Key Breakout Benchmark

Importance of Benchmarking
As traders, we can sometimes fall into the relevancy trap, focusing on and trading only those strategies developed by our own hands. We want our efforts to be rewarded. The best way to do that is to actually trade the strategy. However, for most traders who inadvertently fall into the twin traps of curve fitting and data mining, their best efforts fall far short of what is necessary to succeed in real markets, with real money. This is why it’s always important to benchmark your strategy efforts against well established and robust methodologies. Methodologies that have worked well in the past and in all likelihood will work well in the future. The benchmark strategy should be the minimum hurdle your own strategy must attain before consideration is given to trading it. In my opinion, one of the best publicly available strategies to benchmark against is the Turtle strategy. If your own efforts can’t surpass the Turtle strategy then you are much better off trading it, not your own creation. Please refer to the following link to read a more detailed discussion on the importance of benchmarking.

Benchmarking Key Breakout vs Turtle
Let’s benchmark Key Breakout (with the medium-term trade plan applied) against the Turtle strategy. Benchmarking should comprise two parts;

  •    Robustness Analysis and
  •    Performance Analysis

Robustness Analysis
A strategy’s robustness is dependent upon its amount of out-of-sample performance, level of curve fitting and degree of data mining.

A robust strategy will generally have plenty of positive out-of-sample performance, little curve fitting and no data mining.

Let’s see how Key Breakout holds up when it’s compared to the Turtle benchmark strategy?

Apart from the release date, Key Breakout compares favourably to the Turtle strategy on a robustness comparison. Although Key Breakout looks relatively young (2009) when compared to the Turtle strategy (1983) we should not dismiss its youth when you understand the majority of strategies rarely make it to their first anniversary. Key Breakout should be applauded for making it to young adulthood! We should all be impressed with its positive out-of-sample performance.  Being a pattern based strategy underpins it soundness where it doesn’t rely on a collection of indicators with subjective and optimised variable values. Key Breakout has 1 variable for a 4-bar ATR calculation which is the same value across all markets and across both buy and sell setups. This definitely minimises any level of curve fitting. Also Key Breakout, despite being designed to trade currencies, is profitable across an out-of-sample portfolio of diversified markets. It’s simply outstanding. This absence of data mining and minimalist curve fitting all up makes Key Breakout a robust strategy.

Performance Analysis
If we’re satisfied both strategies are robust and will (hopefully) continue to enjoy a positive upward sloping equity curve, the next question we have to ask ourselves is which strategy is superior?

For this we need to review the numbers.

My number one objective as a trader isn’t what you’d expect. Yes, I do want to make money. However all my energy and concentration is purely focused on surviving the markets. Nothing else comes a close second. I think of myself as a Risk Manager first and foremost rather then a trader. Anyone can make a profit in trading. What many cannot do is manage a string of losses. Banking profits is effortless. Winning trades generally take off, look after themselves and don’t give you any grief. They’re effortless. However losses are a totally different story. Suffering, recording and funding losses is exhausting, both on your trading account and on your confidence, damaging both your mental and trading capital. It damages your trading soul. It’s what can drag you down and cause all sorts of strife. It’s the pain of trading.

So my first priority is to ensure my risk-of-ruin (ROR) is at 0% and that it remains stable. Not fluctuating. Not shifting upwards. In my opinion ROR is the most important concept in trading. Nothing comes a close second. If you’re not familiar with ROR then I’d suggest you stop trading immediately and become familiar with it. A good place to start is my book The Universal Principles of Successful Trading (Wiley 2010).

With 50 units of money combined with a positive expectancy of over 30% and 20% respectively both strategies have a 0% ROR, so that is a positive start.

In addition their respective 0% ROR should remain stable as both strategies to date have been robust.

