The Terrible Danger of a Good Risk to Reward Ratio

Everybody knows there's no Holy Grail in trading.

Except, of course, there is. 

While there may not be a system that qualifies as the Holy Grail (debatable), smart people will tell you that a concept is Grail-like.

And that concept is risk to reward

Just recently, I listened to a webinar that told us that very thing. 

In the webinar, many different systems were discussed. The point was: the system we choose isn't that important. 

What was truly important, they said, is that our reward must be much larger than our risk. 

The key to being a successful trader is having profits that are 2-10 times larger than the amount of our stoploss. That way, even if the win rate is only 50%, our profits will always outweigh our losses.

Risk to reward is the key to everything. It's the Holy Grail. 

Great. All our problems are solved. 

We just need a system that wins 50% or more and has profits, say, 2-3 times larger than our losses. No problem.

Except there's a problem. 

There's a huge danger to having a "good" risk to reward ratio. 

The first problem is the winning percentage itself. 

To trade a system with a reward far outpacing the risk, the truth is that the win percentage isn't going to be 50%. It's most likely going to be a lot lower. 

Typically "good" risk to reward systems have win percentages that drop down into the 25% range. 

Yikes.

Do you know what it's like to trade a system that wins about 25% of the time? Have you ever tried it? 

It's not great.

If we win 25% of the time, that means we lose 75% of the time. That's a lot of losing. That means almost every day of our trading life is going to be spent looking at our accounts going down. 

And when we go on losing streaks (streaks of small loss after small loss), it can get pretty depressing pretty fast.

And when it gets depressing, it's easy to think we'll never get a winner again.

And if we feel like the winner will never come, we might feel like quitting on this loser of a system.

Which means, of course, that we'll miss the next big winning trade.

Which means, bringing it back full circle, we get the nasty combination of a low winning percentage and profits that aren't bigger than our losses (because we just missed the huge winner).

That's a losing proposition.

There's another sneaky problem to seeking the magical risk to reward.

If we believe what the experts tell us, then we won't accept anything less than our winners being bigger than our losers. 

By accepting that concept as law, we might actually be guaranteeing we'll never be successful. 

Here's the thing, risk to reward isn't the Holy Grail. There are many systems that work WAY better with a "bad" risk to reward ratio. 

For example, remember our little indicator experiment on the ES? Remember how we put basic indicators on a chart and found out off-the-shelf indicators beat the market? 

Well, very recently I ran a comprehensive test on targets and stops on the ES using the default Stochastics settings. I took the basic Stochastics entry we talked about in those posts and then tested for the best target and the best stoploss. 

My brand new computer is pretty fast and the test still took an hour (over 100,000 tests). I tested a wide range of possibilities. 

Now if risk to reward is the Holy Grail, the test results should show a target that is many times larger than the stoploss, right?

That's not what happened. 

The top results all had a target that was much smaller than the stop. In fact, the best results had the stoploss being 5 times larger. 

Completely opposite to what we're told. 

You know what else?

I scrolled all the way through the top 200 results. Do you know how many target/stop combinations in the top 200 had a "good" risk to reward ratio? 

Zero.

Not one of the top 200 results had a target bigger than the stop.

So, if we only accept a reward bigger than our risk, we face the danger of turning a winning system into a losing system (or at least a barely profitable one). 

The "bad" risk to reward beat the market. The "good" risk to reward didn't come close.

The bottom line? A positive risk to reward is great if you can get it. Trend following uses this concept and I love trend following.

But a "good" risk to reward can be very hard to trade. And there are plenty of systems that work better with a reward far less than the risk.

We'll talk more about that in tomorrow's YouTube video.

To follow the performance of all the robots you can go here: https://www.scottwelsh.me/performance-tracking/

"The Greatest Strategy of All Time" (Breakout) Course is now available. You can find it here: https://www.kajabinext.com/marketplace/courses

Get the Heron Course here.

Get the Weekly Pivot robot (which is inside the 50% on Purpose Course) here.

My website is here: https://www.scottwelsh.me/

My new eBook, The Inevitability of Becoming Rich: An Interview with a Master, is available on Amazon, and you can get it here.

For information on all my trading courses, go here: https://www.scottwelsh.me/courses/

The recordings of the Thursday webinars go on my YouTube channel. You can Subscribe by going here:  https://www.youtube.com/channel/UCxAWDDaTLVy_diMVJCkGl3A

If you'd like a copy of my free eBook, go to https://www.scottwelsh.me/free-ebook/ and just fill out the form.

My Big Points blog is here: https://www.scottwelsh.me/big-points-blog/.

Follow me on Twitter @swelsh66.

 

 

The Burning Question: Do I Need to Re-Optimize my System?

If you've ever optimized a system and then traded it live, you're familiar with the question that never quite leaves the back of your mind:

Do I need to re-optimize?

Of course, when things are going wonderfully, this question never seems to come up. When money is pouring in, the only question that comes up is whether you're a genius or a super genius.

(Hint: the answer is always super genius.)

But when things go poorly, or weirdly, then we're right back where we started. 

Is my system acting this way because it needs new inputs?

The first scenario to bring this doubt into play is losing. Losing always causes the worst of everything. When the system loses, obviously something is wrong. And that something needs to be fixed. 

