Building a Profitable Strategy w/ Claude - Day 25: We Found a Winner?! — Transcript

Full transcript

1. 0:00Hello guys and welcome back to a new
2. 0:01video in the series of me trying to
3. 0:03build a profitable trading algorithm
4. 0:05using AI. So in the last couple of
5. 0:07videos, I showed you what we have built
6. 0:09so far, the first two strategies we're
7. 0:11going to test, and it's basically a
8. 0:13two-part system. First, a regime
9. 0:15detector. Its sole job is to tell us
10. 0:18what kind of market we are in right now.
11. 0:20Are we trending? Are we ranging? And how
12. 0:22volatile it is? And then, based on that,
13. 0:25we run one of the two strategies, a
14. 0:28momentum strategy for when it's trending
15. 0:30and a mean reversion strategy when it is
16. 0:32ranging. So it is logical, it makes
17. 0:35sense on paper, and I told you that both
18. 0:37of them failed in
19. 0:39the last video. But here's a thing. Why
20. 0:42they failed taught us two of the most
21. 0:45important lessons in this whole journey
22. 0:47so far. And I'm going to share the
23. 0:49results with you here. It's going to be
24. 0:52extremely valuable.
25. 0:53Um this video is going to be packed,
26. 0:56guys. It's going to be an eye-opener.
27. 0:58And just to clarify, I don't post every
28. 1:00day or every 2 days because I generally
29. 1:03spend a lot of time researching, okay? I
30. 1:06don't want to feed you the wrong
31. 1:08informations.
32. 1:09I started this journey with you just a
33. 1:11month ago, but that's exactly what why I
34. 1:14can't afford to send you in the wrong
35. 1:16direction, okay?
36. 1:18That's why I'm taking my time between
37. 1:19the videos. Now,
38. 1:22before we get into
39. 1:24the behind-the-scenes of what happened,
40. 1:26make sure to check the current discount
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44. 1:35on your next purchase.
45. 1:37So in this table, you can see what we
46. 1:40built.
47. 1:41The feature library, think of it as a a
48. 1:43dictionary the strategy speaks, all the
49. 1:46filters, the conditions, and so on. We
50. 1:48have the regime detector, one of the
51. 1:50most important pieces, and there is the
52. 1:53backtest engine, the thing that actually
53. 1:55runs all of this, and the one I broke
54. 1:57down for you in the last video. You can
55. 1:59go check it.
56. 2:00And now the range strategy, the mean
57. 2:02reversion one, that's our primary edge.
58. 2:06And a lot of you asked me how a range
59. 2:09strategy can be the primary edge on a
60. 2:11trending market like NQ.
61. 2:13And yes, a lot of you have a point, a
62. 2:15valid point. If you look at the daily or
63. 2:18the 4-hour time frame, it's clearly
64. 2:20trending up. But watch what happens when
65. 2:22we drop to intraday. Okay? You can see
66. 2:25that 60 or 70% of the day price is just
67. 2:28chopping sideways, going from a range
68. 2:31and then a small expansion to another
69. 2:33range inside a bigger range.
70. 2:36And then we have couple of big [snorts]
71. 2:37expansions, okay? Then back to ranging.
72. 2:41So mostly most of the day it is ranging,
73. 2:43okay? That That's the logic behind
74. 2:46making a mean reversion strategy a
75. 2:48primary edge. And then remember that we
76. 2:50cannot hold trades overnight, okay? So
77. 2:53we'll live and die inside the session.
78. 2:56So NQ chops around most of the day and
79. 2:59gives you maybe an hour or two of real
80. 3:01expansion. Usually the first hour or the
81. 3:04or the first 2 hours and then the power
82. 3:07hour, okay?
83. 3:09Now,
84. 3:09>> [music]
85. 3:10>> let me show you the results.
86. 3:13So the mean reversion strategy came back
87. 3:15with a profit factor of 1.08.
88. 3:18Now before we talk about that number to
89. 3:20exactly, we need to talk about what is
90. 3:22profit factor, okay? You're going to
91. 3:24hear it a lot in all kind of strategies.
92. 3:28Um basically it is the simplest metric
93. 3:32um
94. 3:32out there.
95. 3:34It's basically uh the total money that
96. 3:36you made divided by the total money that
97. 3:39you lost. So a profit factor of two,
98. 3:41okay? Means that for every dollar that
99. 3:44you lost, you made $2.
100. 3:46Now above one, you are winning. Below
101. 3:49one, you are losing. So 1.08
102. 3:52means that we are barely winning. Okay,
103. 3:55so for every dollar you lose, you make
104. 3:57$1.08.
105. 4:00Now, 1.08 is basically untradable.
106. 4:03Um we can't use it as a standalone
107. 4:05strategy. It's break even.
108. 4:07Um we did include a cost.
109. 4:10But, if you look at it, you would think
110. 4:12that it's promising, okay? Because there
111. 4:14is a room to optimize it. Okay, we can
112. 4:17fine-tune it and add couple of
113. 4:20indicators or a couple of filters to to
114. 4:23raise that uh profit factor to something
115. 4:26like 1.2 and 1.3, and that is tradable.
116. 4:29Okay? But, here's the thing.
117. 4:33We can't just adjust a strategy on the
118. 4:35profit factor alone, okay? Because let
119. 4:38me show you the equity curve the image
120. 4:40of the equity curve. And as you can see
121. 4:42that almost all of that profit was made
122. 4:45in just one window, 2022.
123. 4:47And then for 2 and 1/2 years,
124. 4:50it's just break even. It goes nowhere.
125. 4:52So, this profitable strategy only worked
126. 4:55in one type of market.
127. 4:57In 1 year, okay? So, we can't use this
128. 5:00strategy. We cannot enhance it.
