When a trading strategy remains in a sideways or losing trend for several months, many traders feel discouraged and discard it, thinking it has failed forever.

But is that the best decision?

What if the same strategy works again a few months later and yields excellent profits?

In this video, we explain what to do and what NOT to do when our strategies are in a losing or sideways trend for an extended period of time.

Using the example of a Gasoline strategy that remained in a loss state for almost two years, we've analyzed 3 different scenarios and compared their profits and final drawdown values:
-Case 1: Strategy always active
-Case 2: Strategy discarded after 6 consecutive months in loss/sideways
-Case 3: Strategy paused after 6 consecutive months in loss/sideways and reactivated at the first equity peak

If you're already trading live, you'll find this video very interesting, especially if you've already faced such situations.

If you're still taking your first steps in the world of systematic trading, we still recommend that you watch this video carefully, as it will help you understand the importance of precise trading rules and teach you how to better manage losses by avoiding potentially costly mistakes.

Enjoy the video :-)

Transcription

Introduction

Hey, everyone, welcome back to this brand new video.

Today we’re going to be talking about what we should do when our equities move sideways for a period of time.

In particular we’re going to be talking about what we shouldn’t do.

One of the coaches from Unger Academy, and we’re going to be seeing how to deal with this situation, using a strategy that has been live since 2017.

I want to show you this because it will help us understand what to do before we trade in the markets and also to avoid some costly mistakes.

Defining a work plan

Alright, so, let's go right into the operational work plan. That plan that we all should have set up from the very beginning and that we’ll follow when running our systems.

In this video, we aren’t going to get into how to evaluate the performance of a strategy because there are so many aspects to keep in mind.

But, I’m sure you’ll agree with me when I say that it’s definitely essential to define precise rules for the decisions to be made.

What rules are we talking about?

Well, just to give a few examples: rules that determine whether a strategy can be considered valid or not, or rules that select within our portfolio which strategies we should choose.

Or even rules that decide whether a strategy should be paused, so to speak, and many many more.

The list could be really long, but what all these rules have in common is that they need to be defined unambiguously and from the very beginning.

I emphasize the words “very beginning” because, once we are in the market, it will be much more difficult to set up a plan because we’ll be distracted by the trend of the strategies and, last but not least, we’ll have to deal with the emotional component that will come into play.

BIAS strategy on Gasoline live since 2017

Now, I want to show you the strategy that I had mentioned.

It’s a bias strategy that was developed in 2017 on the Gasoline future, the RBOB.

Let's take a look at the code together. The first thing that stands out is the simplicity of the strategy; in fact, it consists of very few rules.

We see the entry days of the long side, the third session of the week at 5 am. The long position is then closed on Friday at the end of the session.

On the short side, on the other hand, we’ll enter immediately at the start of the week, that is, on Sunday evening at 6:15 p.m. exchange time, and then close the position one session later, at 5 p.m., so at the end of the session.

We note that we have a pattern on the long side and no pattern on the short side.

Since this is a commodity, we would expect a mirror-image trend, so symmetrical for the two sides, long and short.

Also Stop and Profit were not set symmetrically, but are included on the long side and not included on the short side.

This is possible because this is a bias strategy. So we’ll be trading on the long side and short side at 2 separate times of the week, so we could assume an asymmetric trend even though it’s a commodity.

Equity in different periods

Here I wanted to apply the strategy to 4 different charts. We are of course always looking at the RBOB Gasoline with a 15-minute time frame and the strategy is always the same. What varies is the historical time period that we consider.

In this top chart, we start with data from 2010 to the end of 2017.

So here we have the period of development of the strategy.

We see that the equity curve grows regularly, but as we know, we always aim for a such a result while developing a strategy.

In this second chart, instead, the data include an early Out-of-Sample period.

As you can see, the data end at the end of 2019, so 2018 and 2019 are 2 years that the strategy went live on the market. We can see that it’s also done well. It’s continued to do so more or less, with a few small glitches, but let's say it’s held its metrics.

Instead, in this third chart we can see the strategy with data through 2021, so we’ve added an additional 2 years of Out of Sample.

Let’s now open our equity curve chart. This is where the problems start. Because if the strategy did very well up to the end of 2019, I would say, from 2019 onward, so in 2020 and 2021, the strategy moved sideways, even lost a little bit, so it definitely seems to have lost the momentum that it did have in all the previous years.

So the temptation is strong to decide to eliminate the system and no longer include it in our portfolio.

Let's just say this curve might suggest that.

But let's ask the question: what was the rationale behind this strategy? In this case, it was a Bias with a filter applied only to the long side, but actually if we remove the filter it's a pure Bias strategy.

Now let's just look at this last past time period. How would have the system behaved without all of the other conditions, so if we looked only at the bias engine?

Let’s load our Bias and see how the Bias actually went sideways, and after all this is logical, since our system had only added a pattern to this Bias.

