"Win rate increases by 4%" Improve an effective trading rule — Japanese Stock System Trading Basics Course ⑤

"A 4% Increase in Win Rate" Editing a Highly Effective Trading Rule

I am Takeshi Nishimura, a securities analyst and instructor for seminars on system trading at Fair Trade Co., Ltd. In this course, I will explain in plain language and simple expressions so that everyone viewing can understand "system trading" from the basics. Please stay with me until the end.

The theme this time is "Editing a highly effective trading rule that increases win rate by 4%." Now, let's dive into the content.

In the course "Reasons Why You Can Profit Even with a 37% Win Rate," we analyzed the backtest results for the channel breakout method in detail. The results showed that while there is a certain level of effectiveness, it is somewhat unreliable to use in real trading in its current form.

Therefore, this time we will slightly modify the trading rule of the channel breakout method to make it more effective. This time, Mr. Masaaki Saito will also explain the trading rules.

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I am Masaaki Saito. As you may already know, the channel breakout method is based on previous highs, such as "buy when the XX-day high is updated." This means that the shorter the XX days, the more the price moves in small waves, leading to more frequent trades, while the longer the XX days, the fewer trades as it captures only larger price waves.

Breakout-type methods are extremely strong in a one-sided uptrend (buying), but weak in downward trends or choppy consolidation markets. In other words, reducing "false signals" is crucial. From this, you can imagine that the shorter the XX days, the more frequently you encounter false signals and incur losses.

Rather than words, let's quickly proceed with verification that takes this into account.
The trading rules tested in the course "Reasons Why You Can Profit Even with a 37% Win Rate" were as follows.
"Buy when the high of the past 40 days is updated"
"Sell when the low of the past 20 days is updated"
Thus, this time we extended the breakout days and tested with the following trading rules.

┌───────────────────────────────┐
[Buy Rule] - Update the high of the past 250 days (the highest closing price)
[Sell Rule] - Update the low of the past 125 days (the lowest closing price)
Note: Trades are executed at the next day's opening price (start of session) └───────────────────────────────┘

And the backtest results with the above rules are as follows.

┌───────────────────────────────┐
[Verification Results] (Test period: 2000/01/01–2008/05/16)
Win rate: 41.3%
Average return: +11.43%
Average holding period: 326.19 days
└───────────────────────────────┘

How does that look? To make it even easier to understand, let's compare with the previous test results.

┌───────────────────────────────┐
[Prev] → [This time] Win rate: 37.1% → 41.3%
Average return: +0.89% → +11.43%
Average holding period: 49.94 days → 326.19 days └───────────────────────────────┘

The win rate, which was around 37% last time, rose to 41%, and the average return per trade jumped from +0.89% to +11.43%, more than tenfold. A average return of +11.43% means that if you bought and sold with a 1,000,000 yen transaction each time, you would have earned more than 110,000 yen in profit per trade. While the holding period from purchase to settlement becomes longer, this improvement more than compensates for it.

From these results, it seems breakout-type trading methods are better suited to capturing larger trends rather than short-term trends.
Masaaki Saito
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How did you find Saito's explanation of trading rule revisions? Until now, we have explained actual trading rules, but in real trading, not only trading rules but also proper risk management (equivalent to money management) is crucial.
I would also encourage you to view the importance of capital management in another course.