September 4, 2022: Trading lesson (System 7)

System 7 (beta)

This strategy is proprietary and confidential. It is similar to the bread and butter, which shares common entry pivots in some situations. Unlike the bread and butter it can be used in reversals in addition to pullbacks. Its use of an indicator makes it different. I traded it years ago on a one-minute crude oil chart, but found the timeframe was too small in order to quickly calculate position size and execute efficiently. The one-minute TF is also quite demanding on one's concentration and can contribute to mental fatigue.

Since then, I have not used it. I will post some setups in the Watch List file on a proof-of-concept basis. These are not officially sanctioned by the service and will not appear on the Focus List, as this system is in the beta test stage. Trade them at your own risk.

I am particularly impressed with this setup in the intraday futures market. Using a 1.4:1 reward-to-risk, it has a good win rate and good profit factor on the M3 (three minute) TF when moving the s/l up to breakeven when price is +1R in profit.

This TF also allows one the time needed to calculate position size on the fly and execute comfortably. I avoid using the M5 TF because the M3 provides 67% more bars per hour and 67% more setups per day without having the noise prevalent in some smaller TFs. For someone like myself who does not like to day trade more than two hours per morning, the M3 maximizes my time.

Below are all signal bars using System 7 since July 2021. The "W" is a winning trade of 1:1 r:r and "L" is for a losing trade. Ten wins and one loss. On the second chart I omitted the 20 ema, so it may be difficult to determine whether some of these are longs or shorts. I do not expect this high win rate to continue and neither should you.

The Formula

Long-time subscribers know that I have always wanted to develop an income model, a system that could consistently deliver singles and a few doubles with an objective of 4R/month. This would require the following:

Frequency (monthly): 12
Win rate (1:1 reward:risk): 67%
Winners: 8
Losers: 4
Net winners: 4

Monthly R-multiple: 4R
R: 1%
Annual profit: 48% (uncompounded)
Annual profit: 60% (compounded monthly)
Probability of 15% drawdown over 100,000 trades (Monte Carlo simulation): <1%

Monthly R-multiple: 4R
R: 1.5%
Annual profit: 72% (uncompounded)
Annual profit: 101% (compounded monthly)
Probability of 15% drawdown over 100,000 trades (Monte Carlo simulation): 49%

Forward test

The following is a forward test run in '12-'13 using System R over a universe of about 30 tradables, mainly commodities. This is the type of smooth equity curve that is the goal here.

Conclusion: This formula appears to be a low-risk method of achieving an outstanding "income-like" return. Up to this point, the challenge has not been to locate an edge. The challenge has been to find 12 trades per month. System 7 will be used to see if this is possible.

Kevin Marder