That's where the max drawdown number comes in.

If the system has gone through a losing streak that's greater than the max drawdown, then something bad is going on. The market might have changed or the testing wasn't thorough enough. Either way, it's time to stop trading live and look again at the settings. 

In short, if a system has blasted through the previous max drawdown number, it's probably time to re-optimize. 

But that's not the only time the question comes up. 

Sometimes it comes up when things aren't necessarily going badly. Sometimes it comes up when the system appears to be acting strangely.

Case in point: my USDJPY Hornet robot. 

On paper, nothing really bad is happening. It had a great start to the year and since has tapered off. As I write this, it's at about break-even for the year. Clearly, that's nowhere near the max drawdown number.

(In addition, my Hornet took a full loss on a Sunday open when the spread widened to borderline criminal levels. Some of my Lifetime Members never got that stoploss, so they're doing better this year than I am.)

But the USDJPY has been doing something odd for the past few months: it hasn't been trading very much.

And when it doesn't trade very much, it's not going to make very much money--hence the ho-hum performance. 

So, if it's not trading as much as I'd expect, we're back again to the magic question. 

Should I re-optimize it?

The emotional answer is: Yes, re-optimize it! Re-optimize it every day of the week and twice on Tuesday until profit starts flowing again!

But we probably need to look a bit closer first.

For one, my USDJPY Hornet was trading quite often not that long ago. In November 2017 it traded about every other day and in December 2017 it did the same. 

And in January 2018, it traded nearly every day. 

That's three straight months of active action, the most it had seen since 2016. 

So it's not like it's been dormant for a long time. 

In addition, there have been periods like this in the past. November through April 2017 was similar. May 2013 through September 2013 was even more similar. 

And there have been many three-month periods that have seen bigger losses than have been seen recently. 

Last, I don't think that inactivity is necessarily a sign of danger for a system.

Value investors can go years and not see levels tasty enough for them to trade. 

Trend followers can also go several months without seeing a single entry.

If prices aren't dropping low enough, no one would say we need to stop being value investors or change our ways. 

If prices aren't breaking out, we wouldn't say trend following is dead and we need to change everything. 

Well, actually, people say trend following is dead all the time, but they've yet to be correct. 

So what's the bottom line?

If a system is racking up a massive drawdown, it's time to take a look.

If a system is a little more inactive than is preferable, then it's time to stay calm and watch it trade for several more months.

Of course, no one likes to sit around and watch their system not trade.

And I'm one of those people. 

If the lack of trading continues throughout the rest of the year, it might warrant some attention. 

In the meantime, I'll be watching closely. Very closely.

 

To follow the performance of all the robots you can go here: https://www.scottwelsh.me/performance-tracking/

"The Greatest Strategy of All Time" (Breakout) Course is now available. You can find it here: https://www.kajabinext.com/marketplace/courses

Get the Heron Course here.

Get the Weekly Pivot robot (which is inside the 50% on Purpose Course) here.

My website is here: https://www.scottwelsh.me/

My new eBook, The Inevitability of Becoming Rich: An Interview with a Master, is available on Amazon, and you can get it here.

For information on all my trading courses, go here: https://www.scottwelsh.me/courses/

The recordings of the Thursday webinars go on my YouTube channel. You can Subscribe by going here:  https://www.youtube.com/channel/UCxAWDDaTLVy_diMVJCkGl3A

If you'd like a copy of my free eBook, go to https://www.scottwelsh.me/free-ebook/ and just fill out the form.

My Big Points blog is here: https://www.scottwelsh.me/big-points-blog/.

Follow me on Twitter @swelsh66.

The Surprising Indicator Beats the Market Best of All

During the past several weeks, I've tested fifteen different indicators and price action entries.

I've tested MACD, Momentum, moving average crosses, Stochastics, RSI, Key Reversals, and Outside Bars (just to name a few). 

A lot of them beat the market. 

But, to finish our discussion, I wanted to talk about the Indicator that performed best of all.

And it might surprise you. It did me.

The #1 performing indicator was...

Keltner Channels. 

Were you expecting that?

As I've done throughout our discussion, I just used the off-the-shelf settings. I didn't optimize any of the indicators or price action entries.

That being the case, here's how the Keltner Channel "strategy" works (using the standard inputs of length 20/ATRs 1.5).

When price closes above the Keltner Channel, we go Long when price moves 1 tick above the high of the bar that closed above the channel.

Here's what that looks like:

https://www.screencast.com/t/Jr3042ONQMl

Then we hold for 60 bars. 

Well, not exactly.

I did the smallest bit of optimizing for this one. I just had to see.

As it turns out, the Keltner Channel entry works best if we hold for 57 bars. Considering that's almost exactly the same at the holding period we've been using, I thought that would be okay. 

Here are the results.

If we used 1 contract on a hypothetical $25k hypothetical account, from 1998-2018 we'd have a profit of $106,762 and a total return (no compounding) of 427%. 

See the report:

https://www.screencast.com/t/dPjdFxRE

If, on the other hand, we bought-and-held 1 ES contract from 1998 until 6/27/18, we'd only have $73,055 of profit and a 292% return:

https://www.screencast.com/t/ZSM0FHEaMM

Of course, as you peruse the reports, you see that the Keltner Channel also had WAY less drawdown. We could double our trade size using the Keltner Channel and get twice the profit for the same drawdown as buy-and-hold. 