3 different scenarios based on our plan

So, the question is: to trade or not to trade this strategy? That is, keep it or throw it away? Let's do the math.

In this little table, I listed the monthly Profit and Loss of the strategy. We’ll find them in this column, where each row represents the results of one month.

Next, we find the NAV of our equity, the peak reached by our results, and the drawdown from the peak that we reached (if applicable of course).

Let's focus particularly on this last column. Here I wanted to count how many months in a row our strategy failed to record new highs.

We can see that from January 2018, because this table obviously starts with the beginning of the Out of Sample period, to May 2020, the strategy performed well and consistently recorded new highs.

We had also seen that in the equity lines as well.

However, starting in May 2020, the strategy began to move sideways and failed to record new highs for many months.

Here on this page I’ve reported the results of the strategy, but I wanted to distinguish 3 different cases based on the operational decisions that we could have made.

First, the yellow highlighted line includes the Out of Sample results up to April 2020, which aren’t taken into consideration because up to then we had seen that the strategy would have performed well and so we certainly wouldn’t have decided to throw it away.

From here onwards let’s focus on what I called the "Always On" case.

In this case, the strategy would have always remained at market, namely, we would have never disabled it, and here we see the results represented by a gray line on the chart.

Now, let’s turn to case 1. This is the case where, perhaps out of desperation, after 6 months of performing sideways and even after a loss of performance, we had decided to disable the strategy by literally throwing it away.

So, from here on, it would have no longer generated results, and this blue line, that we see here, would have obviously remained stationary at the level of the October 2020 results.

However, in this column, case 2, we are in a situation where we have given ourselves rules to work by.

Imagine that, similar to Case 1, we waited 6 months of consecutive drawdowns, without recording any new highs in our equity curve, before stopping the strategy.

In this case, however, we're talking about a temporary suspension of the strategy. We didn’t throw it away completely, we simply benched it.

And until when?

Again, it's about giving yourself rules.

Suppose the rule for reactivating the strategy is to see a new high in equity.

So, if we look again at the chart we saw earlier, we can see that the strategy would have finally reached a peak of equity again in March 2022, and then, starting in April, we could have reactivated it to get positive results (this is obviously a coincidence).

Here I’ve tried to summarize the results of the 3 different situations in this chart above. So, the Out of Sample in the "Always On" case would have yielded a profit of $100,000 with a maximum drawdown of about $32,000.

Case 1 would have generated a profit of $55,000, with a maximum drawdown of about $20,000.

Case 2, which is the compromise between the two in this case, would have generated a profit of $80,000 and a maximum drawdown of $20,000.

I’d like to point out that even if the strategy never had to recover, which of course was possible after this sideways period, the comparison with case 1 would have shown a parity situation, so we wouldn’t have lost anything compared to the case where we had decided to discard our strategy.

Final results and correct way of operating

Well, now we just have to reveal the last card, let's say, that we had kept covered, namely, the equity of the curve to date.

Here it is. We can see that after this sideways period, the strategy has come back strongly well and generated results that have never been reached during the whole historical time period.

I mean, look at that, we see a truly explosive 2022.

So, the main mistake was that there was no clear and unambiguous plan put in place before going live, but let's say, the decision was made to arbitrarily eliminate a strategy only after it had performed poorly.

On the other hand, although in hindsight we would have gained, it would also have been a mistake to let our strategy run without ever shutting it down, precisely because it had been sideways for many months.

The correct course of action would have been the following.

First, set up a plan with clear rules.

Going back to our example, a necessary condition for the strategy to go live might be that it has experienced an increase in equity in the past 6 months.

2, strictly follow the plan we’ve laid out and leave the strategy on the bench pending a possible recovery if the necessary conditions are not met.

So, the strategy isn’t eliminated, but it’s kept on standby.

Then, if the strategy responds well, as it did in this case, we would have put it back into the live strategy portfolio.

So, the question is, how do you create a work plan?

There are endless ways to do this, but making decisions on a whim is certainly not a good place to start.

When we talk about how we choose strategies for our portfolio, one of the things that we do at the Unger Academy is use a software called Titan, and one of the things it does is to evaluate the performance of our systems and indicate which systems we should trade and with what size, based on our capitalization and the risk profile that we’ve established.

Conclusion

Well guys, we’ve seen today how to deal with performance deterioration and what mistakes to avoid (mistakes that can cost dearly).

In the case of the strategy shown and still live, failing to follow a plan would have resulted in a loss of profits and therefore a loss of tens of thousands of dollars.

If there is anyone among you interested in the world of systematic trading, I recommend that you go and click on the link in the description of this video.

From there you can go and watch a video by Andrea Unger, go and get our best-selling book by just covering the shipping costs, or even book a free call with a member of our team.

If you enjoyed the video, please leave us a "Like", subscribe to our channel and click on the notification bell to stay updated on the release of all our new content.

Thank you so much for watching and your attention, I will see you next time, bye-bye!

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