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.

My Favorite Tip For Successful System Trading

I love Moneyball.

For a lot of reasons.

I love it because it's Michael Lewis' true story of the analytical revolution in sports (everything done today comes from this book/movie).

I love it because it skewers the closed-minded old guard.

I love it because it challenges us to find new, better ways to think about our lives.

And mostly, I love it for how Billy Beane (played magnificently by Brad Pitt) ran his baseball team.

On one hand, Beane cared deeply about the success of his team.

He cared so deeply that sometimes, after a loss, things got hit with a bat.

On the other hand, he never watched the games.

While his team was playing, Beane never watched. He worked out or went for a drive or did anything that would keep him from looking at the game.

When he hired his new assistant, he gave him one simple instruction: Just call me when it's over.

Caring deeply and not watching may seem like a contradiction. If you don't watch, you don't care, right?

But actually it's the opposite.

If we're going to be successful system traders, we have one massive obstacle:

Us.

We're the problem.

If we have the data and believe in the methodology that produced this data, then success is inevitable.

All we have to do is not screw it up.

How do we screw it up?

By watching trades.

If we watch our system take trades, we're not going to like it.

"This trade isn't going to work out."

"The robot never should have taken this trade."

"It's almost at the target, I'll just take it out here."

And guess what?

When we get involved, we get emotional. When we get involved, we think irrationally. When we get involved, we change what our trusted system produces.

And not for the better.

For a long time, I would watch my robots take trades. And inevitably, when I watched, I did something stupid.

Because of me, profitable trades turned into break-even trades. Because of me, profitable trades turned into small losing trades. Because of me, losing trades were made bigger because I panicked and took it out before it came back.

But that's not the worst of it.

When I watched trades, my angst went through the roof. Living with a losing trade all day was horrible, and when the loss was finally booked it felt like a sharp stick in the eye.

After watching a loss closely, the desire to avoid that pain again makes it likely that we'll lower the trade size on the next trade, which, of course, will be a winner.

Or, after watching a loser, we might be so strung out that we decide to just turn the robots off.

I'm not living through that again.

But all of that is fixed by not watching the trades.

If we're not watching the trades, we won't take them out early or change the trade size or make an emotional decision to stop trading.

If we're not watching, the system can do what it's supposed to do--produce the numbers that the data said they would.

And you know what?

Looking at a loser after it's over is not NEARLY as bad as watching it live. Seeing a losing trade after the fact isn't fun, but it's completely doable.

Not watching allows us to just stick to the numbers without pride or prejudice.

And that's how a system becomes successful.

It turns out that the secret to successful trading isn't the system we trade.

The secret trick to trading a successful system is to be like Billy Beane.

And never watch.

 

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.

Why Everyone Can Beat the Market (plus presentation tonight)

Is there anyone out there who still believes in the Efficient Market Theory?

If you're unaware of what that is:

The efficient market hypothesis (EMH) is an investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

This was taught by famous people in famous schools for a long time.

But nobody still believes this, right?

Nobody still believes that all information is already "priced in" and the market is always trading at fair value. That just doesn't make sense.

For example, if you think that markets are always efficient, take a look at the 52-week high and low of any stock you like.

How about Amazon (AMZN)? If the efficient market hypothesis is true, then Amazon's fair value fluctuated by 76% within a year.

Think about that, in the past 52 weeks, Amazon the company saw its value change by 76%.

Its assets changed that much? Really?

In short, if markets are efficient, in March, 2018, Amazon was worth $9 billion and then by April, 2018 it was only worth $7.75 billion.

Whoa, that must have been some month!

Did a fire destroy  $1.25 billion worth of inventory? Did all of its workforce quit? Did no one buy anything for 30 days?

Before you answer, please know that three weeks later it was worth $9 billion again.

So either Amazon lost and found over a billion dollar of assets in a few weeks or the markets are inefficient.

It's one or the other.

And if you believe in the latter, guess what? The markets can be beat.

Let's do another example.

From 2000-2010, the SPY (the ETF that tracks "The Market") actually decreased in value.

From December 31, 1999 to December 31, 2009, the market was down 24%. Here's a picture:

https://www.screencast.com/t/yu2iFovN

That's a decade of investing in the market and ending up with a lot less than you started with.

