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This Simple Trading System Makes 170% A Year

LOREM IPSUM DOLOR SIT AMET

Download the rules to a trading system that makes 170% a year in stocks.

170% trading system

Regular readers of this blog will be aware that I like to create trading systems using Amibroker; a program which allows you to test various investment strategies on historical stock data.

In my opinion, trading systems are extremely valuable because they let you trade without emotion. Today I have come across a strategy that is simple yet incredibly powerful and if you keep reading you will discover the rules to these amazing trading system.

Beating Warren Buffett

beating warren buffettI’m sure you will agree that the Sage of Omaha, Warren Buffett, is one of the greatest investors of all time.

Over the last fifty or so years, Buffett has returned around 20% annually, making him one of the richest men in the world with a total wealth of over $60 billion.

But what if you were able to make much better returns than 20%? What if you could come up with an algorithm that makes 170%, or even more?

With a compounded annual return of 170% you would kick Warren Buffett’s butt. You would destroy Jim Simons, thrash George Soros and wallop Bill Ackman. Starting with just $10,000 you’d have $100 million in six years and a billion in less than 10.

The 170% Per Year Trading System

This trading system has been designed for use on the S&P 500 universe of stocks. It is long only (meaning that we will only buy stocks, never go short) and it’s made up of very simple rules.

It’s just a simple trend following strategy that buys a stock when a quick moving average crosses above a slower moving average. So when we see a stock with a moving average crossover, we will buy it, let the trend run for a profit, then sell as soon as the trend is over.

Using Amibroker I have tested this system on the S&P 500 universe of stocks between 2000 and 2012. As you can see from the results below, this simple strategy has performed incredibly well.

trading system results

Between 2000 and 2012, the trading system produced an annualised return of 172.45% with a drawdown of 14%. That gives it a CAR/MDD of 12.34.

It also has a Sharpe Ratio of 3.91 and a Profit Factor of 9.29. This is a truly remarkable result that has the potential to make you the richest person in the world in just a few years!

incredible trading system results

As you can see from the equity charts and the monthly table of results, this trading system produces amazing returns in the US stock market.

170% trading system

amazing trading system results

Starting with a capital of $10,000 the system has ended up with more than $1.6 billion in just 12 years. At this rate. you will be richer than Buffett in no time. You could even become the very first trillionaire.

So, what exactly are the rules to this system?

[showhide type=”post” more_text=”Click Here To See The Trading System Rules…↓” less_text=”Hide…”]


//Start System Code
SetFormulaName("APRIL FOOLS");
SetOption( "InitialEquity", 10000);
PositionSize = -100;
Buy = Cross(EMA(C,2),EMA(C,5));
Sell = Cross(EMA(C,5),EMA(C,2));
BuyPrice = O;
ClosePrice = O;
//End

Unfortunately, the April Fools trading system is an unrealistic trading strategy.

The trading results and equity curves are real and were produced in Amibroker. However, the system code was designed in such a way that the results cannot be relied upon.

There are at least five major flaws with this system.

1. Curve-fitting

First of all, the trading system has been curve-fit to the existing data. The parameters for the moving average crossover were optimised to find the values that lead to the strongest performance in the test period. If we were to use these parameters going forward, there is a strong chance that they would not perform as well.

2. Future leak

Second, this system actually looks into the future. On line five (above) we have instructed Amibroker to buy a stock when the 2-day EMA crosses over the 5-day EMA. However, this EMA (exponential moving average) is calculated using the close price and Amibroker is actually buying the stock using the open price (line seven). In other words, we are buying the stock before the EMA crossover takes place, knowing that it will happen later on. This is clearly not possible.

amibroker code check future leak

3. Zero commissions

Thirdly, this system uses no commissions or slippage. In real life, it costs money every time you make a trade . You are also not guaranteed to get filled at the price you want, especially for large orders. Having no commission or slippage is not realistic and can make a big difference to simulation results, even more so when trading on short-term timeframes.

