How Much Money Will This Trading System Make?

How Much Money Will This Trading System Make?

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Welcome back to the second last episode of the Basics of Trading featuring Prateek and me. Wow. How time flies, we're already at the second last episode, in the eighth episode we learned, how to define a trading system, how accuracy works, and the importance of Risk Management. Today we will learn how to backtest our hypothesis.

We’ll try to find out the profitability of our trading system using Amibroker. We'll also go through some important numbers, like our net returns and accuracy. This will help us understand how the trading system actually works, on that note, you guys know what to do, hit that like button right now and leave a comment saying Prateek sir is our politician, gives profit to every citizen.

It will really embarrass him but more importantly, it will make the algorithm push the video to more people. If you hit & comment it helps the channel go a long way. So thank you so much for doing that, and now let's get on to the episode. Welcome back to Episode Nine. Prateek.

You are finally here. Can we please. Can you please trade? m In the next episode. This episode only will actually backtest this system. You remember the system that you just? Yes I remember.

So capital let's imagine is one lakh rupees example and then we'll start looking for our 52 weeks high. Yeah, but like looking at 52 weeks like this will take very long to find this right, like to scan all of the stocks and which of them have had a 52 week high. Yeah, yeah. So, actually, when I traded in 2007 right, that's when I started 2008-9-10, like all the way to maybe 2014-15, the process was to open the chart and mark the entry, exit and calculate the profit and loss, and we'd go back 10 years and test the system like that. Okay. And after like 7 days, we’d know that the system doesn’t work.

"No, God please no, no". So, 6 months would vanish just like this. So it's very difficult. Now, there's an automated way to do it. Okay. It was there in 2008 also, I didn't know it.

You didn’t know it. But luckily today we'll use a software. Okay.

I'm using Amibroker. Okay. Doesn't mean you have to use Amibroker. You can use Excel. You can use Python if you coder or a developer.

You can use any software. Got it. Don't get crazy thinking I must learn this software. There are many ways to do it, we're going to choose one way today. Okay. All right, so the initial capital is one lakh rupees, and let's test and see what happens.

Yeah. Can you just summarize the objective, so how are we selecting the stocks? By selecting stocks that have had a 52 week high. Correct. And you’re buying it on? Only from the national stock exchange top 100 companies.

Excellent. Yeah. And what's your stop loss and what's your target? 30% stop loss and target is 60%, at least 60%. So and what about the trailing stop loss, how will we trail the stop loss? Every 10 weeks low. Yeah that's important.

Yeah. The lowest of the last 10 weeks and you keep trailing it. Yeah. That's it, right.

Let's see the backtest and run it in an automated way. On my laptop. Give me the laptop. Perfect.

Okay so this is Amibroker. F*** That's crazy. That makes no sense to me right now. Very simple, in left side you have all the companies. Kotak, LIC, etc. Got it. And you click in the right side, chart opens.

Got it. It looks like a normal charting platform. This I understood.

Great. Now, there is an analysis window here. Here I can do a bunch of things right. So here we can actually write some code and we’ve written over here a code that’s called 52 high final. got it. Final because there were many codes, like final final final.

And this is what the code looks like. Okay, do you want me to explain? No, it's fine. This is a separate course altogether. I think yeah.

Recording course. Comment below if you want that. So you guys wrote a code, what does this code do? So the code does exactly what we wrote here. The system which is find find stocks with 52 week highs from National Stock Exchange top 100 cap companies. Yes, find the top stocks, which have had 52 weeks high, then place an order on these.

Yes. On the Friday 3pm that they have 52 week high. Yeah.

Have a stop loss of 30% on it with the trailing stop loss of 10 day lows. Yes. And what is it called, not margin, it's called something which is your reward needs to be 60%.

Your profit target. Your profit target is 60%. So now you put this all in this code and you put it into Amibroker and yeah we're gonna backtest it. Correct. Click on backtest and see if this system.

Yeah. What would it have generated if you did it for the last 20 years. Absolutely.

Got it. And when, when we click on it, it's not going to be minus your whole family at your house and your property is lost. It could be actually, it could be. Yeah, we don't know. Yeah.

Can you click on scan, why don't you do this, actually. It's a little complicated, so just follow instructions clearly. Okay. Don't mess this up.

Okay, Click on backtest. Scan backtest. That's it man you just backtested 20 years.