Rather then looking at the raw net profit and worst drawdown my focus is always on the old fashion reward/risk trade off. What do I receive for the potential risk? On this measure Key Breakout’s return/risk ratio of 23 is more rewarding then the Turtle’s 18. On a risk/adjusted basis Key Breakout is similar to Turtles, making 2.2 units of excess returns for each unit of drawdown risk, compared to Turtle’s 2.3.

The next insight I’m keen to focus on is the average risk, or average stop per trade. Naturally my preference is for a lower risk and this is for two very important reasons. One, I naturally prefer to risk less capital then more and secondly, its cuts to the efficiency of the strategy in making money.

No doubt you may have heard or read the comment where it’s suggested that getting into a trade is not important. What is important is where you get out? Don’t worry about the entry, its all about the exit.

For me that’s a red flag. It suggests to me the presenter or author in all probability doesn’t trade because the entry and stops/exits are both terribly important. You can’t rank one above the other as your entry and stop/exit represents the risk per set-up and is the lynch pin to your position sizing according to your money management strategy. It’s the lynch pin to the potential money you can make.

Remember money management is the secret behind both our survival (lowering our ROR) and our prosperity. As our account balance grows money management allows us to increase our position size thereby increasing our net profit for a positive expectancy strategy.

So the higher average risk or stop per set-up means a trader will have a lower position size relative to a strategy which has a lower average risk or stop per setup.

The biggest draw back of the Turtle strategy is the large size of its stop. It uses a 2 week stop giving it a very high average risk per trade of 4.5%.

Key Breakout has a much smaller average risk per trade of 2.4%.

According to their respective average risk measures, Key Breakout should be a far more efficient strategy in making money since its lower average risk per trade allows for larger position sizes compared to the Turtle strategy.

Let’s review the next performance metric to have a look.

Efficiency (with Money Management)
IF we survive in trading our second objective is to make money. And since we know the secret behind earning big money is money management we as traders want to know how efficient a strategy is when the money management strategy is applied.

In this example I have applied the Fixed Percentage money management strategy where I’ve assumed a starting account balance of $50,000 where 2% of the account balance is risked per set-up.

As you can see Key Breakout, when a conservative 2% Fixed Percentage money management strategy is applied, has hypothetically made $2.1b compared to the Turtle strategy’s $419m giving Key Breakout a superior CAGR of 30%.

Key Breakout is by far the more efficient, profitable and therefore, superior strategy.

Remember entries do matter when they can give you smaller stops!

Difficulty in Trading
Each model has a high level of 21/19 consecutive losing trades. So neither is easy to trade. But then trend trading is never easy. However these losing streaks can be reduced by adding a complimentary and diversified trading strategy to your portfolio of strategies, such as Key Level (retracement trend trading), Key Swing (mean-reversion trend trading) and Key Exhaustion (top and bottom picking).

Key Breakout has a lower worst drawdown of -$61,000 compared to the Turtle’s -$86,000.

The metrics are self explanatory and as you can see the strategies are pretty similar.

Just look at the shape of their equity curves to see how similar the strategies are. I suppose there should be no surprises as they are both breakout strategies however it is uncanny how similar they are. If you currently trade a Donchian/Turtle Channel breakout strategy you should seriously consider purchasing a copy of Key Breakout as it’s superior, making more money on a money management basis.

Benchmark Summary
In my opinion, although the Turtle Strategy has by far more out-of-sample performance data compared to Key Breakout, I feel the latter is superior.

Generally the strategies are pretty similar however where Key Breakout streaks ahead is in its efficiencies;

  • Superior risk/reward (23 vs 18),
  • Lower $ drawdown
  • Lower average risk per trade (-2.4% vs -4.5%)
  • Higher potential profits ($2.1b vs $419m)

For me, Key Breakout is the superior strategy. My efforts have paid off.

You will need to carry out a similar benchmark for your own strategies and if they’re not superior to the Turtle strategy you should consider trading it over a portfolio that you can afford to fund , or even better, consider purchasing yourself a copy of Key Breakout!