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Monday, June 21, 2021

Automated Trading Strategies: Futures Trading Is A Dark And Scary Forest


Gustave Doré’s illustration to Orlando Furioso: a knight and his men see a knight and lady approach in the forest

I recently wrote a post titled: We Are Treasure Hunters Searching For The Holy Grail Of Automated Trade Strategy. I asked readers to “join us in the hunt for the holy grail in the dark and scary forest”. Moments later I received an email from a subscriber that seemed distressed. He was upset because he felt we were encouraging people to invest in automated trading strategies that were based on simulated data. He didn’t feel our assumptions were correct and seemed to question our motives. So I want to use this post to be clear about our goals. I also want to tell you a bit more about my personal background and what we envision for this newsletter.

Our goal:

We are hunting for the “holy grail of trade strategy” and we define that strategy as having the following performance:

  • Profit factor: greater than 3
  • Annual draw-down: less than 3%
  • Annual return (Return on Max Drawdown): greater than 500%
  • Minimum daily net profit: -$1,000
  • Avg Daily profit: greater than $1,000
  • # of Trades: less than 5,000 trades annually

Where do we stand today?

We have 22 strategies listed so far per the chart below and we try to post at least one strategy per month. 

We haven’t found the holy grail yet, but we’re getting close:

As you can see Strategy 18 is our rising star. It has 5 out of 6 of our criteria and a profit factor of 6.74, which means that it made 674% more in gross profit than gross loss last year. (members click here for a description of Strategy 18)

This is one of the primary objectives of Automated Trading Strategies: to find the holy grail of trade strategy. Our subscription fuels that research and we share all trade strategies that come out of this research with our members. To be clear: our paid subscription is specifically for those that want to share in the product of our research.

You don’t need to invest real dollars in our strategies to join the hunt

We want to encourage people to join us on the hunt for the holy grail of trade strategy. That said, and this is very important, you don’t need to invest real dollars in our strategies to join the hunt. You don’t even have to subscribe to our newsletter to join the hunt. 

We are targeting three groups of people with this newsletter:

  • Novice or New trader — Someone interested in trading
  • Seasoned Trader — Seasoned trader looking for an edge in a new strategy; automated or not
  • Automated Trading Strategy Hunter — Looking for high performing automated trading strategies and research specifically aimed at increasing the performance of trading strategies in general.

Within these groups, there are those that want to use our strategies live and there are those that don’t.

This section is a must read for those that want to use our strategies live.

We welcome and encourage all three groups to use our strategies, but it is important to keep the following things in mind, especially before going live. We are speaking to the novice or new trader, the seasoned trader and the automated trading strategy hunter:

  1. If you can’t afford to lose your full investment, don’t trade — not just our strategies, but in general. Automated trading is specifically for people that can afford to lose the full investment. At a minimum you’re going to need the annual draw-down on net profitability to get started. In other words, if you lose this money, it’s not going to result in a change in lifestyle. I have followers that are constantly on the lookout for alpha. Their threshold is low due to low/negative rates on fixed income products. These are the same people that drop $25,000 on doge and then sell it when the price pops to clear $4 million. I personally gave away over 50,000 doge on Medium (when it was trading for $.0000005) so this is a real phenomenon.
  2. Don’t ever go live on any strategy (ours or anyone else’s) without testing it first. We’re giving you a map, but you need to vet it out. Go on the trail yourself, GoogleMap it, think about how much food/drink you’ll need along the way, what kind of supplies — develop a game plan. Even then, the weather (market) may change on the day of the planned hunt, so nothing is guaranteed (more on this later).
  3. There are trading costs that are not included in our published stats, i.e. broker commissions, data costs, slippage, platform costs, research, internet, equipment, taxes. These costs depend on the trader/asset so you should think about what the cost of each is to you and what impact that has on net income. This is why you want a strategy with a profit factor (ratio of gross profit over gross loss) greater than 1. This is also why we report net profit per trade — all of these costs can be calculated at the per trade level. 

I’ve said this before, but it makes sense to repeat myself here, we are day traders, not coders or financial engineers. We’re a bunch of old day traders with little technological experience. We like to drink and talk about the markets on Friday afternoon. I don’t personally trade any of our strategies with real dollars, only simulated live. As a day trader, I make 1–2 live trades per day with a 3/5 to 1 risk reward ratio. And, I’ll continue this until I find an automated strategy that offers the same risk profile. 

Trading is hard

One common question we get is, ‘if I don’t know how to trade, can I still trade your strategies?’ Before I tell you the answer, I want to tell you about one of my favorite shows — Alone. 

Alone is a reality TV show about a group of people that compete to see who can survive in the wilderness alone for the longest period of time. The winner gets $1 million. It always amazes me when contestants show up on Day 1 with absolutely no knowledge of basic survival skills. But every season there’s the idiot that could barely make it past one night. There’s also the guy/gal that hunts for a living, studies bush-craft, is a religious fan of the show and has already developed a daily game plan based on the success of winners in past seasons. Rarely is his/her motivation about money; it’s about the psychological challenge, the love of the hunt.