If you believe we can't beat the market, then the only thing we can do is accept it. Tough cookies for us!

We can't beat efficient markets, so we'll get nothing and like it.

Or, if you believe people are crazy and that markets constantly give us opportunities, then you believe it's possible to not have a decade of lost money.

Or, we could just use our eyeballs and look at that chart again. See how price quickly falls and then rises and then falls again? Every time irrational people make those moves happen, we have a chance to beat the market.

"Fine, opportunities are available. How can we take advantage?"

Any way we like!

I'm sure there are at least a dozen different systems out there that could take advantage of those inefficient moves.

Here's just one way.

I love the RSI indicator, so let's use that.

Just using the standard settings for the RSI (14 length, Overbought at 70, Oversold at 30) on a monthly chart of SPY, you can see that RSI went into Oversold twice in the 2000s.

https://www.screencast.com/t/F8exksNpCQM

If we bought the first time RSI closed into Oversold, we would've finished the decade with a 36% gain instead of a 24% loss.

If we missed that one and bought the second time RSI went into Oversold, we would've finished with a 15% gain instead of a 24% loss.

But if we like short-selling better, we could have sold when the market went into Overbought and ended up making 19% for the decade. See that here:

https://www.screencast.com/t/DJ6tPdvu

Either way, by preying on irrational behavior and making trades when things got extreme, we could have beaten the market handily.

And this is true for all markets.

The first step to beating the market is believing we can beat the market.

The second step is much harder (but doable).

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

_______________

Lesson: How to Beat the Market with the Templeton Strategy
Speaker: Scott Welsh
Date: Wednesday, May 2, 2018
Time: 7:00 p.m. U.S. Eastern Time (4:00 p.m. Pacific)

  • Learn a Depression-era stock picking strategy that is still used today.
  • Learn how to improve the strategy for the modern market.
  • Learn where you can find these stocks to replicate the strategy.

Click here to attend and receive the video recording.

_______________

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.

 

 

Why Trading Beats Buy-and-Hold (Even When it Doesn't)

Recently, we talked about a trend following system on Apple (AAPL).

Even more recently, I got a great email about that post.

The point of the email was a good one: even though the "breakout system on steroids" for AAPL produced fantastic returns, those returns weren't quite as high as just simply buying-and-holding for the same time period.

Which is true.

However, the key issue here is the buying-and-holding part.

Buying AAPL several years ago and holding it perfectly until now assumes:

  1.  That a trader could analyze AAPL a decade ago, and make some sort of confident determination that AAPL's $24.99 price at the time (4/29/08) would rise to today's $166.66 (4/23/18).
  2. That a trader would continue to hold the ENTIRE POSITION when the stock price dropped OVER 50% down to $12.27 a few months later.
  3. That a trader would not be mentally exhausted from the year-long ordeal and wouldn't jump at the chance to sell out to end the torture when the stock price finally came back to the original entry price in September, 2009.
  4. That a trader wouldn't sell out when the stock doubled its value in March, 2011.
  5. That a trader wouldn't sell everything in a second when the stock price dropped from $85 to $65 in three months amid all sorts of bad news coming out of China (2012).
  6. That a trader wouldn't sell everything in two seconds when the stock price dropped from $130 to $93 in 2015-16 amid negative projections of iPhone sales.
  7. That a trader could withstand the constant barrage of articles like this saying "this whole exercise of forecasting sales and other corporate financial metrics is inherently prone to error."

To hold AAPL through all of that (and more) might be one of the greatest displays of mental toughness in the history of trading.

I don't know anyone who could do it (including me).

I've never met anyone who has done it (or anything close to it).

(I'd love to hear from you if you have).

While buying-and-holding looks amazing on paper, in real life, it's borderline impossible.

A diet doesn't work unless we can actually do it. A workout won't work unless we can actually do it.

Nothing will work unless we can actually do it.

Which brings us back to the AAPL system in my post.

A system is something we can do every day. A system isn't barraged with constant, manic news articles. A system takes almost all of the emotion out of it.

We might lose trades, sure, but we can just go back to following the rules.

In short, it's not unreasonable to say that we could follow a system for ten years without any trouble.

