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A Better Way to Trade in 2021 & How I Develop Algorithmic Trading System Portfolios

A Better Way to Trade in 2021

Managing risk is the best way to trade

Most traders confuse managing risk with a high percentage of winning trades.

One of the things I don't like to do is try to be perfect in my trading.

I know this might come as suprise and counter intuitive!

Its one way to chase the wind and make too many decisions, flip flopping from one strategy or market to another at the wrong time.

I'm sure you know what I mean.

Any given strategy can have a 1-2 year losing period. Trying to avoid this or jumping off normal drawdowns to a strategy at an equity peak that then goes into a drawdown can be detrimental!

Another thing I like are strategies with small stops that let profits run. This might mean most of your trades are losers.

You won't catch me trying to win 90% of the time. Coming from an academic background, you are trained to "get it right" 80-90% of the time. The mindset for trading is different.

I prefer 30-50% winners with strategies that hit home runs as this is a better way to manage risk in my opinion.

We highlight this in our 25K-50K Portfolio.

In our base 25K-50K Portfolio, 5 strategies are down slighly the last 12 months while 5 strategies are up the last 12 months. This is by design.

I would rather jump from an equity peak to a strategy in a pullback than to jump out of drawdowns into equity peaks.

When I put the portfolio together, I want a combination. I want strategies I anticipate will work in the current market environment with some strategies in a drawdown and some strategies in a runup.

Additionally, portfolios are designed to have a diversity of exit strategies and entry techniques in the portfolios.

I anticipate a Commodity Bull market in 2021 but even if I am wrong the strategies I have chosen can take short trades and can do well in Bear markets.

The 25K-50K Portfolio includes 5 additional strategies through today.

We highlight the 25K-50K Portfolio go over the latest market outlook as we welcome the 2021 Trading Year.

What to Trade in 2021

We have a list of seven portfolio setups that we like for 2021. The Portfolio Calculator has been updated with the latest results through December 31.

Portfolio Calculator

This week, we continue to highlight one of the strongest portfolios in 2020 The 25K-50K Portfolio. While it had a losing December, the results were consistent throughout 2020. We had one challenging month with NightTrader in October. NightTrader has bounced back and we only made one change to this portfolio as we roll into January. The only change going into 2021, is adding a profit target to Cobra III E-mini Nasdaq.

25K-50K Portfolio Special Offer

The 25K-50K Portfolio is a low frequency trading systems portfolio with a good balance of strategies in the Stock Indexes, Soybeans, Gold, and Crude Oil. The five bonus strategies for the annual subscription include one strategy for each of the five markets: Natural Gas, Soybeans, Gold, Crude Oil, and E-mini S&P.

The special offer to subscribe to the 25K-50K Portfolio (Annual Subscription) with the 5 bonus strategies is good through Monday, January 4, 2021.

We will continue to highlight our Seven Portfolios for 2021 throughout the month of January.

Complete List of 2021 Portfolios (All Seven)

 

Trading Psychology
Frustration and Optimism Are Good

Markets have the tendency to change on the month, quarter, and year based on my observations. Most of the negative months in the Portfolio Calculator that I have experienced are usually "one off" months where we see quick changes in the new month and a snap back to profitability. Sometimes it extends beyond one month.

While the Georgia run off is next week, and there is no absolute certainty the market will change for sure on January 4, we know that real institutional accumulation and distribution will occur at some point and we will have some real trends come into the market.

I have seen strong trends in January's after the holidays, and more so the last few years. Q1 can be strong with these types of trends.

So while I am frustrated about the end of 2020 and the pandemic in general, I am also very optimistic about 2021.

As a trader, I have learned that holding Frustration and Optimism together is a good place to be.

If you hang on to Frustration, your Pessimism will take you out of the game.

While traders may argue, optimism won't move the market in your favor - you would be correct! However, Frustration and Pessimism will kill your ability to see new opportunities in the market and your ability to take action.