Oh my god, I would like to thank my fingers. Now what? Now basically, you click on this, why don't you do that and you generate a report that, that blue, yes that one, that's your report. Oh nice, okay. Let's see what this is. Done.

Epic. Okay, now make sense of this for me, I see a lot of green stuff that's good. Which means it was profitable.

Yeah, okay, so what is the initial capital, how much is, how much is it one lakh, one lakh rupees. Okay initial capital we assume is Rs.1 lakhs, and the ending capital is 47 lakhs. 41,976 rupees, so this is a 40, you 47x your money. Over the last 20 years based on this system. Yeah, that's right.

And compounding kicked here right you couldn't do this on a short term. It happened over a long term. But but it's beaten Nifty by a lot. What the f***. Cool right, it's worth it, right. Yeah.

Another thing is, annual return, what am I getting annually. That’s 20% on average. You’re making 20% an average. Oh it means this sounds like this is this if you follow this system we will beat Nifty consistently. Yeah, if it's beating Nifty by a big decent margin, it means it's beating all other asset classes. It’s beating all other asset classes.

Yeah. Wow, that's good. So this is basically 20%, per year over 20 years you can get on this system. That's right. That's right.

Remember, this doesn't make this system, great. We're showing this as an example, you can change the variables, test it and create your own. Ideally that's what you should do because this is an educational show. We’re not recommending a system, but this is a great way for people to understand that there is a method to the madness of trading or investing right, you don't need to rely on gut, you can just use science and get there. That's crazy.

And this doesn't even feel that risking or making one trade two trades a week tops. Yeah exactly. So how many all trades, do you see 600. 600 trades over 20 years, 580, so that's 30 trades, 2 trades a month. So you can do this, casually as a side thing while you're also working, you have a job where your income will keep, so if you have a job, income keeps increasing. Yeah.

So the amount of capital that you keep pulling in, should increase should increase. Yeah, we did not factor that in, if you had done that. So imagine this initial capital if it went from one lakh per say five lakhs.

Yeah, that's 5x of what you end up with. Yeah, and you put in a little more maybe. And you keep doing that. Oh wow! So, it's, it's crazy. Yeah that's compounding percentage increase every year.

Yeah. You made a video on compounding, right. Yeah, that's what. Oh wow, cool, awesome.

Another thing is remember we said win loss ratio must be more than 50%. What is the win loss ratio? You tell me, look at this. Win loss ratio is 55%, not bad, not bad, not bad at all, so we're over the, what we wanted a 50% at least we're over that average profit, what is that average profit per trade? That's a good question, that’s 16%. Whoa. That's crazy right.

Yeah. When you enter the stock, most likely, like the average profit is 16% overall these five years. And this is the average profit you were looking for at least a 60% profit. Yeah, but once you minus the losses from it exactly it averages out to 16% per trade, that is good. This is great. Yeah.

And the cool thing is you don't have to worry where the market is right now right. Correct. It could be going up could be going down, you’re just following the system.

Yeah because if it has worked in the last 20 years, then it must work in the next 10 years too. See also, you're also trading the top 100 stocks right, so they're generally going to be decent. So tell me something, I have so many questions. Yeah cool.

Tell me, we backtested for 20 years, what happens in say 2008, where the whole market crashed. How much would I have lost based on this system. That's a very good question, that is your maximum loss that your system has faced. The maximum loss this system has faced.

Basically, what I’m asking is when it’s a loss, how bad is it and how badly I’ll lose. So, Nifty fell 50%, this system fell 25%. Oh that's actually a good outcome.

Yeah it’s because you probably got stopped out and some of them had trailing stop loss, so you got some profit, you didn’t lose 50%, and you weren't holding as the markets fell, you just exited. And during the crash, the markets won’t make any highs, so you stayed put. Oh wow.

So you didn't even wait for the market to keep going down, you just exited because your stop loss hit. Okay, tell me more details about the report. So over here is the maximum system drawdown, that is 25%, 24.89 but let's round it up to 25.

This is the worst case, if you have Rs.1 lakhs capital, what’s the worst case scenario? Rs.75,000 is lost. No, sorry, 75,000 is saved, you lost Rs.25,000. Yeah, which is okay if you're okay with that. Yeah. Then you can trade.

Oh wow. This is the, yeah, if I'm okay with it. You also have to be okay with the 4,000%. Yeah, yeah, Of course. Okay let's see some charts right.