Just follow the rules and keep following the rules. That doesn't seem like a Herculean task at all.

So, yes, there are a few examples of individual stocks beating a system via buy-and-hold.

But a trader would have to get every cent out of that buy-and-hold without a single slip up--which simply isn't realistic.

One emotional sell-out along the way would give the win to a system.

And it would take ten years of emotional perfection to reap the benefits (which were only slightly better than the system anyway).

That's why system trading beats buy-and-hold trading--even when it doesn't.

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.

Can We Talk About This E-Mini Chart for a Second?

Everyone is skeptical about testing results.

And you should be.

Fake testing results are an easy scam.

"This system makes 100% per month! Here are the results! Buy now!"

And, of course, those claims are probably/definitely false.

I get all that.

But I need to talk to you about something.

A few weeks ago, I was researching the Heron system on long-term charts (specifically the Daily charts).

I was tinkering around with big profit targets and other wrinkles, and I was putting the Heron on different instruments (like individual stocks and Futures).

And I came across some settings on the E-Mini (futures contract @ES).

Like I said, I was looking at big profit targets. I was curious what a trader's life would look like if one trade paid for a month or two of bills.

I also was playing around with big stoplosses because I wanted the trade to have time to get where it wanted to get.

So, for fun, I put a massive profit target and a too-big stoploss on @ES and tested it back to 2002.

Holy crapoly.

Here's a Performance Report (based on a $10k account, trading only 1 contract each time, and trading costs built in):

 https://www.screencast.com/t/N5kVoocTpS

A few things about this report.

This assumed no compounding. If we raised our trade size with profits, the returns would be much higher.

Now take a look at the Percent Profitable number. I'll wait.

Ninety-six percent win rate!

That's ridiculous. Any system with a win percentage that high is a scam.

Except, of course, systems that have high win percentages on long-term charts.

What's Warren Buffet's win percentage? Nearly 100%? What's an Index Fund win percentage? 100%?

When you trade long-term charts, the win percentage can be high, especially if you're a buy-and-hold type of trader. And if you have a massive stoploss, you're basically buying-and-holding until you hit the target.

For example, this @ES chart only has 2 losing trades since 2002.

It naturally makes sense that the max drawdown would be high in this sort of system, and this system does have a 52% max drawdown (if you traded it on a $10,000 account).

[The Report shows a drawdown higher than that, but that's not quite realistic. The chart only lost a max of one in a row, and that loss was $5,200. The next trade was a winner (with a little drawdown at the beginning), so it seems more logical to assume a 52% drawdown in real life. If you disagree, then consider max drawdown to be a little higher.]

If we just assume a 52% max drawdown, then that's the same drawdown as an Index Fund and the returns on this chart (with no compounding) are about four times higher than the market.

So that's four times better than the market for the same drawdown, and we get to win 96% of the time.

That's crazy.

What are the takeaways?

One, I think we all need to respect the earning power of long-term charts. The mindset of most traders is that we have to be in there every day cranking out wins.

The truth is: a few trades a year can provide everything we need. And we need to seriously consider that.

A long-term trader's life is way less stressful than a short-term trader's life.

Two, maybe we don't need to be afraid of high win percentages on long-term charts. We can win a lot if we're thinking long-term.

Three, it might be a good idea to take whatever system you're trading and move it out to longer timeframes.

On one hand, you can see if your system is robust. It should be profitable on a longer chart if the system is solid.

On the other hand, it might bring a whole new perspective.

The bottom line is that I'm not smart enough to trade this @ES chart.

Not yet.

It's just an experiment at this point.

But you never know when I might get smarter.

[If you're a Lifetime Member or a Heron Course member, email me if you want the settings to the @ES chart].

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.

Follow me on Twitter @swelsh66.

The Breakout System on Steroids

I love the Breakout strategy.

I love it because it's the most researched, most eternal trading strategy ever invented.

I also love it because, when it works, it's the most fun you'll ever have in trading.

Seriously, what could be better than watching a winning trade run for days, weeks, or months?

As with all things, though, there are some downsides to trading this way.

One, it doesn't win a lot. We need to be there for every breakout, so a lot of them will be false ones. Sub-50% win percentages are never fun, and that's what you get with this methodology.

