the lowest profit in its cohort, at $54K, and the lowest profit factor at 1.81, it also has the best drawdown at only $7,315 or 2.74% (holy grail worthy) and the highest number of profitable trades as a percentage of total trades at 95%. That means that of the 1,269 trades taken throughout the year, 1,205 of them were profitable. So, for Strategy 44b we’ve made some concessions on profitability in exchange for lower risk.

Each strategy has its strengths and weaknesses. It’s also important to note that all strategies end before session close, so you don’t have to worry about initial margin. In other words, these strategies require less capital. To learn more about the impact of initial margin, click here.

Strategy 43 Performance Charts

This is what Strategy 43 looks like in chart form. It makes on average 1.45 trades per day, and has an average net profit of $736 per day or $506 per trade on one NQ contract.

This is the cumulative profit of Strategy 43 over a 1 year period (01/01/2021–01/01/2022). It never falls lower than $4,900, but this is due to timing (when the strategy started) more so than anything else.

This is how the strategy breaks down on a day-of-week basis. Based on this chart, the strategy is profitable every day of the week, with Monday being the most profitable. I’ll discuss why we think that is at the end.

This is a chart of the strategy by hour-of-day. Keep in mind, this strategy closes at the end of the day. The goal of the strategy is to catch slow moving trends up or down. As a result, an end-of-day exit is common, which is what this chart is showing us.

Due to insights found in the Mudder Report (documentation of weekly strategy performance) we’ve decided to pay closer attention to weekly trends by adding a weekly chart to all strategy descriptions. We’re doing this for two reasons:

  1. It might help with our weekly strategy selection process
  2. It might help to determine the best time for entry, with the goal being a cumulative low greater than $0

Unlike Strategy 40, there are no observable patterns in the weekly chart, but it gives us an idea for what a normal high or low week looks like.

This is the weekly profile of Strategy 43.

The rest of this post is behind a paywall on our Substack Newsletter — Automated Trading Strategies (ATS). To learn how to recreate this strategy, sign up for a subscription to ATS at the bottom of the original post here.

For links to all strategies and the most recent performance chart, click here. To find out more about who we are and what we’re trying to do, click here. We also provide you with two strategies you can try for free before subscribing. These are not our best strategies, but it gives you an idea for how the process works.

Strategy 44 will be published on ATS on March 1.

Originally published at https://automatedtradingstrategies.substack.com on February 15, 2022.

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https://automatedtradingstrategies.substack.com

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