Pretty amazing. 

After all of the testing, the Keltner Channel indicator beat all other indicators and the market.

Who knew?

Maybe it's time for all of us to get some Keltner Channel in our lives.

 

To follow the performance of all the robots you can go here: https://www.scottwelsh.me/performance-tracking/

"The Greatest Strategy of All Time" (Breakout) Course is now available. You can find it here: https://www.kajabinext.com/marketplace/courses

Get the Heron Course here.

Get the Weekly Pivot robot (which is inside the 50% on Purpose Course) here.

My website is here: https://www.scottwelsh.me/

My new eBook, The Inevitability of Becoming Rich: An Interview with a Master, is available on Amazon, and you can get it here.

For information on all my trading courses, go here: https://www.scottwelsh.me/courses/

The recordings of the Thursday webinars go on my YouTube channel. You can Subscribe by going here:  https://www.youtube.com/channel/UCxAWDDaTLVy_diMVJCkGl3A

If you'd like a copy of my free eBook, go to https://www.scottwelsh.me/free-ebook/ and just fill out the form.

My Big Points blog is here: https://www.scottwelsh.me/big-points-blog/.

Follow me on Twitter @swelsh66.

 

Price Action v. Indicators: Which Works Better?

We now know that indicators have been given a bad rap.

Not only are they worthwhile, but they can beat the market easily.

And we also know that, when it comes to indicators, RSI is the winner (so far). 

But what about price action, though?

I've heard a lot of traders talk about how price action is the only truth in trading. Again, I tend to agree.

Indicators have complicated math based on price movements, of course, but why deal with the middleman? Instead of creating an equation for price action, why not just look at the thing itself? 

It seems to me that using price to determine entries would be superior to using a derivative indicator. 

To do our case study, however, we'll need to determine what we mean by "price action". 

For our testing purposes, price action will mean an entry signal based only on what's happened on the charts. 

Today, we'll look at one of my favorite price action patterns: the Key Reversal.

The official definition of a Key Reversal is: "A key reversal is a chart pattern that consists of a new low and a higher close than the previous bar. When a Key Reversal pattern occurs, a long entry order is placed for the next bar at open."

I like this because it appears to mean something important. 

If price goes lower than the previous Daily bar, then the market is dropping, signaling that a downtrend might be upcoming.

However, instead of continuing down, price abruptly reverses back up and, in fact, closes above yesterday's close. The market thought things were bad and then dramatically changed its mind.

To me, that's significant and is something we should be a part of.

Here's a picture of a Key Reversal. Notice on the bar with the red arrow how the low goes below the previous bar and then the close is higher than the previous close. We enter at the open of the next bar:

https://www.screencast.com/t/sMjIg9ZRE3

So, using the same parameters as we have previously (1 contract, 60 day exit, $25k account, ES, 1998-now), let's take a look at how price action performed.

Pretty well, it turns out.

Entering on a Key Reversal and getting out 60 bars later produced $64,934 of profit. This beat buying-and-holding the market by 143% (Key Reversal 259%, buy-and-hold 116%). 

Price action does appear to matter.

What about drawdown?

The close-to-close drawdown of the Key Reversal was -$40,594. Considering that's more than our hypothetical $25k account, that means we'd have to have a bigger account and the return percentage would drop. So that's not good.

But the Key Reversal max drawdown was still better than the buy-and-hold max drawdown of -$55,625. 

However, as you remember, the RSI close-to-close max drawdown was -$15,828 while producing $68,772 of profit.

RSI beat Key Reversal in profit and max drawdown. 

The top-ranked indicator (so far) is better than this type of price action.

But they both beat the market.

Is there a different price action pattern that might be the best yet? We'll find out in Thursday's YouTube video.

To follow the performance of all the robots you can go here: https://www.scottwelsh.me/performance-tracking/

"The Greatest Strategy of All Time" (Breakout) Course is now available. You can find it here: https://www.kajabinext.com/marketplace/courses

Get the Heron Course here.

Get the Weekly Pivot robot (which is inside the 50% on Purpose Course) here.

My website is here: https://www.scottwelsh.me/

My new eBook, The Inevitability of Becoming Rich: An Interview with a Master, is available on Amazon, and you can get it here.

For information on all my trading courses, go here: https://www.scottwelsh.me/courses/

The recordings of the Thursday webinars go on my YouTube channel. You can Subscribe by going here:  https://www.youtube.com/channel/UCxAWDDaTLVy_diMVJCkGl3A

If you'd like a copy of my free eBook, go to https://www.scottwelsh.me/free-ebook/ and just fill out the form.

My Big Points blog is here: https://www.scottwelsh.me/big-points-blog/.

Follow me on Twitter @swelsh66.

 

 

 

 

Which Indicator is Best: Stochastics or RSI?

Last week we learned that indicators definitely do work

Putting an indicator on a chart (in this case, Stochastics), waiting for a signal, and then holding for a set period of time produced a substantial amount of profit and had less drawdown than buy-and-hold by a country mile. 

So, if the data shows that an indicator is an effective way to beat the market, the question now becomes: which indicator works best?