Two, it doesn't trade very often. The best breakouts are the ones that happen on long-term charts.

If price breaks above the high of, say, the past 20 bars on a Daily chart, something is probably going on.

If price breaks out above the high of the past 20 bars on a 5-minute chart, however, nothing is probably going on.

But if we use the long term charts for their effectiveness, that means we don't trade very often. How often is not very often?

On a Daily chart, we might get between 2-6 trades a year. If we're only going in one direction (only Long, for example), then we might go a whole year and not get a single entry.

And if I know traders, that's a bad, bad thing.

Even if a breakout system can provide all the income a trader could ever want, the traders I talk to would rather chew off their own foot than only trade 3 times a year.

So is there any way to speed things up?

Yes.

This week, we're going to look at AAPL.

Stocks are great for breakouts because they, um, break out. They break out like crazy. And since the stock market has a long-side bias, it's possible to only consider Long trades.

Fine. But how do we get more trades?

Well, instead of waiting for an instrument to break above a previous high, what if we decided to trade a breakout on a regularly scheduled basis?

Meaning: what if we took a trade every time AAPL broke out to a new monthly high?

The thinking goes: when we hit a new high for this month, we may be seeing the start of something--even if we've been in a downtrend.

If we're waiting for a new high of the past 90 days and the stock plummets, it could be a year before we get back to that high again. That's a lot of waiting--and a lot of potential missed profit as it comes back up.

By getting in on a monthly high, we get an early entry when the downtrend ceases. We get profit all the way up.

In addition, trading each new monthly high means that we will probably get a trade every month.

They won't all be good trades, but, hey, at least we're trading! No more waiting around till the cows come home.

Getting back to AAPL, for this style of breakout trading, we drop down to a 240-minute chart and get in on a monthly high. That could be the first day of the month or any other day. As long as it's the high for the current month, we get in.

Then we use a hard stop in case things go badly.

And we use a timed exit because we want to lock in profit on these breakouts. We're trading more often, so a lot of breakouts will be mediocre. A timed exit gives us a chance to be profitable on unspectacular trends.

Last, we use a trailing stop like we always do for breakout trading.

Using those rules on a hypothetical $10,000 account, we used full margin and actually traded $20,000 worth of stock on each trade. (The margin for Tradestation allows us that much margin if we're holding trades overnight. We could use a smaller trade size, of course, but we're going for it.)

How did it do?

From 2008-April, 2018, AAPL averaged over 35% per year with a drawdown under 40%. And, no surprise, it averaged about 1 trade per month. No long dry spells with this methodology.

For comparison, during that same period, the market averaged about 9% per year with a 50% drawdown.

Stocks are a great vehicle to use for breakouts. Not every stock trends as strongly as AAPL, but if you can find something that moves, scheduling a monthly breakout looks like it can make good money.

And, thankfully, it gives eager traders the action they need.

 

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.

How is 2018 Going So Far?

We're a quarter of the way through 2018. It's a good time to examine what's happened so far.

As you know, I'm obsessed with beating the market, so that's where we'll start.

Remember, the experts want us "regular folk" to only buy index funds (I follow Vanguard's VFINX).

We're not smart enough to trade on our own, and, even if we were, we couldn't beat the market in a million years.

That's why the only way to do it is to invest in "the market" long-term, and that means owning an index fund and contributing to it regularly.

Fine.

How would we be doing, then, if we owned index funds?

We'd be down 0.79% for the year.

Not terrible, I guess, but not making any money either.

Well, what about some of the best traders in the world? How are they doing in 2018?

  • The world leader in bonds, Pimco, is down 1.27% for the year.
  • Dunn Capital Management (one of the best trend followers of all time) is down 11.05%.
  • Winton Capital (one of the most consistent funds in the world) is down 1.97%.
  • The Magic Formula portfolio (a wildly successful value investing methodology that I track) is also down 1.28%.

Down, down, down, down.

On the bright side:

  • The Barclays Hedge Fund Index is up 0.49% for the year.
  • Chesapeake Capital (run by one of the original Turtles) is up 1.08%.

In other words, most of the best traders in the world are down for the year.

And the best result we see from elite traders is +1.08% for three months.

This is the benchmark. If you're beating these numbers, you're amazing, and I'd love to hear about it.