So this is what the equity curve. Equity curve means what the worth of your account balance is in our test. So as you can see, the account made a new high, didn’t make any money, made a new high, this is pretty good. It is pretty good, and it's moving up pretty good. Now, what problem do you see? Yeah actually, when the market crashed in 2008, we were we were like flatlining, we weren't going down, because you didn't enter only, isn’t that good.

Yeah, that's why it's flatlined. Yeah, good observation. Yeah. Because you didn’t enter at all.

Got it, okay. What is the problem in this you asked. Problem is that, look at that period, right, yeah, you're sitting for, it looks like two years I think. Where do you not made any profit, account is the same, slight profit here, loss there. The 2 years you stayed in the market, most people will quit.

Yeah. Got it. That's, right before the huge surge right.

We went Just as people quit. Yeah, we went from almost Rs.15 lakhs to Rs.30 lakhs. And remember this is only on an initial capital of one lakh rupees right, we have not even added, you will earn more hopefully.

If you subscribe, that is.. Yeah, so this is crazy right, this is only on, this is only on your initial initial capital. Yeah. So imagine every time you get a new lump sum, right, and you put a dime in. Every you're going to put it back into the system, and say I have Rs.1 lakhs in this system, yeah,

but also try out other systems, and the next time you save some amount, and you can be like, ok cool, let me try out a new system and you can you can add that also, or you can add it to this system if it's working well for you. Correct. It's a mental game you see at this point, you've understood so much about the market. I think it's a psychological mental game, right, like, even like platforms like us and LearnApp and whatever we built so far, can only take you so far to actually learn, and you won't lose money, but to actually make money right, yeah that's on you, yeah that's on you. So let's talk about psychology, right, which is the problem of following a system, because your emotions don't allow you to.

Correct. Let’s see an example, look at this this is the year 2000 all the way to 2021. Awesome. And for each year it's giving you the yearly rate.

Oh my god, the first two months were negative. We didn't make any money we saw minus 6.8 and minus 5.3, I would quit here. Exactly. Why would you continue with this, exactly because it sounds defeatist. In fact, not just at the end of the year, every month you saw a negative negative for four months trade, five months trade, six months trade. Infact every month was loss in, apart from just one month because this is breakeven.

Yeah. Just one month was profitable. Yeah, who would trade this and you take trade after trade after trade and only a stop loss to hit, and you’ll be like, man, there’s something wrong, this isn’t working. Yeah, correct. So what gives you that courage, it's because you've backtested it, like this backtesting gives us the knowledge that we saw that loss was coming but keep holding on. Yeah, I mean, it's just that you've decided to do something and you follow through.

Right. I was a thin kid, 45 Kgs, and I had to gain weight, that was my problem, and I've to go to the gym, again and again, and I would lift more weights, I’d just lose weight. And I’d be like, what should I do, and then my trainer, Thakur sir, he'd be like no you have to come home, knock on the door, take me there, and he just made me follow this routine for six months. First two, three months there was no newbie gains also, it’s that bad and then fourth month got better, fifth, sixth, and I just did it right, it's just like that. Yeah, why are you giving a weight example, so insensitive. No, I mean, that's was my issue.

Yeah, let's focus on this, please. Okay, look at next year 2001. 2001 you made a minus 5.3.

Look at March. March is, you loss six minus 6%. After one year of being hit, for 8 months straight from July, you have just lost money. Yeah. And you lose 6% which is the highest you've lost so far after one year, and then you said no I'll do it again and then again again it's two and a half percent.

Yeah. And then you made 0.3% profit in May, okay this is getting really bad. Let's go to the next, next year. Finally at the end of 2002 you realize that you made a 23% profit, not bad, it feels worth it. Now, go through the month once, just very quickly. You made money the first quarter of 2018 February was.

February was 11% first time you saw double digit returns. Yes, pretty good. Yeah.

Then you saw a dip again in May, where you almost lost everything, then in June, you got that back and then you saw dips again for four months straight in November and then December. Finally you saw profits. And made like 23% at the end of the year. 23% that's very good. And remember we've removed brokerage and taxes from this.

So it's very realistic. Look at the next year, though. Then in 2003, you made 170%, close to 170% in a year, in a year, you have almost doubled, tripled your money, and you had like three months of like 18% 13% 18% 15% percent, what happened in 2003? System worked. System went crazy. And by the end of 2003 was the most successful year the system had ever had. Ever.