I've heard sentiment that one indicator is very much like another. Worrying about which indicator works best is counter-productive and a waste of time. 

For the most part, that's been my opinion, too. 

Now I'm not so sure.

For one, the calculations are all so different. I'm starting to think the math behind some indicators is more relevant than the math behind others. 

For another, the numbers show that some appear to work better. 

As I mentioned, the first indicator I ever studied was Stochastics. That's why I used it in last week's case study.

But my favorite indicator is RSI. 

I love the way it trades. When RSI goes to Overbought or Oversold, it feels like it means something. I also like the way it works in real time. Emotionally, the RSI indicator seems to accurately depict market action.

It seems like a trading career could be based around using the RSI.

But is it true? Are my feelings misguided? Let's find out.

For reasons I've already outlined, we're going to stick with using the ES on the Daily time frame, and we're going to stick with a time-based exit. 

It makes sense that, if an indicator really works, we should be able to take a signal, walk away, and come back to see money in our accounts. 

So we're using a hypothetical $25,000 account on the ES on a Daily chart, Long signals only, one contract each trade (no compounding), and holding for about three months (60 days). 

Here are the results. 

From 1998-June, 2018, Stochastics (14 length/20 Oversold) produced $67,658 of profit with a close-to-close max drawdown of -$21,588. The win percentage was 71%

From 1998-June, 2018, RSI (14 length/30 Oversold) produced $68,772 of profit with a close-to-close max drawdown of -$15,828. The win percentage was 81%. 

[Remember, buying-and-holding the ES for the same time period had a max drawdown of over $55,000 and produced profits that were 300% LESS than what RSI achieved.]

Whoa. It appears my gut feeling was right. RSI does capture market action better than Stochastics and is a better indicator. 

RSI makes more money, has 26% less drawdown, and has a higher win percentage. 

However, RSI also produced less trades. Apparently it's harder for the ES to go into Oversold on the RSI. 

Stochastics traded 47 times in this time period while RSI only traded 27 times. If you like more trades, then that might make you lean toward Stochastics even though the overall numbers aren't as good. 

The bottom line: it looks like some indicators do work better than others on robust instruments like the ES. 

Which, of course, begs the follow-up question: does anything work better than RSI?

We'll look at that at tomorrow's YouTube video.

 

To follow the performance of all the robots you can go here: https://www.scottwelsh.me/performance-tracking/

"The Greatest Strategy of All Time" (Breakout) Course is now available. You can find it here: https://www.kajabinext.com/marketplace/courses

Get the Heron Course here.

Get the Weekly Pivot robot (which is inside the 50% on Purpose Course) here.

My website is here: https://www.scottwelsh.me/

My new eBook, The Inevitability of Becoming Rich: An Interview with a Master, is available on Amazon, and you can get it here.

For information on all my trading courses, go here: https://www.scottwelsh.me/courses/

The recordings of the Thursday webinars go on my YouTube channel. You can Subscribe by going here:  https://www.youtube.com/channel/UCxAWDDaTLVy_diMVJCkGl3A

If you'd like a copy of my free eBook, go to https://www.scottwelsh.me/free-ebook/ and just fill out the form.

My Big Points blog is here: https://www.scottwelsh.me/big-points-blog/.

Follow me on Twitter @swelsh66.

 

 

Case Study: Do Indicators Really Work?

Full disclosure: I love indicators. 

I love that, years ago, a smart person saw something interesting in the markets and used smart-person math to numerically give us all a way to make money. 

There are ways to make money trading without an indicator, of course, but our minds are so undisciplined that most of the time we sabotage our own chances before we ever bank the profits. 

Indicators fix all that. 

They give us a definite mathematical entry and a definite mathematical exit. They give us logical reasons to make profitable trades and their calculations provide the discipline to execute properly. 

Just stand on the shoulders of mathematical geniuses and follow the indicators to the promised land. 

I love that. 

But indicators are taking a lot of heat lately. 

They're lagging.

They're based on math that's outdated.

They're a crutch only used by amateur traders. 

Is this true? Is it pointless to use indicators?

To answer, we're going to need some rules that make perfect sense. We're going to need rules that are so simple that the conclusion we draw is darn near inescapable.

Otherwise arguing about indicators is just a bunch of sound and fury signifying nothing. 

First, we need to use an instrument that's been around a while. Putting an indicator on bitcoin futures, for example, is not going to help us. So what's been around the longest?

The stock market.

But we can't pick individual stocks. That would be too biased. It could be argued that an indicator happens to work best on a particular kind of stock. 

No, we need the whole stock market. That incorporates a bunch of stocks and can give us a good picture. 

Second, let's use the futures market, specifically @ES. I suppose we could also use something like SPY, but I'll take the leverage of @ES instead. 

Third, let's only go long. The stock market has an upward bias, so let's use that and also stay very specific. The more variables we use, the less valid our conclusions. Plus, the long side of the market is very different than the short side, so we need to run those experiments separately. 

Last, what is the definition of "working"? If we say an indicator "works" what does that mean?

It means that if an indicator generates a Long signal, the market will go up. If we get a buy signal today, we should then be able to walk away and come back later and see a trade that's made money. 

If we put a stoploss in, we're tampering. We're saying that the indicator probably doesn't work that great, so let's put in a safeguard. That's a shaky signal.

If we put a target in, we're also tampering. We're saying that the signal doesn't have much strength, so we better get out before anything bad happens. 

If we're truly trying to find out if indicators work, then we need to keep it strictly black and white.

Get a signal, take the signal, and come back later and see profit. 

The question then becomes: how long should we wait? Should that signal last years?

I don't think that's a good test. The indicator was based on math that was intended to foreshadow an imminent change in our favor. I don't think any indicator was made to predict where we'll be five years from now. 

So how about three weeks? One week seems too short for this test. A month seems slightly too long. This is debatable, of course, but three weeks seems reasonable. It gives the indicator time to work while not forcing it to do too much.

Three weeks it is. If we find anything exciting, we can change this to a different time span and test some more. 

But that's not all we need. If we're going to believe in indicators, that indicator needs to give us signals that, if followed, beat the market. These signals should help us do better than if we just got in at the beginning and held for the next several years (or decades). 

If our famous indicator makers did their jobs, then those signals should do better than a trader who had no indicator at all. 

Finally, we need an indicator. I'm biased toward RSI and CCI, but the very first indicator I ever looked at was Stochastic, so that's where we'll start. And, to avoid any funny business, we'll just use the default settings given to us by George Lane himself (or C. Ralph Dystant). 

Those settings have a Length of 14 and an Oversold reading of 20.

Rules:

  1. Using a Slow Stochastic with a Length of 14, we're going to wait for price on the ES to go below 20 on a Daily Chart. 
  2. Then we're going to wait for the Fast stochastic line to cross over and close above the Slow stochastic line.
  3. Then we're going to hold the trade for 15 days (3 trading weeks) and exit at the open of the next bar. We won't count the entry bar. So that's 15 bars after the entry and then exit at the open of the 16th bar. 

Here's a picture of a winning trade from March 28, 2018: https://www.screencast.com/t/vLXYmS72x

What were the overall results?

Starting with a $20,000 (and including all trading costs such as slippage and commission), using a Stochastic indicator generated a profit of $56,039 and a close-to-close max drawdown of $15,091. The testing period was 1998 to June, 2018. The test used a trade size of 1 contract on every trade (no compounding). 

According to the Tradestation Performance Report, that's a return on initial capital of 280%. 

If we simply bought and held 1 contract of the ES during that same time period, we would only have achieved a return of 122%.

By the way, the max drawdown if we bought and held the ES would've been $55,625, which is more than 3 times as much as Stochastic's was and would have taken our whole account and shoved it down the toilet. 

The conclusion seems pretty clear: Indicators work. They provide a substantial edge over buy-and-hold.

Well, at least Stochastic does. 

But does it work only under those conditions? 

We'll find out in Thursdays YouTube video. 

To follow the performance of all the robots you can go here: https://www.scottwelsh.me/performance-tracking/

"The Greatest Strategy of All Time" (Breakout) Course is now available. You can find it here: https://www.kajabinext.com/marketplace/courses

Get the Heron Course here.

Get the Weekly Pivot robot (which is inside the 50% on Purpose Course) here.

My website is here: https://www.scottwelsh.me/

My new eBook, The Inevitability of Becoming Rich: An Interview with a Master, is available on Amazon, and you can get it here.

For information on all my trading courses, go here: https://www.scottwelsh.me/courses/

The recordings of the Thursday webinars go on my YouTube channel. You can Subscribe by going here:  https://www.youtube.com/channel/UCxAWDDaTLVy_diMVJCkGl3A

If you'd like a copy of my free eBook, go to https://www.scottwelsh.me/free-ebook/ and just fill out the form.

My Big Points blog is here: https://www.scottwelsh.me/big-points-blog/.

Follow me on Twitter @swelsh66.

 

Falling Out of Love With Short-Term Charts

As far back as I can remember, I always wanted to be a daytrader

Long-term charts were for schmucks.

Long-term charts were for my grandparents' IRA or for traders who wanted to take a few trades a year so they could pocket a few pennies. 

Real traders didn't look at Daily charts. Real traders rolled up their sleeves and did work every day.

That's what trading is all about and that's the only way to trade-for-a-living (and make the big bucks). 

So that's where my focus was and that's where I spent all my time: analyzing, testing, and sweating the short term charts. 

I started with the 1-minute charts and then spent some time on tick charts. You can always find trades in those arenas.

And I made some money. A nice chunk of money, in fact.

But in the middle of my win streak I learned something: things can change pretty fast on those short-term charts. 

After three months of quick wins, I got into a nasty drawdown. After all, who needs stoplosses when you win all the time?

I ended up getting lucky on that horrible trade, somehow escaping trouble and making a nice profit. 

But I was shook. We were one or two more big moves down away from losing our entire account. 

When I looked back on the 1-minute charts, I found several other times when my system would've lost our entire account (using the aggressive betting level we were using). It turns out we'd been living on borrowed time.

In short, the 1-minute and tick charts are just too volatile. Moves that happen on those charts are filled with fake-outs, meaningless noise, and manipulation. I had to let them go.

But traders need to trade, so I found the next best thing: 15-minute charts.

Fifteen-minute charts are sublime. The moves are more solid and you don't have to stare intently at the screen for hours at time, living and dying with each tick. 

