Removing Trades to Add Confidence
By Dave Mabe
Removing the poor sets of trades from your strategy has obvious immediate benefits.
On day one, your strategy is better - fewer trades, but more profitable overall, with more profit per trade.
But even that's not the biggest benefit of this approach.
Look at the equity curve of this strategy:
At first glance, it looks great!
But look at the drawdown from late last year.
A drawdown like that will be the reason you can't trade this strategy with significant size.
The fear that the drawdown will occur again in the future (it's already happened once).
OK, but let's put this strategy through the Strategy Cruncher.
Here's a rule it presented to me in about 20 seconds:
This is the same strategy as above, but the Strategy Cruncher is telling me that when I apply filter XXX (redacted, but email me if you want the details), I end up with the trades in the green line, skipping the trades in the red line.
The original strategy had 4,056 trades over this period.
After applying this rule, I get 2,800 trades in the green line.
Almost a third of the trades were losing money!
OK, but are we giving up total profit? Let's look.
Here are the two versions plotted on the same chart.
Not that different - until you look closer and understand what's happening here.
The strategy achieves the same total profit - with just 2/3 of the trades!
But that's not the biggest win here.
The Profit Factor increased from 1.47 to 1.80.
But even that's not the biggest win here.
The Win Rate increased from 51 to 52%.
But even all that combined is NOT the biggest win here.
By far, the biggest benefit of this approach is your path to confidence with this strategy.
Look again at the most recent chart.
It's subtle, but compare the drawdowns.
The max drawdown went from 30% to 10%.
That's huge, but still kind of hard to imagine.
Look at the equity curve and imagine what it would be like to trade each of these versions.
This is what I mean when I say you're closer than you think...
-Dave
P.S. Are you in a drawdown and ready to quit? Join the other traders who reversed their drawdowns and are printing money with MabeKit. Get Instant Access