4. Survivorship-bias

Fourth, this system suffers from survivorship-bias. The system buys stocks from the S&P 500 universe, however, in this instance we have not included historical constituents or delisted stocks. This means our results are a victim of survivorship-bias.

In real life, businesses go bankrupt, they get taken off the exchange, some merge with other companies. These changes are not always reflected properly in historical databases. Thus, it’s always important to use data that is survivorship-bias free. Such data can be obtained from Norgate Premium Data and easily accessed in the Alpha program.

5. Liquidity

Lastly, the system relies on unrealistic liquidity. When you buy a stock in real life, your position size and entry price will be dictated by how many shares there are available to purchase at the time, also referred to as volume. Normally, you would not want to purchase more than five or ten percent of the total volume as any more would than that would suck up the order book and move the share price not in your favour.  This system has a limit of 50%, meaning, it’s able to buy up half the day’s volume without any movement to the buy price. This is unrealistic.

Amibroker liquidity rule

Running the System Again

Now we know what are the major flaws with this trading system we can fix them up, move the dates forward and run the system again using unbiased out-of-sample data between 2012 and 2016.

Following are the results:

trading system 2 results

April fool trading system 2 results

april fool trading system table of results

Incredibly, the trading system actually made money in the out-of-sample test even though the rules were data mined. However, as expected it achieved nowhere near the same performance level.

The truth is that you will never find a trading system that makes 170% a year. Even though thousands of traders every year are duped into buying one.

So, sorry to build your hopes up with the dream of a 170% per year trading system. But I hope you have at least learnt some things to look out for when building or analysing a trading system.

I know you didn’t fool for it anyway 😉


Comments (12)

Actually I did similar thing today, look at the profit / drawdown table:

https://dl.dropboxusercontent.com/u/9017489/Zrzut%20ekranu%202016-04-01%2010.09.38.png

96% over last 10 years with 30% maxDD.

But of course it has some of the flaws you mentioned

1. Curve fitting: A bit – but believe me – I haven’t run optimization
2. Future leak: No, I’m not aware of any
3. Zero commissions: It’s tested with some commissions, but with no slippage
4. Survivorship-bias. No.
5. Liquidity: Probably uses 200% of liquidity in last year of trading

There’s a big other factor you didn’t mention: testing with 100% allocation for single stock gives very unreliable results.

Have a funny April fools day!

200% liquidity? Sign me up 😉

Udaysinha Ingavale

Good idea.

Hi Joe I like all your posts, always lots of good information

One area I would like you to cover is Database Set-up, this is always glossed over, even by Howard Bandy
Are you able to provide a good UK end of day setup for all UK stocks using Ticker and Name
using separate cagories for Ftse 100, 250,350 Aim, fledgling etc

Take a look at a site: Amibroker UK to see the setup and also the excellent setting up of
information sites like Bloomberg, Reuters, ADVFN linked to each share as it is selected.

Best regards

Martin Hopkins

Hi Martin

That website seems to be a series of screenshots?

I can understand your request as there is not a great deal of information out there about setting up databases, particularly for UK stocks. A couple of years ago I messed around with the data from Reuters but I have to say that it was a bit of a headache and took a lot of organising. That’s one reason why I mostly trade US stocks. The data from Norgate makes it so much easier.
I suppose I could do a post about setting up different databases and watch-lists.

Thanks
Joe

I saw the email and knew it was click bait to show the unrealistic gains. Like how you incorporated April Fool’s. Well played sir. Well Played.

Thanks schwennjr

Haha… Nice one JB! That just made my day ^^

Glad you enjoyed it!

What’s the parameters for fast and slow MA? And what type, SMA or EMA ..?

2-day and 5-day EMA

Mr. Marwood,

Thanks for such an interesting post. A lot of time what helps is to know what is not to be done. This post has helped me understand about two points which i always knew but could not acknowledge. Now, I shall keep in mind the same while developing my system.

Thanks and Regards,
Neha

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