#STUDY: Data Driven Trade Idea

During the market doldrums I uncorked an idea that I had a while back but was unable to trade successfully.  I had shown myself that it was a profitable system but I couldn’t internalize it and become a profitable trader using it.  I still firmly believed there was an edge and decided to investigate once again.  

I began with questioning why I was having difficulties trading this system to begin with.  Upon inspection I realized that I was overly optimistic as to how many stocks I could track.  My first step in the process was to reduce the numbers of stocks observed to a more manageable number through stricter filters and focus on just four.

The next step was to address where I was having issues with trade management.  I realized that I was using too much size for my experience level and opted to trade small over a sample of approximately twenty trades and document a number of price action metrics that occurred during the duration of the trade.

Trade Sample.

Trade Sample

From this I had the following results.

Metrics

Of note is that after 18 trades, this system as implemented made 0 dollars.  Literally 0 dollars.  I was stopped out for maximum loss on 4 of these trades.  50% of the sample hit the low of the day.

The question I wanted to answer is what adjustments could be made for this system to be profitable.  As I’m already trading small, I dismissed reducing risk through positions size as an option.  Only 4 of 18 were stopped out.  With only 20% of the sample size being stopped out I dismissed moving this up — for now — particularly since moving the stop up to the low of day would increase my being stopped out 100% due to 9 of 18 clipping the low of the day. 

Given that I was comfortable with the current trade risk and stop level I looked at selling into strength.  While top ticking is a foolish pursuit, since this system is intraday it’s the only metric I have.  Using the top tick of the day I determined the price differential from my entry.  This averaged out to $1.52.  I adjusted prices from $1.52 downward to a level I concluded didn’t choke off the trade potential too soon yet also captured profit.  Calculating this I accepted that a $1 trailing stop would capture an acceptable profit to make this system viable.

From Marginal to Profitable

With this information I will pursue another sample of trades, collect further data, and use these metrics to refine this system further, making one adjustment at a time.