New Trading System Live Testing

Finally got a bite on the new trading system. I used RightEdge to develop the system. The goal of the system is low frequency / high probability. There are two reasons for this. One, I like winners more than losers, even if the R/R is skewed, it's better to win more psychologically. Let's say that you have a system that is 50% winners and 50% losers. The average winning profit is 5% and the average losing profit is 4%. This has a positive expectancy. Let's say you could take the same system and adjust it to be 60% winners and 40% loser with a winning and losing profit of 5%, which would you prefer (numbers aside). I like option B. Now, I'm completely making those numbers up, but hopefully you see my point.

Now the second reason for low frequency is that I can use options. Options require additional time for two reasons. One, once a trade is flagged, there are a number of strategies to pick from. Second, options are pretty illiquid so if you need to be in and out of a trade, options will let you down time and time again. My plan is to let the trade run until expiration (about 1 month per trade). Oh, and the options use far less capital, so I can let them go longer and give myself exposure to the same symbol a few times over without worrying about risk too much.

So on to the trade, my first entry was IWM. I went with an AUG 42/41 put credit spread. I was filled for 0.12 credit. The 42 strike is just over one standard deviation from the current price of $48. My backtesting shows that combined with my filters and indicators and a one standard deviation out of the money credit position that I should expect around a 95% success rate. Here again we have a high probability / dismal risk/reward type setup. Selling out of the money put credit spreads isn't a bad strategy by itself. You win some, you lose some. My idea is to couple this OK strategy with a pretty good trading system and see if the two make sparks.

I'll keep you posted. And as always, never, ever follow my advice or trades. These are works in progress designed to invoke thought and constructive conversation. Your ideas are welcome.