Insane. In 2004 you got 10% and 60%, 23%. 2008 all of a sudden. Tell me, you’re following a system and in 2008, market crashes, right, how do you still trust your, can a system break halfway through? Yeah, can it stop working, leakage, nothing’s working, tell me is that possible? Yeah, so you're totally right, generally a system tends to degrade over a period of time, higher timeframe systems like this, that doesn't happen, because it's just over a very long time, and the number of trades that you have is very less. For intraday systems, the degradation happens very quickly, but for a system like this there won’t be much degradation.

This you have to follow for till the end of time, like you don't quit, you keep going. And you see results over a long period. That's crazy. Yeah, but but that's a very commonly asked question, you're totally on point asking. How many systems do you have running personally? Yeah so generally, what I'll do is I have a short term system which is intraday.

And then I have a swing system which is a few trades, a week, and then a system like this which is one to two trades a month. Got it. But, because what happens is when you have 2000-2001, I also want to balance it out with an intraday trade, which is. Yeah.

Which makes sense, right. So psychologically you feel okay I made some money, somewhere, I am not losing every trade. So now that we know that this system works. We've backtested it, do we need to go through more details. Yeah there's two more things I want to show. Yeah, remember we did the risk reward ratio 1:2 right.

Yes. So look at this the average profit per stock is here, 20,000 rupees, and average loss is 7600. Got it.

We made money in this difference, literally 1:2 and a half, exactly, 2 and half, three, this is what we aim for, and that's what roughly we got. And that's what happened. Okay, another thing over here is consecutive losses, look at this max consecutive losses is 24. Though there will come a time in the system to 24 trades were consecutively losing. So I'm saying very negative things. System will help you earn but make you cry too.

So it's not that easy. Also, there'll be a time when maximum consecutive wins is 41, 41 trades back to back. I’m Indira Nagar’s gunda. Nice. Okay, cool.

So Prateek this system looks amazing. Yeah. Is there any way that you can make it a completely free to access for people who are watching this. I think as an example. If it makes people understand the market better.

Cool, awesome so there's gonna be a link in description guys if you go there, all of this data, this system, you guys can go access it, you can check it out you can see how it works all of it. Thank you for making it free to access for all you guys enjoy. And it’s 10% commission is mine. So let's see some real trades, Tanmay. I'll open 2021, you can see the profit column over here. Let's see a profitable trade first.

INFY earned 43%. Thank you, Mr. Murti. Love you. Okay, so notice that Infosys is going sideways, and you see this bar. Yeah. This bar just made this new high.

Correct. That's it man, so I'll just zoom in you'll see that there's a up arrow. Amibroker's telling us this was the entry, here’s 52 week high. So now you see that trade right.

Got it. And the market goes up, goes up, goes up you see that red arrow that's exit. Why did we exit trailing stop. Trailing stop loss there. Yeah, that one giant red candle.

Actually you know what I didn't realize this is the current data of Infosys I have over here. And the data is incomplete. So the exit is not there, but it's just shown us a 40% gain, because that's how much it is right now. You're more likely to just hit 60% once it hits that, that's what's happening over here. Interesting. Cool right, but now you see there's a breakout, I can see when you would enter and exit.

Right. So let's see another one you pick, you pick some other percentage, look at the profit and then we just, 59%. Wow. Isn't it ironic that people quit their job and do this? Trade on stock. Interesting, you see this bar, if you see this bar, it has an arrow, that’s the entry all time high, right. Make sense yeah, you entered in close, sorry not all time high, that green arrow is the 52 week high, so the high happened during the week, then the market came down but you entered because there was high.

Correct. Friday you enter and just held on to, money was made when you didn't do anything that's the point. People are like I’ll keep trading on and on and on. But you're not supposed to do that. And over here you exit here, because you get to 60% target the market went up, and luckily the market just fell off fell after that. Awesome.

This is great! Cool, right. This is very cool. You know I always used to feel like, you know, trading was, I used to imagine trading was discretionary in nature. Exactly. You had to know some inside information and some people have control over it.

Yeah exactly. But now when I look at the system and feels like no, actually it's a lot about a lot more about psychological and emotional control. Yeah, but you outsource to a system, and this, you just shut up and follow the system, because humans can’t think, you are a horrible decision taker. Beautiful insane. Let's see one more thing, now what's really what's stopping us from doing this is just educating themselves about it.