Too much optimism isn't good either. Traders need to maintain a balanced mindset in their trading and welcome skepticism. Unchecked Optimism will lead to Greed and Greed will lead to an aggressive increase in position sizing and leverage (this is what the bulls are doing now).

Greed can take a profitable strategy and turn it into a loser fast!

Three Reasons for my Optimism in 2021

While I hold both Frustration and Pessimism together for balance. Three of my reasons to be optimistic about my active trading approach in 2021 are:

  • January and Q1 in general has the tendency to be have strong trends. We have seen institutional traders take action in January. As retail traders, we want to ride these big money trends.
  • Cycles change on a monthly, quarterly, and yearly basis. I have seen this happen many times in my trading career.
  • A 2021 Commodity Bull Market. Soybeans and Corn ended at six and half year highs on December 31 and Orange Juice had its first up year in a long time. Crude Oil ended at $48, $89 higher than its low of -$41. Did the demand come back that quickly or has inflation begun? Many of our portfolios are setup to take advantage of strong commodity Bull markets with strategies in Grains, Energies, and Metals.

The US Dollar has dropped dramatically against other fiat currencies and Bitcoin has rallied to 31,000+.

The money printing at the Federal Reserve has devalued the US Dollar. This will eventually lead to inflation.

While asset prices have sky rocketed since the end of the financial crisis in 2009, (thanks to an accomodative Federal Reserve), cost of goods and wages have been relatively stagnant for a while. Its been a glorious time for asset holders who have seen massive appreciation in real estate, stocks, and other assets. 

Other assets such as sports franchises have been one of the best investments over the last 20-30 years. Jerry Jones paid $150 million for the Dallas Cowboys in 1988. 32 years later, it is worth $5 Billion.

Imagine a cycle where the cost of goods begins to rise.

Inflationary cycles are normal and can't be contained forever. While none of us wants to pay more as a consumer, as a trader we can take advantage of inflationary cycles and commodity bull markets.

Welcome to 2021 trading. Here is what we are looking at. Going over the 25K portfolio, last day of the special offer to include the bonuses. I want to talk about these strategies. I want to keep in mind that we are realistic in our trading and that any given strategy can go through a one to two-year sideways period, and why we are selecting this multi-trading system set-up.

So this is Cobra Crude. It took a huge dip in 2020 and now it's kind of in a bullish trend, -420 the last 12 months. We'll go over the last 12 months of these strategies and show you what I'm talking about. I like this for 2021 based on the market conditions. It went sideways. One of the theories in trading is that you want trade a combination of strategies that are 1.) at equity peaks and 2.) run-ups, and you want trade strategies that are currently in drawdowns or sideways that have done well in the past.

So, if something's in a drawdown or sideways, but it's done well in the past, it can be a good time to get in. Oftentimes, when something's at an equity peak, it can then go through a drawdown, or it can continue. Either case, a drawdown can continue, a sideways can continue. But there are cycles in the market. And I want to show you what we're talking about.

Cobra CT III. -1962.50. Here it is. Pretty sideways equity curve. Gap continuation 2020. We came up with this version in March. And this is what it's done. It's switched down the last 12 months if you backtest it 12 months. 18,585. That's huge. Trading one contract of an E-mini 4,245 drawdown. These numbers are with slippage and commission. So, nice 18,585 profit to balance out these two sideways strategies that we anticipate will do better in 2021 for different reasons.

Soybeans, it hasn't done a lot the last few years. Soybeans has been relatively flat. We're talking about beans in the teens with potential projections of inflation in soybeans and prices at $20. Currently at $13. So, I want to be able to be in Soybeans.

We also have a SR Countertrend for crude oil. -1915. Again, 2020 was an "off year" for these, and we are interested in waves. And we anticipate that more wave action will happen instead of massive V's. And so, it's possible that V's could still continue. But this is what we're looking at. And so we're looking at these strategies and you might think, "You've got four out of five strategies now that are down in 2020." And that is by design. This one strategy here, gap continuation, the profits for one exceed the losses of the other four strategies.

