G'day Sinner,
Just looking at the backtest results you did for this system on the H4 EURUSD - The equity curve looks nice overall, but I notice that there can be long periods of loss. The worst of which was from about March 09 through to December 09 where the system slowly lost money the whole time. That's steady losses for 3/4 of a year. How do you feel about that? Was it because the EA was incomplete? Do you expect your live trading to have the same issue? Were you able to identify the market conditions in which the system performs poorly? More importantly, can you do anything about it?
Looking at the charts during that time, price looks to have a fair bit of chop with an upward bias. But if you stop trading when it looks like sideways action you might miss the next big move.
I'm not saying the system is a bad one, when it does make money it seems to make it quickly. I was just curious as to what your tolerance level is. How long is too long for a losing streak? You said the ASX20 trading is an experiment. Considering the EURUSD backtest shows long loss periods, how long would you allow the ASX20 trading to lose before you decided the system isn't working?
I enjoy reading your posts by the way, thanks for sharing.
Hey mate.
Great questions!
The Chaos system is (as I said in the first post of this thread) essentially just an accumulation of a few well known trading ideas like Dr. Elders Triple Screen Trading techniques, fractal breakouts, Elliott Wave momentum shifts, Elder-Ray style trades using the AC oscillator, etc.
All of these techniques have one thing in common: they are all known to traders as LTTF methods. LTTF stands for "Long Term Trend Following". You may have heard the well worn trading phrase before "let your winners run and cut your losers short".
Well that is the goal of all LTTF systems. To provide a set of highly reliable signals which will almost guarantee you money during a strong trend (because all you are trying to do is hop in on the trend). Now, these same signals are probably utterly useless during a period of extended chop.
The EA provided, is just a rudimentary mechanical one, it has no discretion or money management (MM is known to smooth the equity curve considerably). But you can see it still manages to adhere to the phrase "let your winners run and cut your losers short". So we don't really care about the periods of extend chop, because we know that over a large enough set of trades we will eventually run into a trend which will pay off our losing streak and then some.
This is a really important point to understand:
the market is very paradoxical. For any given trade the outcome from our perspective before we place said trade is essentially (although not 100% deterministically) random. But if the market were truly random, trends would almost never occur. Yet, trends occur all the time.
So for all LTTF trades, it is a truly essential part of our trading psychology keep this point in mind. We are trading the market structure. We wish to make money from higher highs and higher lows or lower highs and lower lows. That means standing first in line to hit the bid or offer when everyone else is fading the trend or already entered the trend 100 pips above you using some MA cross or something.
But the fact remains, we are trading the market structure secure in the knowledge that eventually a trend must eventuate from any breakout of consolidation. We will never be late for any trend that develops, we are always first in line. Nobody wants to buy the highest point, it even seems silly when you first think about it. But, think about it some more and you will realise 1 pip higher than the current high is the only confirmed place that a new trend might be developing.
I hope that sort of answers the fundamental question here but I will reply to each of your actual questions now:
That's steady losses for 3/4 of a year. How do you feel about that? Was it because the EA was incomplete? Do you expect your live trading to have the same issue? Were you able to identify the market conditions in which the system performs poorly? More importantly, can you do anything about it?
1. Steady losses after 20% gains, I feel fine with that. I programmed the EA to take what the market structure provides and it did exactly that. For 3/4 of the year, the market was in unfavorable conditions for LTTF trades but the EA only lost ~3000 of the ~9000 it had made. Pretty good work if you ask me!
2. EA is not incomplete, it was just a rudimentary program to run some backtests, there is no way I would trust an MT4 EA to do my job as a trader.
3. RE: live trading. One of Bill Williams core rules is "never trade when the alligator is sleeping", this is a discretionary rule that is hard to plug into the EA but very easy to apply visually when you open your charts. But this is the core rule to keep you out of chop trades so the EA is obviously trading in some cases where I wouldn't. There is no issue about "missing the good trade" as you said because we only ever start trading in the direction of the trend once a swing high or swing low has been established outside a consolidation. i.e. None of the good trades for us are in the consolidation anyway. Please see the Alpari link at the beginning of this thread for more info on using the alligator to time your trades.
4. See above.
5. Yes, you can do something about it: stand aside. I show many live examples in this trade of standing aside until the trend is confirmed.
I was just curious as to what your tolerance level is. How long is too long for a losing streak?
Seriously, great question.
It is worth looking at this PDF for the answer (think I linked it previously in this thread too).
View attachment Trading%20for%20Infinite%20yield--%20Utility%20theory%20and%20you.pdf
You said the ASX20 trading is an experiment. Considering the EURUSD backtest shows long loss periods, how long would you allow the ASX20 trading to lose before you decided the system isn't working?
Well, EURUSD backtest is a single trading instrument. Trading the ASX20 is very different because you are essentially taking on 20 instruments which are not necessarily correlated (although often can be during periods of extreme market strengh or weakness). This actually allows a much better risk profile than what can be gathered from trading a single instrument. As you can see I am holding both longs and shorts against different components of the index, whereas if I was trading just the index itself I would probably have to be long everything. e.g. tomorrow if I wake up to find the SP500 tanked 50 points overnight I might get stopped out of my long trades but the short ones will remain happily intact.
It might be worth looking at this PDF to answer some of your questions in that regard. Trading LTTF it is very often important to spread your trades out across a variety of instruments to achieve a smoother equity curve.
View attachment turtlerules.pdf
I honestly hope this helps and I wasn't just rambling for the last 30 minutes as I typed this post. Please get back to me if you feel unsatisfied, I will try to respond again.