Transcription
Gold made a huge positive move since 2024. Lately, it pulled back a little bit, but if you're lucky to invest in gold in January '24, then you made a lot of money.
Now, you don't have to be lucky to invest or to trade gold. In fact, if you go to my TAA portfolios, these are tactical allocation signals. Many of these portfolios hold gold through logic of momentum. So, here is an example. This is the core and US sector rotation. And we can see this portfolio holds gold on average 11% of the time. Here is another portfolio. It's called Profusion 5. And this portfolio holds gold about 7.1% of the time.
All my tactical asset allocation portfolios hold for a month or more and that is just eternity to traders. Of course, I have featured strategies that trade gold on daily time frame, but even that is considered too long for happy trigger traders. And so, in this video, I will show you a strategy that scalp gold for profits.
Now, sculping in my book is trading intraday on an hourly bar. Now, I know this is not sculping in trader book where they are looking to trade in and out within seconds or minutes. Believe me, long-term that doesn't work. If it is, then we'll all be trading intraday one minute time frame. Also, don't confuse trading on one minute time frame but holding for longer time frame. So, if I want to execute my strategy, even if it's on hourly, I can still use the one minute time frame to execute the hourly logic time frame.
Regardless, the strategy that I'm going to show you today trades a 2-hour bar time frame and I will be using a very simple indicator to build that strategy. Now you might ask why 2-hour bars and this is not fixed in stone. In fact, you can do 45 minutes, 1 hour, 2 and 1/2 hours and so on so forth. Basically, you just want to be above the intraday noise that 5 minutes and 15 minutes introduced daily. And this strategy will use a single indicator which is the stochastic.
This is the gold chart using 120 minutes bars. So each bar represent 2 hours intraday. And below it we have the stochastic. The stochastic consists of two calculations: the percent K and percent D. And you can smooth both of them with a moving average. So here I'm using the fast percent D which is the green line and the slow percent D which is the red line. So both of these are smooth average of the original calculation which is percent K. And basically we will use the crossover to trade gold long intraday.
So here is the strategy turned on. When the green line which is the fast percent D cross above the red line which is the slow percent D, we go long and we have a trailing stop to exit. So it's a single exit. The trailing stop is based on average true range and this indicator represent that ATR trailing stop. So you can see when we breach it we exit and then we wait for the next crossover we enter and then when we breach it we exit.
So the strategy extremely simple. We take the stochastic, we have two smoothing averages of the percent K. It depends on your platform. They sometimes are called fast percent D and slow percent D. But basically they are just smoothing average of the original stoastic which is percent K. Then we take the crossover. Whenever they cross over on the upside, we go long, we exit with a trailing stop.
So if we want to optimize this strategy, we have the length of the stochcastic and we have the smoothing averages of the stochastic and then we have the ATR trailing stop which includes again a look back period and an ATR multiplier. So I fixed the second smoothing average at five. And so we only need to optimize one smoothing average. So let's go from two to five. And then we have stochastic length. I will do 5 to 25 step of five. And then for the trailing stop we have an ATR length again five to 15 step of five. And the ATR multiplier 0.5 to 4 in step of 0.5. Now remember why I'm doing 50 because I'm using intraday. All these calculations are on intraday. So if this was a daily time frame, I can use the ATR length up to 20 days. Now you can do that. You can do a second time frame which is the daily where you calculate the ATR length on. In this case, I'm keeping everything on the same time frame.
So overall, we have 1,600 combinations. So out of the 1,600 strategies, we have about 1,300 that is profitable. So this is a great sign that we are on the right track. And if we sort by return to draw down, these are the best strategies on the top. About 340 strategies are doing better than 3:1 return to draw down ratio without using any filter.
Now here is a look at the top 30 strategies sorted by return to draw down. And we see a common theme which is the smoothing length five shows up most of the time. And for the ATR multiple we see two and a half showing up most of the time. So let's fix these two and try the optimization again. So now the smoothing is fixed at five and the trailing ATR trailing is fixed at 2 and a half. And so we have 50 optimizations to run. All these optimizations are profitable and all of them producing very good number of trades very close in the average trade and of course the top one is $12 which is the best one.
So here is the best strategy applied and we are making about $270,000, 6.4:1 return to draw down ratio, 2,600 trades on average you're making about $100 and about 40% win rate which is typical. In fact, it's the top of the range of a breakout or trend following strategy.
Now, every strategy, especially with one like this where we have thousands of trades, it will definitely benefit from a filter. The filter basically will weed out false breakouts or false signals. And the filter can be anything. Usually direction will works really well. Volatility also works well. Volume or any type of pattern for example shrinking bar ranges. But usually patterns are better suited on a daily time frame. So you can still use pattern filters but you should apply it on the daily time frame instead of the 2-hour time frame. While direction and volatility can be used on both time frames.
Here are the results of optimizing several filters on the same strategy. And we see now we can go up to nine return to draw down ratio. Now this is just a set of filters that's using direction and volatility. And I'm interested in reducing the trade. So this looks really good because we take about a thousand trades off and we increase our average trade. So let me pick this one.
So this is now a comparison between the two strategies. Of course, it's the same strategy, but this one on the right includes a directional filter. This one doesn't. We can see we reduce this the trades by about 1,200. Same win rate, but we increased our average trade. And you see how they produce a totally different profile, but both strategies capture the latest huge move to the upside. You can see this one, $2425 is making about $115,000 and this one making about $150,000.
And that is the difference between amateur traders and algorithmic traders. Amateur traders tweak everything until they get 90% win rate and they try extremely hard to make it work on one minute time frame. While algorithmic traders build systems that works well with other systems in a portfolio. Try testing this same system on 2 hours or 1 hour or 4-hour time frame and see what you can come up with.
Now I will dive deeper into the system and the filters that you can use in a coming issue of the algo trader. You can subscribe to it for free, link in the description below. And if you like this video then you will love the next one. [Music]