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.

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.