Part 4

In part 1, we discussed factors to be considered when evaluating (and trading) a mechanical trading system. These included Profitability, Trade frequency, drawdowns and more. Email me at Lundish@aol.com, if you would like me to resend it to you.

In part 2, we discussed the very important issue of money management. The issue of volatility and choosing markets. Email me at Lundish@aol.com, if you would like me to resend it to you.

In part 3, we discussed a portfolio of systems and their performance based on Margin plus Max. Drawdown.

Today we continue this great piece from my father, John R. Hill and George Pruitt.

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Part 4

All text below is mine from 2023.

Below is the hypothetical equity curve of trading a basket of popular systems from the 90's. Please read hypothetical disclaimer and note past performance is not necessarily indicative of future results.

Several of these systems have promise today in my opinion.

The graph is the same. Performance is not changing. What is changing is initial capital allocation. This is an all important calculation. Allocate too little and you could be "shaken out" of a good system before a potential capital appreciation run. Allocate too much and you run the risk of capital MIS-allocation. Using money to trade that could be used better elsewhere.

Note that two systems have drawdowns greater than 100%. Further, our stance is that most traders / investors won't sit through a drawdown over 25%. This eliminates another five systems. Leaving us with three.

So which system(s) do we choose. One thought is to divide the percent return by percent max drawdown. This way, Turnkey has a number of 11, Gary Smith # 2 is 6. And, Gary Smith #1 is 4.

One final note on capital allocation. If you believe, as we do, that will stop trading a (potentially) good system on a 25% drawdown, then use 4 times maximum historical drawdown as the starting capital requirement.

Do you own research. System vendors in their quest to get clients will try to boost their percent returns by allocating as little as possible to the system. After all a 100% return is better than 25%. Not if the drawdown is also 100%.

Next week I will wrap up this series with a description of all these systems; some "logical conclusions" and characteristics of a "good" system.

The "99 Percenter".

No, I'm not talking about wealth. Or course, this pattern could produce it - and past performance is not necessarily indicative of future results.

The "99 %er" is a pattern which shows a complete reversal of sentiment right from the open of the day.

Note the 2 days marked "A". Both are bars of near complete weakness. High open and low close. The next day starts with a strong open. Ideally above the first bar's midpoint or even it's high. This bar continues up showing a reversal of sentiment. And, My father would say there is a "99 percent chance it continues". Again past performance ... The first instance had immediate follow thru. The second, took a few bars congestion before continuing up. Read more of my father's trading tactics in his two books here.

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My father’s books on FuturesTruth.com

Book 1

https://store.payloadz.com/details/1049573-ebooks-business-and-money-scientific-interpretation-of-bar-charts-by-john-hill.html

Book 2

https://store.payloadz.com/details/2027107-ebooks-business-and-money-stock-commodity-market-trend-trading-by-advanced-technical-analysis-by-john-hill.html

For education purposes only. You can lose money trading.

All performance results are hypothetical. 

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. STAFFORD TRADING HAS HAD NO EXPERIENCE IN TRADING ACTUAL ACCOUNTS ON THIS SYSTEM. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE HYPOTHETICAL PERFORMANCE RESULTS, CUSTOMERS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THESE HYPOTHETICAL PERFORMANCE RESULTS.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS