Building a Profitable Strategy w/ Claude - Day 45: This Changes Everything — Transcript

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1. 0:00Hello bunnies, and welcome back to a new
2. 0:01video on this series of me trying to
3. 0:03build a profitable trading algorithm
4. 0:05using [music] AI.
5. 0:07Now, a quick refresher, if you're new to
6. 0:08the channel, we have been building this
7. 0:10thing from zero. We tested a bunch of
8. 0:12ideas in the past. Most of them failed
9. 0:14that as expected, and we ended up with
10. 0:17one strategy that actually worked. The
11. 0:19opening range breakout, and it works on
12. 0:21two different markets with couple of
13. 0:23tweaks, NQ [music] and the tax. So, same
14. 0:27strategy, two assets.
15. 0:29>> [music]
16. 0:29>> Now, in this video we're going to talk
17. 0:30about a concept that's going to change
18. 0:32how you hunt for strategies and how you
19. 0:35try to build profitable trading
20. 0:37strategies. All right. Imagine this with
21. 0:40me. You spent months trying to build a
22. 0:42profitable trading strategy. You
23. 0:44research the ideal, you build a backtest
24. 0:46engine, you run hundreds of variations,
25. 0:48you include the fees, the slippage, you
26. 0:51backtest it on years of historical data,
27. 0:53>> [music]
28. 0:53>> and finally you find one that works.
29. 0:56A generally profitable, consistent over
30. 0:59many years strategy.
31. 1:01Not a lot of people can show you that.
32. 1:04And based on the metrics within
33. 1:06reasonable risk management, this
34. 1:08strategy has a 90% chance of getting you
35. 1:11funded [music]
36. 1:12on whatever prop firm you choose.
37. 1:14Pretty much all have the same model,
38. 1:16right? Phase one 10%, phase two 5%, and
39. 1:19then you start taking payouts on your
40. 1:21funded. Now, think about the industry
41. 1:24we're talking about. The prop firms
42. 1:26periodically release their own [music]
43. 1:28statistics. I'm going to put one on the
44. 1:30screen right now. As you can see, more
45. 1:32than 95% of people never even reach a
46. 1:36single payout.
47. 1:3795% failure rate, and you're sitting
48. 1:40there with a strategy that can give you
49. 1:42a 90% chance of getting funded without
50. 1:45ever touching the maximum drawdown, and
51. 1:47everything is automated. So, there's no
52. 1:49psychology involved. That is something
53. 1:52few people has.
54. 1:54Now, there is a catch. If you want to
55. 1:56respect the 10-maximum drawdown, this
56. 1:58strategy only makes around 15% a year.
57. 2:02On a personal account, 15% a year is
58. 2:04enormous. If you have half a million or
59. 2:06a million in personal capital, you are
60. 2:08set for life. But on a prop firm, phase
61. 2:11one and phase two together is 15%. So,
62. 2:14that's your entire year just waiting to
63. 2:16get funded. And then another month for
64. 2:191% payout or something. So, it's just
65. 2:21not going to cut it.
66. 2:22Of course, you can raise the risk maybe
67. 2:24maybe be multiplied by 1.5 or two to get
68. 2:27funded faster, but you also raise the
69. 2:29maximum drawdown with it. So, that 90%
70. 2:32chance of getting funded it can drop to
71. 2:34maybe 60%, which means there is a 40%
72. 2:38chance of blowing the account.
73. 2:40So, what does everyone do in this
74. 2:42situation? Well, most of them is going
75. 2:44to abandon that strategy and go look for
76. 2:46something better. Less drawdown, better
77. 2:48return.
78. 2:49Funded in under four months, maybe.
79. 2:52But the problem is that finding a
80. 2:53statistical edge with high metrics
81. 2:55[music]
82. 2:56is not easy. You can spend a year
83. 2:58looking for it. And I know people
84. 2:59personally that spend year building a
85. 3:02strategy with high metrics.
86. 3:04And in that same year, the weak strategy
87. 3:06you throw away would have already funded
88. 3:09you.
89. 3:09So, what if I told you that instead of
90. 3:12spending your life hunting for that one
91. 3:14holy grail of a strategy,
92. 3:16a strategy that you try to force to make
93. 3:18money in trending markets, ranging
94. 3:20markets, high volatility, low
95. 3:22volatility, and still give us a smooth
96. 3:24equity curve through all of it? What if
97. 3:26we take weak strategies and make them
98. 3:29work together as a team? So, that's what
99. 3:31this video is all about. Now, before we
100. 3:33get into it, make sure to check the
101. 3:35current discount that Funded Engineer is
102. 3:36running. One of the best and most
103. 3:38reliable futures firms out there.
104. 3:40You can use the coupon code stranger for
105. 3:42a really nice discount on any account
106. 3:44type that you choose. Now, in the last
107. 3:46video, I already showed you this
108. 3:48briefly. Let me show you with equity
109. 3:50curve right here from the last video.
110. 3:52So, as you can see, NQ and the DAX
111. 3:55equity curves
112. 3:56pay attention to this.
113. 3:58NQ goes into one of those flat
114. 4:01stretches. It's not making money, it's
115. 4:03just chopping sideways, and the DAX over
116. 4:05that exact same period [music] is making
117. 4:08money. And then later it flips, the DAX
118. 4:10cools off, and NQ [music] is the one
119. 4:12making money.
120. 4:14Now, watch what happens when we stack
121. 4:15them together.
122. 4:17The curve gets smoother, and the
123. 4:19drawdown gets shallower.
124. 4:21So, that's the whole mechanism. All
125. 4:23right? So, let's put numbers on this
126. 4:25concept. Let's say that two strategies,
127. 4:28each one makes 15% a year and [music]
128. 4:30has a 10% maximum drawdown. And you run
129. 4:34both of them at half the size. [music]
130. 4:36Your return doesn't change since you are
131. 4:38risking half for each, so you're still
132. 4:41making 15%. Nothing surprising here, but
133. 4:44your drawdown does not stay at 10%
134. 4:48because strategy A has its bad months in
135. 4:50March, and strategy B has its bad month
136. 4:53in September. So, they don't bleed at
137. 4:56the same time. When one is down, the
138. 4:59other is covering it. So, instead of a
139. 5:0010% drawdown, maybe you end up with
140. 5:03something closer to 7%, and that
141. 5:05reduction, that 3% reduction is
142. 5:08everything because now you have room to
143. 5:10scale. You push your risk back up until
144. 5:13you're raising the full 10% that you
145. 5:16were always allowed to use, and the
146. 5:18return goes up with it. So, the same
147. 5:20risk you were already taking, but now
148. 5:22you [music] are getting funded in months
149. 5:23instead of a year. That's just two
150. 5:26strategies. Imagine a book of 10 or 12
151. 5:30or [snorts] 20.
152. 5:31Now, there is a condition here, and this
153. 5:34is where a lot of people gets wrong.
154. 5:36The strategies have to be uncorrelated.
155. 5:39Not zero, zero basically doesn't exist,
156. 5:42but low. And the mistake that a lot
157. 5:44people do is they measure correlation on
158. 5:47everything. The returns, the trade
159. 5:49frequency, the holding time, when each
160. 5:52one enters, what assets it trades,
161. 5:55>> [music]
162. 5:55>> and they throw it all in and get a low
163. 5:58number, and they think that they are
164. 5:59diversified.
165. 6:01Well, the problem is that none of this
166. 6:03matter. This is not the number that
167. 6:05matters, okay? The only correlation that
168. 6:07can hurt you is the correlation in
169. 6:09drawdown. And I showed you a perfect
170. 6:11example of this in the last video, where
171. 6:13I showed you NQ and ES, two [music]
172. 6:16markets, all right, from the opening
173. 6:18range breakout.
174. 6:19And they traced almost exactly the same,
175. 6:22same [music] profit, and most
176. 6:23importantly, same drawdown.
177. 6:26So, that's not two strategies. You can
178. 6:28we cannot use them together.
179. 6:30You also can have two strategies on
180. 6:32completely different assets, one on
181. 6:34EUR/USD, one on gold, different
182. 6:36frequency, different logic, equity
183. 6:38curves that looks nothing alike, and
184. 6:40then you check and zoom in on their bad
185. 6:43periods, and they are 60 to 70%
186. 6:45correlated. So, they go underwater
187. 6:48together
188. 6:49almost every time, okay?
189. 6:52That's the one that matters. Everything
190. 6:54else just cosmetic.
191. 6:57So,
192. 6:58once you understand this concept, the
193. 7:00whole hunt changes.
194. 7:03So, instead of looking for the best
195. 7:04metrics and the highest profit factor
196. 7:06and the biggest return, the cleanest
197. 7:08curve, now, instead, strategy with 1.2
198. 7:11profit factor that makes money while
199. 7:13everything else you own is bleeding is
200. 7:15worth more to your account than a 1.8
201. 7:19profit factor that does the same thing
202. 7:21>> [music]
203. 7:21>> as what you already have in the book.
204. 7:24All right, let me rephrase that. A
205. 7:26mediocre strategy that's [music]
206. 7:28genuinely different is worth more than a
207. 7:30great strategy that's basically a copy
208. 7:33from an existing strategy that you
209. 7:34already have. And this will take a huge
210. 7:36weight off our shoulders. We don't need
211. 7:39the opening range breakout to work in
212. 7:41every regime anymore. We don't need to
213. 7:43force it to make money in ranges, in
214. 7:46consolidations every single month
215. 7:48because that's exactly how you can end
216. 7:50up uh stacking filter after filter until
217. 7:53you have over-fitted
218. 7:55the whole strategy and it is guaranteed
219. 7:58that it's going to fail in live [music]
220. 7:59markets, right? We don't need every
221. 8:02sleeve to survive everything.
222. 8:04We need the book to.
223. 8:06All right? So, where does that leave us?
224. 8:09We have two sleeves right now.
225. 8:11That's what individual strategies inside
226. 8:13a book are called, sleeves. [music]
227. 8:16The opening range breakout on NQ and the
228. 8:18re-anchored version on DAX. And unlike
229. 8:22NQ and ES, [music] these two are
230. 8:24generally uncorrelated, especially in
231. 8:26the drawdown, right?
232. 8:28But two sleeves is not a book. It's just
233. 8:30[music] the start. So, the next video
234. 8:32we're going to go hunting for sleeves
235. 8:34and they're going to be completely
236. 8:35different types of edges. Maybe from the
237. 8:38same family, the breakout family. Maybe
238. 8:40trend following, mean reversion.
239. 8:42So, there's a whole sea of families to
240. 8:45pull from. And this time
241. 8:47it's going to be fun because we're not
242. 8:49looking for those crazy metrics,
243. 8:52right? Mediocre is fine. And when we
244. 8:54going to add them to the book, you're
245. 8:56going to watch the book gets better
246. 8:58every single video.
247. 9:00So, make sure to subscribe, guys, so you
248. 9:02can follow the whole journey with me and
249. 9:05always get your hands dirty. Don't just
250. 9:08watch me do it. Go actually and do it
251. 9:10yourself. Build your own book. And now
252. 9:13I'll be trading and good luck.