Automated Trading Strategy #53
Click on the table to enlarge.
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
Today, we’re introducing Strategy 53.
As a I said at the end of Strategy 52, most strategies don’t perform the same in all markets. The few that do tend to rely on market extremes. Strategy 52 is a strategy that relies on extremes. Extremes provide opportunities regardless of the market, but they are generally found in trending or directional markets rather than sideways markets.
In addition to extremes, a trader could also make a lot of money by being able to identify when a market is trending or moving sideways. A sideways or consolidating market is one without a trend. It’s usually caught in a tight range or consolidating. How can we think about this in terms that an automated strategy can understand and identify?
Well, we know that trending markets generally happen with volume. We also know that price tends to move quickly in trending markets. So, one way to identify a trending market with the use of indicators might be to isolate on high volume, high price change areas — in other words, you’re looking for a profile that is marked by high volume on a fast moving price. Now just because you’ve identified a high value area, doesn’t mean you’re always going to find a profitable trade opportunity, it just narrows your search. In the strategy description below, I’m going to show you how we identified areas of opportunity within these high value areas.
There are 9 contracts within this portfolio:
- CC — Cocoa; 100 minutes
- CL — Crude Oil; 83 minutes
- CT — Cotton; 68 minutes
- ES — E-Mini S&P 500; 91 minutes
- GE — Eurodollar; 59 minutes
- KC — Coffee; 92 minutes
- NQ — E-Mini NASDAQ 100; 75 minutes
- RTY — Russell 2000; 89 minutes
- ZN — 10 Year Note; 74 minutes
Based on our backtest, the portfolio made $126K with a profit factor of 2.54. Each instrument is optimized based on a minute-based data series.
This is the cumulative net profit of the strategy based on 1 NQ futures contract over a one year period:
As you can see, it is marked by sharp movements up and lengthy, yet shallow, draw-downs. It has:
- an annual net profit of roughly $30K,
- a max drawdown of only 1.52%,
- a ‘lowest’ daily low of -$750,
- a ‘highest’ daily high of $7,565,
- a ‘lowest’ cumulative net profit of -$30
So this is a strategy that never went below -$30 on a cumulative basis and never lost more than -$750 on any given day (for NQ).
You can also trade KC, which has a better performance record. It has a net profit of $23K, a profit factor of 5.09 and a percent profitability of 71%. This is the cumulative net profit performance chart based on the KC contract:
If we trade Strategy 53 using the KC futures contract, it is smoother and has a steadier movement upward in contrast to NQ. KC is less volatile than NQ so net income is lower, but profit factor is higher. This is often the performance trade-off among instruments and we’re using this trade-off as a way to maximize the strategy’s performance (more on this later).
In total, there are 651 trades in this portfolio (based on the backtest) with a net profit of $126K and profit factor of 2.54. You’ll also notice that the number of profitable trades is 44%, which is low. This is because Strategy 53 has an average win/loss ratio of 2.94. That means the average winning trade is 2.94x more than the average losing trade. In dollar terms, the average losing trade is $246 while the average winning trade is $724. All together, this is telling us that Strategy 53 is very good at cutting losses and increasing gains. I’ll talk about the indicators we use and why that is in the strategy description.
If you’re interested in learning how to recreate Strategy 53 from our strategy description, subscribe to the ATS Newsletter. You’ll have instant access to all 53+ automated strategies. I’ll start with the concepts and indicators used so you can recreate using whatever platform/language you’re familiar with. I’ll also show you the command structure (screenshots) within Ninjatrader 8’s strategy builder. The strategy is also available for download (C#) within the strategy description. Remember, you can test all strategies by duplicating our backtest results above and if you need help, just send me an email.
For links to all strategies available within the ATS subscription, click here.
Originally published at https://automatedtradingstrategies.substack.com on September 1, 2022.