I'd found a home.

Over the next few years, I spend about 2,500 hours testing daytrading strategies on 15-minute charts. Finding a viable, consistent strategy was a lot harder than I had anticipated. 

But, finally, I think I got there. I found a strategy (the Hornet) that stayed consistent through the years (according to my research) and I even made a 100% return in one year trading this strategy with a robot. 

I was home. 

Then I built on all that research and developed a similar robot on the 15-minute charts (the Heron). That strategy had the backbone of the Hornet and many additional hours of research behind it.

I was home again. 

But all is not perfect in the land of 15-minute bars.

There are some negatives that come from daytrading.

One, and maybe most important, execution is critical. If you need a 20 point target or have a 50 point stop, then you absolutely, positively must hit those numbers. If you don't get those exact numbers, then the numbers will be off. 

This, of course, means that your reasonable expectations for the system will be off, too.

For example, earlier this year, my broker closed my trade for a full stop-out even though price didn't come anywhere near my stoploss. Allegedly, it was due to the widening spreads on the Forex open on Sunday. I only get about 4 of those losses a year, and now I have one that may or may not be legit.

In fact, some of my Lifetime Members got that stop-out and others didn't. How fun. 

But that's part of the game in small daytrading charts--and it's not pleasant. If you don't get the exact execution on a trade, then results can vary. It won't turn a good system into a bad system, but it's annoying. 

And tiresome. So, so tiresome. 

There is a way out of this execution worry, though: long-term charts. 

If you're trading on long-term charts, it doesn't really matter if the execution is exactly right.

When you're seeking a 100 point target and you get 99, your expectations might be 1% off. When you're seeking a 10 point target and you get 9, your expectations now might be 10% off. 

What's more, everything works better on long-term charts. 

If you have an entry rule that's based on an efficient indicator or based on a philosophical truism, chances are it's going to work pretty well on a long-term chart. 

When something happens on a Daily or Weekly chart, something is definitely happening. There are almost no significant fake-outs or manipulation on longer-term charts. 

What I've learned during the past few years of watching Daily charts is that it's a calm, peaceful experience.

The spreads just got wide for some reason? Shrug.

My entry was two points off? Boring.

The trade gapped overnight? Yawn.

When you're looking for big moves, little insignificant things don't matter. And that might be what I've all been looking for all along. 

While that sounds good and is making me rapidly fall out of love with daytrading, there still is one big question looming?

Does long-term trading make enough money?

And we'll talk more about that in Thursday's YouTube video. 

 

To follow the performance of all the robots you can go here: https://www.scottwelsh.me/performance-tracking/

"The Greatest Strategy of All Time" (Breakout) Course is now available. You can find it here: https://www.kajabinext.com/marketplace/courses

Get the Heron Course here.

Get the Weekly Pivot robot (which is inside the 50% on Purpose Course) here.

My website is here: https://www.scottwelsh.me/

My new eBook, The Inevitability of Becoming Rich: An Interview with a Master, is available on Amazon, and you can get it here.

For information on all my trading courses, go here: https://www.scottwelsh.me/courses/

The recordings of the Thursday webinars go on my YouTube channel. You can Subscribe by going here:  https://www.youtube.com/channel/UCxAWDDaTLVy_diMVJCkGl3A

If you'd like a copy of my free eBook, go to https://www.scottwelsh.me/free-ebook/ and just fill out the form.

My Big Points blog is here: https://www.scottwelsh.me/big-points-blog/.

Follow me on Twitter @swelsh66.

 

Should We Trade The Scariest Day of the Week?

What's the scariest thing in trading?

For my money, the scariest thing in trading is taking a trade on Friday and holding it over the weekend.

The research, however, tells us that holding a Friday trade over the weekend is a very smart thing to do. 

In fact, according to the numbers, we should never be afraid of holding a position overnight or over a weekend.

In a February 2, 2018 article in the NY Times, we learned something fascinating.

The Bespoke Investment Group did a study that looked at the cumulative stock market gains since 1993. 

The research showed that, since '93, the stock market has gained 541%. Nice.

But here's the amazing part: ALL of those gains since the 90's came OUTSIDE the regular trading hours.

For example, if you bought in the last few seconds of each trading day since '93 and held overnight, you would've made 571%. 

If, however, you bought at the open and closed out at the end of every day, you would've LOST 4.4%. 

Every single bit of the gain in the stock market has come from holding overnight.

But how about Forex?

Since Forex trades 24 hours a day, there's only one opportunity to hold a trade overnight, and that is entering a position on Friday and holding until Sunday.

That just sounds scary (and stupid). What does the research say?

Using my oldest daytrading robot, the USDJPY Hornet, I went back to 2003 and tested each day to see which day is most profitable. 

Based on a losing trade recently and my dislike of holding day-trades over the weekend, I was sure that Friday would be the worst day. 

Here's what I found. 

First, I looked at the entire week. What's the most profitable combination of days to trade the Hornet?

It turns out the best combination is to trade Tuesday-Friday (no Mondays). Coming in close second is to simply trade every day. Those are almost even. 

If we're talking about individual days, though, here's how the rankings come out. 

The most profitable day by a wide margin is...Friday.

Friday is the most profitable day.

Next on the list was Wednesday. Then Tuesday, Thursday, and finally Monday.

