This is the reason I'm searching for a backtesting program as mentioned in https://www.elitetrader.com/et/threads/index-futures-back-testing.370606/ (Mods, feel free to combine these 2 posts if you want) Here's my story trading S&P500 Futures since the end of August. I was doing really well, usually holding 2 contracts at a time, but sometimes 3. I would make trades just based on the overall market sentiment (always bear during this time), but not hold anything in advance of major news releases, although I would try to "ride the wave" in the immediate aftermath of a major release (CPI, NFP, etc.). There were some losses, and some times when it would go the opposite way for a few days before turning positive. Overall, I profited about $29,000 in that time. Until... This recent "bear market rally" (or so I thought at the time), but then I realized that market sentiment had changed. Now I think we're in a bull market. All the negative things forecasted for the future have been priced in. So I lost -$31,000, wiping out all my gains and then some. I've since made back $5,000 doing short-term trades. I have come up with a new strategy that I think could fit my situation. I'm going to enter trades based on market sentiment direction, and then place a limit that is just 1 point above/below where I enter. This will profit me $50/contract. At this point, I'm willing to buy 5 contracts at a time (initial margin = $71500, maintenance = $65000). This gets me $250 profit each time I win. So far I have a 100% success rate, and the worst performance took 12 hours to close for a win. This may seem like I'm just earning pennies, but the reason it can work for me is that if I can iron out the flaws in the plan, I would be willing to invest more. It is not unreasonable that I could put $500,500 in my account, which would allow me to enter into 35 contracts per trade, which would be $1750 profit per successful trade. With 252 trading days per year, that's $441,000 profit per year. The obvious flaw is that I have nothing in my strategy to tell me when to sell for a loss. Obviously I will lose eventually. But if I place my stop-loss too close, that will eliminate some trades that otherwise would have been wins if I were willing to hold onto them longer. This is what I planned to use the backtester for. Thoughts?
So, you're scalping for one point per trade? What is your risk/stop-loss? The likely flaw with your strategy is that you need a 90 % win rate or more to have a positive expectancy since you likely have a very negative R/R ratio. On the other hand, if you risked 1 to gain 2, you could get ahead with a win rate as low as 50%. Risk 1 to gain 3 or even higher and your win rate can go even lower. The scalping approach holds some appeal to myself as well, but that high win rate makes it hard in practice. I think I had a winning streak of >10 days the last time I tried it, but I ended up taking 3 full stops in a row one day and gave back most of my gains leading up to that. An alternative is an hybrid approach where you're mostly scalping, but take the occasional big trade. This is something I've considered myself as these days I'm swinging for the fences a bit too often.
My strategy doesn't have a defined loss yet, as was mentioned in my post. So far I just hold until I win. I would think having a 2 point: 1 point win:loss ratio would result in a lot of losses based on random market noise. On my wins over the past few days, I've been down as much as 12 points and still won. There's a lot of volatility lately so 12 points doesn't cause me to panic. On the topic of swinging for the fences: I think S&P will go above 4100 by the end of the year. Experts now seem to agree. Although the same experts agreed with my "bear market rally" opinion just a few days ago.
That's the inherent problem with scalping ES. It's virtually impossible to gain 1 point without at least double the risk. Maybe it can work if you enter with market orders on momentum, but I'm sure it won't work consistently. At 12 points of heat your R/R is extremely negatively skewed. I can't run the math now, but I imagine you need a 95 % win rate to survive that. So, the question is: 1. Can you maintain a 95 % win rate? 2. Do you want to rely on a strategy which REQUIRES a 95 % win rate? To me, this is not a robust strategy. The best strategy takes both scalps when that's what's offered and larger swings when that's on the table. That said, I did speak to a trader a few years ago (before covid and volatility increased). His strategy/target was 1 ES point per day with 25-30 contracts. He claimed to have <5 losing days per year. After hitting his target of 1 point he was done for the day no matter what.
I would love to only enter the trade when technicals say so. What would be the indicator that tells me momentum? (I realize I should like a novice here, but I'm more just rusty on the terminology of technical indicators. I'm actually very good at math so I would love to use them here). Btw, I love the last paragraph of your post. I wish I could have talked to him. Did you meet him online or in person? Are there trading conventions? I would even consider going 0.25 point. This is why I need to find "Expert Adviser" program like I've seen with Forex. That way, I can edit the variables until my hearts content until I find the best strategy.
I'm not sure such an indicator exists. At least not one out of the box available for retail traders. ES backfills a lot, so it's not really a momentum market. Occasionally you get these one way moves that runs, but a lot of the time it's a jiggy and zaggy market. I imagine this is due to all the program trading, arbitrage and hedging activity in this market. NQ exhibits more momentum moves, but there's still some back-filling even with that market. That guy I mentioned was someone I talked with on a ET in private, but we quickly lost touch. I asked him a few follow up questions but he left before answering and I haven't seen him since. I never met a trader in real life. I would have loved to. Every trader I "know" are EliteTraders.
First of all, scalping fast moving markets like ES, NQ, etc. is pretty foolhardy without taking an automated approach. On top of that, where are your trading stats ? Win rate, avg win, time-in-trade, etc. Your trading stats are the most important thing you can have right now. You need a platform for both realtime and backtesting purposes. The backtesting will tell you how much risk to take for 1-2 points of profit. Typical Risk/Reward ratios are 1:1, 2:1, 3:1..... re: "What would be the indicator that tells me momentum?" There's a ton of them....RSI, MFI, OBV, etc. You'll discover quickly that sometimes you go with the momentum indicator and sometimes you fade it. A good auto trading platform will allow you to switch between both modes.
This part, is the flaw in your strategy. You will win 19, 29 or 39 in a row, but that one loss with wipe out all your gain. Because at some point, you will have to take the loss, and it will be big. Even with 97% win rate strategy, you will lose. When you find a strategy that seems to be profitable, your goal is to find its flaw and weakness. And when it seems to good to be true, usually, it is. FWIW, I backtested that strategy (amongst thousands of others!!) a long time ago.
I know that's the flaw. That was the point of my original post. Actually with a 1:20 win:loss ratio, I would break even at 20/21=95.2%. I'm looking for how to adjust this so that I win most often. And perhaps throw in a few other indicators that increase my chances, as well as a qualitative look at near-term market expectation (what is the current consensus, bull or bear?).