Trade Ideas Blog

This Strategy’s Winners Are 5x Greater Than Its Losers – Explanation:

Jun 10, 2009

I gave a solid presentation to traders online in a DTI chat room this afternoon.

DTI offers educational services across all instruments but specialize in equities, commodities, and futures. They are lead by the talented Tom Busby and Jeanette Sims.
The format I used involved soliciting requests for favorite chart patterns ahead of my talk so that I could take such examples and model them during my presentation – very off the cuff and impromptu strategy configuration. Most of the time this usually generates sub-par strategies as measured by our backtesting tool, The OddsMaker – not today. Thanks to the group we stumbled onto unusually profitable strategies that I share with you now.
Here was the chart pattern request:
“buying above price consolidation/selling below –
more powerful off daily time frames”
It produced this strategy that caught $DIN in the mid-morning (a beautiful chart):
1 Alert: Running up (intermediate); Filter=2 (Ratio)
11 Filters: Min Price=2 (Dollars) Max Price=200 (Dollars) Max Spread=12 (Pennies) Max Distance from Inside Market=0.1 (%) Min Daily Volume=300,000 (Shares / Day) Min Current Volume=1 (Ratio) Min Average True Range=1 ($) Min Up from the Open=0.05 ($) Min Up from 20 Day SMA=1 (Bars) Min Consolidation=3 (Days) Min Position in Consolidation=100.5 (%)
and these backtest results from The OddsMaker:
The trade plan modeled for this strategy consisted of trading from the open until 3 hours before the close and holding each symbol generated from the strategy until the open 2 days later. A stop loss of $0.30 was consistently used.
The results?
The average winner was 5x the size of the average winner (even though the win rate was 1 out of every 4 alerts). That’s still a good strategy: when I lose, I lose only $0.30, but when I win, I win $1.50. Hand it over.
Note that the daily summary of results which show the date, the day’s P&L total, and the number of trades that day, reveals how the market rewards this strategy more recently than during the first days of the strategy. Viewed as a histogram I might consider being more aggressive with this strategy i.e., with profit targets and number of trades I take from the strategy.
I’ll be keeping an eye on this strategy and may tweet some example alerts. Stay tuned and follow me @TradeIdeas.