So let's look at the next five strategies. SR Countertrend Crude Oil A. Another down strategy. Love SR Countertrend III, Crude Oil and the potential for this strategy. It can hold positions longer overnight on the SR CounterTrend IIIs.

Let's look at Gold. Up a little bit. I would call this sideways. Up one or two thousand is sideways. And so this is what we're looking at. SR Countertrend three Gold. Night Trader, one of the top strategies, it had a challenging October. -7,125. And then it's rebounded since that, pretty much. And you see the equity curve here. So your two top strategies are up.

You have gap continuation +18. SR Countertrend three. Our Night Trader up 13,825. That's 31K. And then you have SR Countertrend 2ES, up 5,000. This one tests back to 1997. So like these strategies that test back to 1997. It went on a massive winning streak through September, and then it pulled back since that time, perfect time to get in.

It did have a down trade today, first trading day of the year. Georgia runoff elections tomorrow and the election uncertainty surrounded with that has a big pull back today. And we see the dip buyers are now emboldened by that as they bring it in here and profit at these levels. Cobra three, down today, last 12 months plus 18K.

So if you sit with the strategies, there's five profitable strategies, five down strategies, with four of those strategies very profitable plus 18K, SR Countertrend plus 5K, that's 23K. Plus Night Trader that's 36K I'm just rounding. Rounding down, actually. And then plus 18K. So plus 54K on the strategies that were profitable and then the five strategies where this one was profitable too. So 54, about 55K because I rounded down on the other.

So 55K on the profitable strategies and minus 1,100 minus 1,900, minus three, minus 4,100, minus 6,000 and minus 6,500 on your losing strategy. So the last 12 months you have about five strategies that are down minus 6,500, and the winning strategies are up about 56... What'd we say? 56,000. So, about 50,000 total net profit on these five strategies.

And we're keeping the losing strategies because they have a long-term performance. And we want to look at the bonus strategies that you get with this to get more exposure to markets like soybeans, crude oil, gold, and natural gas.

Let's look at the results of this natural gas minus 1925. Good long-term performance, pretty much a sideways equity curve. We have SR Countertrend three gold B -175. Very breakeven over the last 12 months in gold or crude oil plus 1250. These are always leveraging commission once again. And soybeans day trader three, again, soybean strategies haven't done that much the last few years. We want that exposure, anticipate more price action as soybeans move higher.

And Vixxo C is a low frequency strategy that tests well back to 19, or actually 2003, because it uses the Vicks. And so, this is one of our strategies that has high percentage of profitability, high profit factor, low drawdown. It's a low-frequency strategy, only 31 trades, 13,000.

And so, hasn't traded since... Last trade was actually December the 14th. And so, it will get in at the 24 hour session open and get out before the 24 hour session close. So it doesn't hold it during any session closed periods, except for the 15 minutes between 3:15 and 3:30.

So, those are the strategies that we're looking at for the 25K. Once again, we're seeing a market sell off today. We see these tight sell offs, and then we see these steep sell offs. And they're always met by dip buying and the dip buyers are still going to be in bold, and they're not going to be scared to come in and buy this.

But we have election uncertainty with the Georgia runoffs tomorrow. I think there's some uncertainty about the outcome of the Senate race and the Georgia election and the market does not like uncertainty. It also likes gridlocks. The market likes gridlock. And so, if the Senate house and presidency are controlled by one party or the other, the market doesn't like it so much. So they prefer gridlock.

And so if it looks like the Democrats, which are leading right now, will actually win the Senate, that could be more uncertainty than what was planned in the markets, not a particular desire for one party over the other in the markets, but just the uncertainty of what one party would do if they had full control.

And so, looking at the markets today, keeping that in mind tomorrow, we should have some more resolution. Longest election uncertainty period ever. And we will see what will happen tomorrow. Should be interesting. Looking forward to 2021. Welcome to the 2021 trade.