Trading is the same way. It’s hard and you have to be prepared. You have to love the markets. You have to submit to the trend and create a game plan for defeating the dragon (your ego). It isn’t about the money; it’s about the psychological challenge, the love of the hunt and a fascination with market structure. So I would say using our strategies to trade if you don’t know how to trade is only preparing yourself to be eaten. Otherwise, you’re the idiot that signed up for a survival show that doesn’t know how to survive.

And, what’s nice about trading is that if you’re good, the market will provide — there’s no need to sign up for a contest.

Love at first sight

Personally, I’m in love with trading — I’ve been hooked ever since we first met. I try to convert friends and family, especially those with with kids and grand kids (simulated trading is basically a video game and kids love video games). Once you start making money in a simulated environment there are several companies that will fund you after passing a test — just do a search for funded trader programs

While trading in a simulated environment is akin to playing video games (you haven’t really risked anything but time), it can help to hone your skill-set to a point that you go on autopilot when trading live. It takes a lot of practice to learn something at the subconscious level. Indeed, it is said that it takes 10,000 hours of trading to make money.

As a day trader myself, I can attest to the hours required to learn how to trade. I’ve been trading for many years. I started as an associate working for a major investment bank. My job was to get prices for exotic currencies with no market so it was more about relationships than market knowledge. 

I worked on the bank’s trading floor. This was when institutional traders played poker and drank beer at lunch; they kept a 25 year-old bottle of Glenfarclas under the desk and a bottle of 222s in the drawer. They were the wildest people in the bank and they always got free stuff from brokers. One weekend a broker sponsored a “trader’s only” weekend at the Ritz. I had the time of my life. 

We all wanted to be the head trader. Bank leaders loved them. Risk managers feared them. They were unfettered, unruly, untouchable and I wanted nothing more than to be one of them.

I was a junior trader on the FX desk at the time. I didn’t know it, but I had one of the best mentors in the business. Back then, we had a squawk box that connected us to other traders, but sites like were just getting off the ground and traders were just starting to realize the implications that came along with financial technology. This was about the same time that banks started bringing in quant savants and financial engineers to create automated strategies. Traders knew that everything was about to change. And it did. Some traders stepped out on their own and lost it all. Some made fortunes.

What did I do?

This is my story

I opened an account with $10,000 and lost it all in nine days. I had no one to complain to, no one to blame. I could have blamed my mentor for laughing at me when it happened, but that’s what he was supposed to do. I was the only one to blame.

$10,000 was a lot of money for me in those days. I entered into a deep depression. Within days of entering the dark and scary forest I’d been eaten. A feral dragon came out of nowhere and devoured me head first. I tried to get away, but there was no reasoning with the creature — I was standing in some sort of emotional quicksand. (It seems obvious now, but I was the dragon)

This is when I decided to do two things:

  1. Develop an impenetrable risk management plan for day trades
  2. Create automated trading strategies

I needed something that would take the emotion out of trading. I needed something that would help me to slay the dragon — better yet, I needed something that would help me to avoid the dragon altogether. And so I began my own little hero’s journey. I haven’t stopped. Along the way, I found others. There are many others.

We’ve all been eaten.

We’ve all sacrificed.

We’ve all suffered.

So I understand when traders, especially those with experience, get mad when they feel as though other traders aren’t explaining the risks of trading to newbies with adequacy. Some traders are just selfish and want to keep the profession to themselves, but others are genuinely concerned. When we bring people into the dark and scary forest they can get eaten and we don’t want to be responsible for that. That said, for some hardheaded idiots (like myself) being eaten is part of the initiation.

The goal of any legitimate mentor isn’t really to teach you how to trade, it’s to teach you how to minimize the risk of being eaten. The more analytical you are, the harder it is to slay the dragon. Good teachers measure their success by the number of students that are still alive at the end of the day. While there are no guarantees, there will always be another trading day. So, the first question you need to ask your mentor is: What’s your risk management plan?

There are no guarantees

There is no guarantee that any strategy (simulated or live) will produce the same result in the future. We know and believe this. But, we also believe our requirements for the holy grail of trade strategy will point us toward a strategy with a true edge in the market. Furthermore, we believe that edge will be large enough to make up for any deviation that’s not modeled out in the simulation.

What’s Next:

  1. All Subscribers: Next Strategy Update/Review coming up on July 6
  2. Members: We are currently focusing on strategies involving pattern recognition. We would like to combine pattern recognition with reversion to the mean theory (Strategies 16–22 in particular) to see if an opportunity exists to increase net profitability.
  3. On 7/8/2021 our subscription price will be going up. You can read more about that here.
  4. Research Requests For Members: Thanks again for all the great questions and our apologies on the delayed response for some. Current research requests include:
  • Do our strategies work on cryptocurrencies (this is a common question)?
  • Are certain trading days better for automated strategies (earnings season, economic data releases, FOMC announcements, triple witching hour). If so, can we take advantage of these days in the future? 
  • What can market physics/auction mechanics tell us about trading strategy?
  • Can we develop a strategy that does better in the lunchtime lull?
  • Can we develop a strategy that does better during morning volatility?
  • Can we combine lunchtime lull and and morning volatility strategies into one?

If you have any questions, please reach out to us directly at

Subscribe now

To read more of our posts on Automated Trading Strategies click here.

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