What Can A Virus Teach Us About The Holy Grail of Automated Trade Strategy?
Static magic vs strategic selection…
We’ve decided to call our weekly update ‘The Mudder Report’ for reasons that are only obvious if you’ve read the first post in the series. In that first post, we compare the performance of our strategies with a horse race and we refer to those strategies with the best performance as the ‘mudders’. We often refer to our research as a ‘hunt’ and the best automated trading strategy as the ‘holy grail’. Clearly we like analogies. Here’s another…
Perhaps we need to think about the holy grail of automated trade strategy in the same way that we would a virus, and we can think about the market as the market body. Due to the nature of a virus, the body must be able to stop viral replication before inspiring a mutation. The more ways it can do this, the better the immune system. A good market, which includes any market worth trading in, will do anything it can to block replication and mutation of the virus. This is what the market does to your strategy. Any profitable anomalies are quickly identified and traded away.
We aren’t looking to kill the market — like any virus, we need the host to survive — we just want to make a 3 to 1 profit (profit factor of 3). We need to be able to replicate and mutate when necessary to do this.
What are we up against?
The strategy we’re trying to create is either static magic or it has the ability to mutate and replicate. We know that optimization, which could be considered a type of mutation, doesn’t work. All strategies marked in yellow on our performance chart were optimized, and they’ve all been shown to be highly inconsistent with backtest results.
One way to create a constant mutation / replication is to employ various strategies based on observable trends in the market. In other words, to torture the viral analogy, we know the market’s immune system is going to attack us. If we’re thinking like a virus, we need to be ready with various strategic mutations. As gods in the process, your job is to select the best strategic mutation(s) and we’re defining those ‘best’ strategic mutations as having the following:
- 2+ weeks of profitability
- High profit factor
- 2+ trades for the week
So far we’ve been profitable every week based on this selection process.
It will take some time to develop a theory about how this selection process might work over time. Our rubric is evolving, but we’re making progress and learning more about how to ‘pimp a trend’ every week. You can read this week’s report here. That said, we continue to be on the hunt for the ‘static’ holy grail of automated trade strategy as well. In truth, the latter is preferred because it requires less work, but the former may be more in line with what it takes to tackle the market.
The Mudder Report is published every Sunday.
Originally published at https://automatedtradingstrategies.substack.com on November 23, 2021.