The rankings (by profitability):

  1. Friday
  2. Wednesday
  3. Tuesday
  4. Thursday
  5. Monday

So here's what the research is saying.

By not holding a position overnight in the stock market, you'd be trading for 25 years and end up with less than you started.

By not holding a position over the weekend in the Forex market, you're missing out on the most profitable day.

Over the long term.

That's the key.

Holding a position overnight and having it gap the wrong way is a horrible feeling. Just going through that one time can make a trader never want to do it again. 

There's no shame in wanting to avoid pain. Who wants sleepless nights?

But if we can take the pain of the losers, research shows that we'll be better off in the long run by holding on. 

I'm not saying it's easy.

I'm just reporting the news.

Please don't shoot the messenger.

 

To follow the performance of all the robots you can go here: https://www.scottwelsh.me/performance-tracking/

"The Greatest Strategy of All Time" (Breakout) Course is now available. You can find it here: https://www.kajabinext.com/marketplace/courses

Get the Heron Course here.

Get the Weekly Pivot robot (which is inside the 50% on Purpose Course) here.

My website is here: https://www.scottwelsh.me/

My new eBook, The Inevitability of Becoming Rich: An Interview with a Master, is available on Amazon, and you can get it here.

For information on all my trading courses, go here: https://www.scottwelsh.me/courses/

The recordings of the Thursday webinars go on my YouTube channel. You can Subscribe by going here:  https://www.youtube.com/channel/UCxAWDDaTLVy_diMVJCkGl3A

If you'd like a copy of my free eBook, go to https://www.scottwelsh.me/free-ebook/ and just fill out the form.

My Big Points blog is here: https://www.scottwelsh.me/big-points-blog/.

Follow me on Twitter @swelsh66.

 

 

 

 

Do Good Strategies Really Work in all Timeframes?

It's the sentence that comforts and fills our hearts with confidence:

"This system works perfectly on all timeframes!"

Whew. That's good news. If it works on all timeframes, it must be awesome.

I'm definitely buying that!

But what does the phrase "it works on all timeframes" really mean?

And is it true?

First, if a system has a numerical profit target and/or a numerical stoploss, then that system definitely will change in different timeframes.

An entry signal on a Daily chart is vastly different than an entry on a 15M chart. The 15M chart has a lot more noise and is based on short-term market fluctuations. We can't expect a signal on a 15M chart to travel as far as a signal on a Daily chart.

Plus we have the problem of the stoploss. If our stop is to be placed under a previous low, for example, then the low on a 15M chart is probably only a few points away.

A stop under a previous low on a Daily chart is probably dozens of points away. That, of course, changes everything from risk to reward to trade sizing to target distance.

So, if the system has a hard, numerical stop or target, it's pointless to talk about that system working in multiple time frames. That type of system changes into an entirely different system with each timeframe change.

If a system doesn't use numerical stops and targets, though, then we can reasonably, potentially, possibly make a claim that the system works in all timeframes.

Let's go back to our example last week on the Golden Cross system (last week's post is here).

The Golden Cross is a basic trend following system and it definitely produces profit (at least it did on Dow Jones stocks). You go long when the 50 simple moving average (SMA) closes above the 200 SMA and exit the position when the 50 SMA closes back down below the 200 SMA. 

Those rules make philosophical sense and can easily be applied in the exact same form on any chart we choose. 

Thus, it would be easy to claim that this system works in all timeframes. 

But does it?

If we put the Golden Cross on a Visa (V) Daily chart, we get a profit of $20,800 from 2009-May, 2018 (trading $10k worth of stock each time) and we'd be currently in a massively profitable open trade. The max drawdown would have been $5,300. 

Now let's transfer this system, with no changes whatsoever, to other timeframes of Visa. Here are the results:

  • Daily chart: $20,800 profit, -$5,300 max drawdown

  • 240 minute chart: $15,500 profit, -$5,700 max drawdown

  • 60 minute chart: $2,800 profit, -$8500 max drawdown

  • 15 minute chart: $2,690 profit, -$7,300 max drawdown 

  • 5 minute chart: -$9,800 profit, -$13,400 max drawdown 

As you can see, when you move to smaller and smaller timeframes, the results get worse and worse, culminating with the 5-minute chart being completely unprofitable.

This system uses a timeless, proven trend following philosophy yet it clearly doesn't work on all timeframes. Anyone saying so is trying to sell you something.

It begs the question: if a simple trend following system doesn't work on all timeframes, what does?

Anything?

Here's the real question, though: does it even matter?

We'll discuss that on Thursday's YouTube video.

 

To follow the performance of all the robots you can go here: https://www.scottwelsh.me/performance-tracking/

"The Greatest Strategy of All Time" (Breakout) Course is now available. You can find it here: https://www.kajabinext.com/marketplace/courses

Get the Heron Course here.

Get the Weekly Pivot robot (which is inside the 50% on Purpose Course) here.

My website is here: https://www.scottwelsh.me/

My new eBook, The Inevitability of Becoming Rich: An Interview with a Master, is available on Amazon, and you can get it here.

