Monday, February 16, 2009

Revising Expectations

This weekend was spent entrenched in the charts. I know that I had a good change in my methodology - a more profitable one. But with that I had to do a couple things. First, was to reconfirm over my "baseline month" that the changes were worth it and valid. I always test my ideas over the same one month segment to see how various changes in stop management, entries, etc all fair out. It gives a nice comparison and you can see if your ideas actually have merit. Second, I needed to revise some of the setups. *Gasp* Right now you are all rolling your eyes and saying to yourselves "This guy is full of shit. he said in his last post he wasn't changing his setups!" Hold up and let me explain!

My old setups bought into stop runs essentially as sell stops were getting hit I would try and ride that wave of orders into the market to profit. That means that all of my setups already had defined swing highs and lows, thus creating the support and resistance points in which I placed my bets. Now, while i'm looking for the same patterns, I am undoubtedly trying to call tops and bottoms here. With that comes two changes. One, you will get stopped out more often. Two, you will get more profit and have better risk : reward when you are right. But this means that we have to redefine our expectations. I flat out won't be hitting 80% win rates or anything close to that. The setups rules needed to be modified to allow me to re-enter if I had called a top or bottom too quickly, got stopped out, only to have the move reestablish itself and allow me in.

The other big change was the removal of one of my setups - the "Untouchable". The big U was problematic for my new entry method because it took moves that had divergent behavior but relied on an indicator to be SO overbought or oversold that the odds it would continue on were worth betting on. Well that worked with my old method because I was jumping into that move once the swing was already established. What it didn't to take into account was the 80% of the time when it flat out failed I would already be in the move with my new entry methods and I would get nailed. So it had to be removed. So what were the results?

Below is the initial baseline using the new entry criteria. This included all the setups (including the Untouchable, my older stop management, and no re-entry allowance).

  • Win Rate: 57.25%
  • Net Profit: $3,362.50
Here is the revised test using all of the changes and the removal of the Untouchable setup. Note the equity curve slope and draw downs compared to the baseline.

  • Win Rate: 58.87%
  • Net Profit: $4,075.00
Conclusions? I was disturbed by the massive draw down at one point through my initial test batch. However, I found out what was causing this (the Untouchable) and was able to correct it. There is a decent upwards sloping equity curve with minimal draw downs and continual growth. But gone are the days of 80-90% win rates. I will lose - a lot. That's part of this methodology. Expect to be checking this blog and seeing me posting up days with much larger losses and down days more often than I ever have. On the flip side I will be making more money that if I was taking those high win rates but unprofitable entries.

The other thing I will be doing starting tomorrow is trading the NQ along side the ES. The NQ is a market that works perfectly with this entry method. In fact, i'm almost ashamed to say its more efficient in its execution and overall profitability than the ES is. The NQ moves in a smoother, less backfilled environment which is perfect for this type of trading. I've done significant testing with this idea and comparing the ES and NQ charts side by side they are usually spitting out tandem entries (in which case I will defer to the ES) but sometimes what one market misses, the other catches and in those situations I will be able to profit where I have been unable to previously.

So we are going to give it a go tomorrow and see how the first week goes. Hopefully it doesn't end in an epic failure but I'm confident that this methodology is more robust and powerful than it ever has been before.


Michael said...

Looks like you've been very thorough, the second chart does looks much better.

Good luck this week, let's see if we can't hit a new equity high this week!

E-Mini Player said...

You're reminding of what I did when I first got into trading the ES; I added the NQ and YM to the mix as well :D But you're right in that the NQ is a smoother index. Best of luck man!

Ziad said...

You seem to be undergoing the same path I did in my development. Initially I tried to go for a high win rate and 1:1 R/R. Later I realized I could be much more profitable going for the lower win rates and higher R/R's. It's much tougher to trade this way psychologically as, like you mentioned, there will more and bigger losing days. But overall it does net you more profits. So if you can condition your mind to withstand some strings of losses and occasionally bigger drawdowns, you could have some great results. After all, it's not a style most traders can trade, and as such it will inherently be more profitable.

Good luck with it.