Personally, I believe regular people can beat the market. I don't think it's impossible.

So I've spent several years working on strategies that a normal person can use to beat the market consistently.

How are those strategies doing?

As I tweeted out a few days ago, my robots are doing okay. As I write this, here are my 2018 real-life results*:

  • The USDJPY Hornet is up 7.80% for the year.*
  • The Breakout robots (EURUSD/USDJPY) are up 6.05%.*
  • The GBPUSD Heron is up 3.62%.*
  • And the Fair Value portfolio is up 3.71% (on a hypothetical $6k account).*

[* - these numbers are accurate as of this writing, but they may have changed. To get updated numbers, go here: https://www.scottwelsh.me/performance-tracking/]

Obviously, it's still early and a lot can happen between now and December 31st.

But so far, so good.

Let me know how you're doing and what you're trading.

Hearing about results that beat the market always makes me smile.

See you next week.

To follow my robots' performance, you can do here: https://www.scottwelsh.me/performance-tracking/.

 

The Fair Value web page is here. You can see the Fair Value Course here.

To follow the Heron's performance (as well as Hornet and Breakout) you can go here: https://www.scottwelsh.me/performance-tracking/

Get the Heron Course here.

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

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.

 

How to Reduce Drawdown Without Using a Stoploss

As we talked about last week, winning every series of trades is a marvelous thing.

If we want to be successful, we can't quit.

And nobody quits if we're winning all the time.

Which is why trading systems with no stoplosses are great.

But we know that there's a downside to winning all the time. The downside comes when things go badly.

On one hand, the lack of a stoploss gives our trade the time to recover and end in profit.

On the other hand, the lack of a stoploss also gives our trade the time to move against us and destroy our whole account.

How do we stop that destruction?

Well, we could use a stoploss.

But if we do that, our winning diminishes, our resolve diminishes, and we've lost the one thing that's most attractive about trading this way.

So is there anything else we can do?

Yes.

We could have a time limit.

When we trade without a stoploss, we not only win every series of trades (as long as we don't lose everything, of course), but we win quickly.

Going for a small profit target and not using a stop combines to give us quick success. For example, in my Fair Value system, trades are closed out in profit within 24 hours around 90% of the time.

If that's the case, why not end it there?

Unless it's the Swiss Franc Flash Crash of January, 2015, nothing is going to take our whole account in one day.

When trading without stops, if it's going to go badly it's going to be a long, drawn-out process. The trade will go the wrong way and then level off and then go the wrong way again and on and on. The path to to a margin call is slow and tortuous.

What if we never allow that to happen?

What if we only give our trades a short amount of time to work out? If we get one of our fast winners, then that's great.

If we don't win right away, let's not let anything get out of hand. Let's just cut off the whole process after a certain amount of time has elapsed.

Does that make a difference?

It did for the USDCAD.

Last week, I talked about how a USDCAD trade went into a drawdown for nine months before finally closing out in profit.

That's a long time. And if we used a trade size that was too large, at some point in that nine month journey, we could have lost the account.

What would happen if we only gave our USDCAD trades about a day to work themselves out? What do those numbers look like?

Of course, if we limit the amount of time our trades have to work out, we're going to lose some slow-moving winners. But hopefully it's worth it.

To the results.

If we keep everything the same but limit our trading period to about one full day, not surprisingly, our total profit drops about 40%.

As expected, we lose some winning trades if we limit the time we trade.

But if we keep everything the same but only trade for a day, the max drawdown drops 89%!

By not letting the USDCAD slowly move against us for a long time, we lower drawdown by an extraordinary number.

Is lowering profit by 40% worth having our max drawdown drop 89%? That's something we have to decide.

One more thing.

Using a time exit works best for slow-moving instruments.

For example, the AUDJPY is the exact opposite of slow-moving. If we use the same time exit on AUDJPY, we don't lower drawdown at all. It's almost exactly the same.

Profit gets lower, though. By using a time limit, our profits would actually decrease by 92%. Yikes.

Obviously, a pair like the AUDJPY does best with no limits whatsoever. It needs time and space to be effective.

So keep that in mind.

Each financial instrument has its own personality and each must be treated accordingly.