For information on all my trading courses, go here: https://www.scottwelsh.me/courses/

The recordings of the Thursday webinars go on my YouTube channel. You can Subscribe by going here:  https://www.youtube.com/channel/UCxAWDDaTLVy_diMVJCkGl3A

If you'd like a copy of my free eBook, go to https://www.scottwelsh.me/free-ebook/ and just fill out the form.

My Big Points blog is here: https://www.scottwelsh.me/big-points-blog/.

Follow me on Twitter @swelsh66.

 

 

 

Does the Golden Cross Strategy Really Work?

Ah, the magical Golden Cross.

I've heard it mentioned on Mad Money, CNBC, and by a trader/educator on a podcast yesterday.

Even people who don't believe in technical analysis (what??) acknowledge the Golden Cross.

It's that powerful.

If you don't know, a "pure" Golden Cross is when the 50 period SMA crosses above the 200 period SMA.

When the 50 crosses the 200, that's golden--and we buy.

I'm not sure of the origin story or why those numbers were chosen (these are excellent round numbers), but everyone knows the Golden Cross and many people swear by it.

But the real question is: Does it work?

If you had to bet $10 right now, what would you pick? Is the Golden Cross golden or a bunch of bunk?

My first thought when considering it is: Yes, it should probably work.

A 50 SMA crossing up over the 200 SMA on a Daily chart is a basic form of trend following. And we know that trend following is the greatest trading strategy of all time.

If the short term momentum becomes greater than the long term momentum, something is definitely happening. I assume some sort of profitability will follow.

But I also tend not to believe anything in the trading world that's been regurgitated ad nauseam.

And since it's so popular, there's little chance it's still profitable (if it ever was) because we all know that if strategies get too popular they completely stop working.

Right?

So I decided to test it out for myself. Here's what I found.

First, I decided to do my testing on stocks. Why? Because I've only heard the Golden Cross mentioned when people are talking about stocks.

Plus, stocks have a long-side bias which seems perfect for the Cross.

Last, the data on stocks goes back farther than any other instrument.

But I didn't choose just any stock. I chose the stocks in the Dow Jones.

Why? Because these are stocks that have been around and are going to be around for a long, long time.

If it works, then I want to have tested it on something that we can actually trade going forward.

Here's my conclusion.

The Golden Cross works. Kind of.

I tested every long trade (the Golden Cross is only for going long) on every member of the Dow Jones Index.

I took every trade and did not use a stoploss. I got in when the 50 closed above the 200, and I exited when the 50 closed back down below the 200. That's it. That's the whole strategy.

When I did that, I found that 26 of the 30 Dow members would have been profitable.

That's great! But also meaningless.

It's meaningless because we now know the Golden Cross produces profit, but does it beat the market? If it doesn't, then why bother?

So, to compare apples to apples, Let's just say we only have a $10,000 account.

Using that number, from 2008 to today (May, 2018), buying and holding the Dow Jones Index would have almost exactly doubled our money. A $10,000 account would've turned into a $20,000, giving us $10,000 of profit.

That's the number we have to beat.

We quickly see that using the Golden Cross on the individual members of the Dow, some would have done fantastically.

AAPL, for example, would've produced $37,000 worth of profits using the Cross. Outstanding.

But XOM, on the other hand, would have LOST $3,500 since 2008. That's not good.

So I simply averaged the returns of all 30 Dow components, and that average turned out to be $7,000 worth of profits.

On average, trading the Golden Cross this way on all of the individual members was less profitable than buying and holding the Dow Jones Index.

However.

These numbers do NOT include current open trades. Many Dow stocks would be in super-profitable open trades as I write this.

V, for example, is still in the middle of a 60% gain at this moment. That's going to be a huge win no matter what the market does in the future.

And, like I said, many of the Dow stocks are in the middle of big winners right now.

So it's reasonable to conclude that the Golden Cross is as good or better than buy-and-hold.

And that's without adding any extra rules to the strategy.

What if we used a time exit rather than a cross down below? What if we had a target? What if we used a stop? What if we used a filter?

Any of those additions could possibly push the Golden Cross to new heights.

In summary, I would say the hype around the Golden Cross is legitimate. It's a form of trend following, and we know trend following works in the long run. This strategy is worth looking into.

But last week, I read that bitcoin is bearish because it's about ready to form a Death Cross?

Wait, what's a Death Cross? And is it something to fear?

We'll talk about that in Thursday's YouTube video.

To follow the performance of all the robots you can go here: https://www.scottwelsh.me/performance-tracking/

"The Greatest Strategy of All Time" (Breakout) Course is now available. You can find it here: https://www.kajabinext.com/marketplace/courses

Get the Heron Course here.

Get the Weekly Pivot robot (which is inside the 50% on Purpose Course) here.

My website is here: https://www.scottwelsh.me/

My new eBook, The Inevitability of Becoming Rich: An Interview with a Master, is available on Amazon, and you can get it here.

For information on all my trading courses, go here: https://www.scottwelsh.me/courses/

The recordings of the Thursday webinars go on my YouTube channel. You can Subscribe by going here:  https://www.youtube.com/channel/UCxAWDDaTLVy_diMVJCkGl3A

If you'd like a copy of my free eBook, go to https://www.scottwelsh.me/free-ebook/ and just fill out the form.

My Big Points blog is here: https://www.scottwelsh.me/big-points-blog/.

Follow me on Twitter @swelsh66.