129. 5:03And it's just um
130. 5:06not good enough. So, the profit factor
131. 5:08right here is not a metric that we can
132. 5:10rely on. Sometimes we we can find
133. 5:12strategies that has 1.3 or 1.4,
134. 5:15but
135. 5:17maybe the the the sample trades were too
136. 5:20uh small, like uh in the span of three
137. 5:23or four years, it took only
138. 5:2570 trades, and that's not enough. So,
139. 5:27even with a nice profit factor of two,
140. 5:301.5 or two profit factor,
141. 5:33the sample size is too small, okay?
142. 5:36Especially if it is intraday. If it is
143. 5:38swing trading, that that's all right.
144. 5:40But, if it is intraday, that's um not
145. 5:43good enough. So, there are other metrics
146. 5:45that we should uh rely on, but
147. 5:48that's for the mean reversion. For the
148. 5:50trend following strategy,
149. 5:53it's not a bad idea to look for
150. 5:55expansions on NQ intraday,
151. 5:58but basically what we did, we are
152. 6:00scalping breakouts on the 15-second
153. 6:03timeframe and on the 1 minute.
154. 6:05And the timeframes in between.
155. 6:07So, that's the mistake. NQ does expand.
156. 6:10We have nice moves on the first hours,
157. 6:14on the last hour, especially the first
158. 6:16hour and the power hour, but it doesn't
159. 6:17expand cleanly, okay?
160. 6:20There's a lot of noise and
161. 6:21manipulations, so you can't expect a
162. 6:2315-second break to kick off the whole
163. 6:26move. Okay, you're going to get chopped.
164. 6:29So, the real moves are big and slow.
165. 6:32And when you scalp tiny breakouts,
166. 6:34you're going to spend the entire day
167. 6:35getting chopped up waiting for the move
168. 6:38you're trying to catch. Remember that we
169. 6:40said that NQ intraday, it chops a lot.
170. 6:44So, if we try to catch a trend on those
171. 6:47lower timeframes, it's just not going to
172. 6:49work out. We're
173. 6:50we're basically fighting the nature of
174. 6:53price of NQ. So, that right here, this
175. 6:56brings me to the next thing that we're
176. 6:59going to test, and it connects directly
177. 7:02to what we just learned, especially
178. 7:04about the trend
179. 7:06system.
180. 7:08So, the trend strategy died because it
181. 7:10tried to it tried to scalp the
182. 7:12expansions instead of riding the
183. 7:15expansion, okay?
184. 7:17Well, there is a famous strategy built
185. 7:20to do exactly the opposite that we're
186. 7:22trying to do. It doesn't scalp a few
187. 7:24pips or trying to catch um big moves on
188. 7:28timeframes like the 15 or the 1-minute
189. 7:30seconds. It waits for the market to
190. 7:32define its range in the morning and then
191. 7:35rides the big move for the whole day
192. 7:38with a wide stop loss, okay? Remember,
193. 7:40NQ tends to chop. It's not clean enough,
194. 7:44especially in the last 4 years. If you
195. 7:46remember, if you're on the season trader
196. 7:49audio back there 2022, 2022
197. 7:53and 2023, one of them it was one of the
198. 7:56easiest markets to trade. It was
199. 8:00clean expansions. You can write a trend
200. 8:02without a lot of manipulations, but that
201. 8:04changed in the last 3 years. Okay? I
202. 8:08remember one time we had like 10 days
203. 8:10straight 10 trading days where the AM
204. 8:13session was basically chopping every
205. 8:16single day. We opened the chart, it was
206. 8:18like 2 years ago. We opened the chart
207. 8:21and the whole AM session for 3 and 1/2
208. 8:24hours, all it did was chopping around.
209. 8:26It was nightmare to trade that. But this
210. 8:29strategy, it has a wide stop loss to sit
211. 8:32through the chop. It is the opening
212. 8:35range breakout. You have definitely
213. 8:37heard of it. It is probably the the
214. 8:39single most taught day trading strategy
215. 8:42on the internet. Okay?
216. 8:45A lot of people trade it manually and
217. 8:47lose
218. 8:48due to bad risk management, moving their
219. 8:51stop, cutting winners too early, which
220. 8:53is basically the whole edge is letting
221. 8:56the winners
222. 8:57go to full TP and forcing trades and
223. 9:00taking bad trades in between because
224. 9:02this strategy it doesn't fire every
225. 9:04single day. Okay? When you add couple of
226. 9:07conditions to it,
227. 9:08so that's why it looks useless. A lot of
228. 9:11people tried it
229. 9:13bad feedback on Twitter and so on. But
230. 9:16we're going to run it through our
231. 9:17engine, turn it into an algorithm, and
232. 9:20we're going to create hundreds of
233. 9:22variations out of it to test all kind of
234. 9:24parameters, adding higher time frame
235. 9:26confluence, adding
236. 9:29couple of indicators like ADX and moving
237. 9:31averages and find the ones that actually
238. 9:34work. Okay? Variations that actually
239. 9:36work. So, we're going to answer one
240. 9:38question. Does the strategy that
241. 9:40everyone teaches [music] actually hold
242. 9:42up when you test it properly? Okay?
243. 9:45So,
244. 9:46I'm going to run it through the same
245. 9:48engine just like I showed you in the
246. 9:50last video.
247. 9:52And the one that runs
248. 9:54540,000
249. 9:56back tests.
250. 9:57And whatever it came back,
251. 9:59that's for the next video, guys.
252. 10:02So, make sure to subscribe so you won't
253. 10:04miss that. If you've got any questions,
254. 10:07drop them in the comments or DM me my
255. 10:08Twitter account.
256. 10:10And I'll reply to you as soon as I can.
257. 10:12Now, happy trading and good luck.