Yeah, I think this was the purpose of why we came together. Yeah, like, like if you, if you made it through till here you've just unlocked a goldmine right, like so congrats for making it till here, and F in chat for everybody who tuned off after episode 3. But yeah, but I think what you should do is if you thought that this is helpful, you should definitely share this with your friends, 100%.

Because this is not a weekend spent well, this is a life changing, altering event, perhaps, yeah this is a lifestyle altering way of thinking. Right. This buys you freedom, and what is the cost of it, just educating yourself about how it works.

That's it, and just time right, yeah just time and educating yourself. Yeah, you have time, you're doing two trades a week. Barely takes any time. We'll see one more example but this time we'll see a loss. Okay, okay, let's see what a loss looks like so there's this company called McDowell. So this is McDowell, I'll click on show current trade arrow.

I lost 30%. Yeah, where was our stop loss? 30%. Correct. As you can see here, this bar made a 52 week high.

Epic that's how we got in here so he got in, and immediately next day, McDowell got drunk and fell. Here, I'm out. Here's the cool thing, okay. I don't know if it's a cool thing. But the low is where we got stopped out, the market like freakin bounced back out, yeah, right after that, you have to be okay with that. Yeah.

Don't go ahead and modify this look at them just, people will be like, I'll modify 30 to 35%. Don’t do that, a lot of things will change. Exactly. Let's see one more loss trade so people know what a loss trade is.

HDFC Bank, only seven and a half percent loss. I wonder why, let's see, maybe the trade didn’t exit actually. So okay, the entry is here. And very quickly we exit and then very quickly we exited, and we immediately exited after that. But it shouldn’t have been 30%, so why is it showing 7 and half percent. Trailing stop loss.

Yeah, last 10 weeks low. 1-2-3-4-5-6-7-8-9-10, it touched its low and exited, and that's what saved us. So, even here, when we could have got 30% off, the system saved us. Yeah. We could’ve lost way more. And we've taken four months to recover.

Right, now I think we made an entry later, because it did make a new high, we must’ve entered actually, if you go back to analysis. I'm sure you’ll see HDFC Bank open long, there it is. There you go. There it is right, so over here the entry exactly what we just said right, and we’re still holding. Ohh amazing, watching the system at work is epic.

Yeah, so, so that's it right. So I hope this is useful, man. This is very useful.

Like, I know we kept saying that all the trading is not like a quick shortcut to money, but f*** it feels like. When you look at a system. Does feel like it's a once you understand, I think, I think the challenge here is to gain the knowledge to understand how this works.

Yeah. H ave patience. Right. And trust the system. That's it, man.

That's it, guys. Money in 21 days? 21 years, money 59X. All right guys if you have any questions, go to any of the episodes, you can drop a question in the comments, the LearnApp team will reply to you in the comment itself and make sure you go check out the link in the description. There are many many more informative courses that can help you in your trading journey. And this is coming from people who are trading billions of dollars worth of money that I will never see.

So now Prateek tell me something, so if people take a course on LearnApp and if they have questions and doubts, right, like how do they solve it, other people to solve it for them on LearnApp. Yeah, so we have a lot of people working at the company who are actual traders. Oh, and I think the real thing about investing is that it's very active right, once you learned all the systems on the platform you want to be coached, last week this happened, this is my question. So we answer those very very quickly. So, actually, through your investment journey, you have us throughout.

And if you have any questions it's answered there so I mean, what more do you want right. Correct. Yeah, correct. Awesome, but please don't ask dumb questions. You can actually.

Watch the video again, watch 4X, everything’s there. So now we have a system in place. Yeah, right, and we have backtested the system and we found that the system works. Right. We know exactly how much money the system could make. Okay, so now it's actually time to put the system to test.

Sure, so I'm gonna put one lakh rupees as capital into the system, maybe a little more let's see, and actually test the system, and, and we're gonna show people exactly in real time how much money went in, how much money came out. Absolutely, what was my profit and loss, completely transparent. Correct. And we're gonna do this in the next episode. So if you want to see how the system works in real time with actual money. Check out the next episode, and we will see you there. And if I make a loss, then, haha.

And of course while trading you can analyze your stocks fundamentals and history in depth, all thanks to ticker tape. Check out ticker tape link in the description. And before you begin trading one must have a D-mat account. So open your D-mat account with the link in the pinned comment.

So Prateek, let’s meet in the next episode. I’m going to trade. That’s my computer.

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2021-07-03 19:18

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