But if we want the joy of winning all the time and want our drawdown to be much lower, putting a time limit on lethargic currency pairs might be a good option.

It sure seems to be for the USDCAD.

The Joy of Trading Without a Stoploss

Never losing is a beautiful thing.

I know losing is where the learning is and failure is necessary. I know all that.

But losing sucks.

Winning streaks are magnificent, though.

When my tennis students went on 50-match winning streaks, I never sat around and wished for it to end. When my favorite sports teams go on a run, I never root for a loss.

And when my trading partner and I won over 50 trades in a row back in 2010, running my account up 50% in about three months, we never once turned to each other and pined for a good old-fashioned stopout.

I know losing is unavoidably essential.

I still want to avoid it like the plague.

Which is why I look back on that period in 2010 with fondness and joy. What a great time that was.

And do you know the style of trading we were doing?

We were buying things on sale without stoplosses.

We'd wait for a Forex pair to drop into an extreme oversold zone, and then we'd buy it. The "Fair Value" of that currency pair was way above current price, so the chances of that pair going our way for a small gain were very high.

So high, in fact, that we never lost a series of trades for three months. The size of our account shot straight up with no backpedaling whatsoever.

But not every trade could have gone perfectly. What happened when price kept dropping?

Good question.

If price dropped more, we would buy more. And once we got into profit, we got out.

But what if you bought more and it still kept dropping?

Then we waited a little longer and bought even more. And once we got into profit, we got out.

Okay, but what if it still kept dropping?

Well, that's the problem.

Without an iron-clad plan for emergency situations, things can get very ugly.

What does ugly mean?

Ugly is no longer going into REM sleep because you're listening so hard for a target alarm to go off on your computer.

Ugly is seeing a drawdown so uncomfortable that you stop talking to your partner because both of you don't have the words.

Of course, if that scary trade somehow works out (as ours did), the feeling is euphoric. I can still feel the happy weakness in my knees from when that trade closed out.

One one side, when you trade without stoplosses, the winning comes easy and often. There's no system that can match the good times of trading without a stop.

But on the other side, trading without stoplosses can ruin your whole account or take forever to close out.

What's the difference between those two scenarios? Trade size.

If your trade size is large, the winning is amazing but the losing can make you lose everything.

If your trade size is small and reasonable, it won't take your whole account, but it can take forever to get back into profit.

And this is exactly what just happened on a (kind of) recent USDCAD Fair Value trade.

Using the rules of the Fair Value system (you can find that system here), a series of long trades were taken by the robot back in June, 2017.

The trades got into trouble pretty quickly when the USDCAD dropped at a historic rate but then recovered pretty quickly. Using a discretionary "get out of trouble" method, it was possible to have gotten out of those trades quicker and gone back to business-as-usual.

But who really knows how to "get out of trouble" and who wants to? Adding positions to losing trades is the perfect way to lose all our money. Why risk it?

By doing nothing, all we could do is watch the USDCAD trade creep up near our entry--but then it sank back down even worse. And it stayed there for a long time.

Until 3/16/18.

On March 16, the USDCAD shot up and closed out all the trades for a profit. The long journey was over.

Yes, it took a long time to finish, but the account was never in danger (if we stayed with the recommended trade size). And the other currency pairs kept chugging along making money in the interim (if we traded the entire Fair Value portfolio).

You can see the results of the entire Fair Value portfolio (including the USDCAD ordeal) here: https://www.scottwelsh.me/fair-value-traders-page/.

The takeaway is this: trading any system without stoplosses is the best way to make money trading when things are good.

If you never lose--guess what?--your account gets bigger and bigger!

The problem with trading without stops is that a trade size that's too big can put our account in peril. And so can not having a plan for when things go wrong.

A big trade size and panic is a recipe for disaster.

That's the danger.

In tomorrow's Youtube video, we'll talk more about this USDCAD trade and how it could have been handled differently for quicker exiting or more profit.

You can subscribe to my YouTube channel by going here.

Hope to see you there.

The Fair Value web page is here. You can see the Fair Value Course here.

To follow the Heron's performance (as well as Hornet and Breakout) you can go here: https://www.scottwelsh.me/performance-tracking/

Get the Heron Course here.

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

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.