Mats Bengtsson

Trading system ideas that lose money

Mats Bengtsson mib over the years

It is quite easy to be fooled into using unprofitable trading ideas

  • The ones having working trading ideas are more likely to be quiet about them than the ones having losing ideas. Simply because the ones with working ideas will always be afraid that they will lose money if too many utilizes their ideas, but maybe executes them better.
  • Many of the ideas that are published and have worked did so when they were published, but the advantage they had is now gone when they are freely available and easily executed and thus used by many.
  • Many programs that are of type "develop your own idea" does for some reason deliver default settings that are far from optimal. Omega Research, having Supercharts and Tradestation as their main tools do for example deliver very few "up to date" indicators/systems/parameters. It is more likely that the developer of a less known tool will spend time including indicators that return a profit.

Even well known indicators like MACD does no longer return profit

One good example of now outdated indicators is that a lot of people have learned that buying when MACD fast average crosses above the slow average is a good buy. In reality this is no longer a good idea.

  • In fact, back testing on stock market data back to 1989 shows that using the original MACD trading idea on the Swedish stock market, buying every time a stock fulfilled that criteria, and selling every time the MACD fast average crossed down below its slow average again, would generate a loss of 1 880 000 SEK. That is a terrible blow in a stock market going upwards on average.
  • To add to that, in one single stock of those, there would have been 28 consecutive losses, and would have demanded a base capital of 128 000 SEK just to be able to trade the account until the first profitable trade
  • Only 31% of the trades would have brought profit, and on average the loss would have been 90 SEK per trade (this assumes a commission of 125 SEK for every trade, buying for 30.000 SEK every trade (this setup assures commission is a low part of the cost, and that trades on low priced stocks weigh in just as high as trades on high priced stocks).

Is the above a realistic loss? No, the real loss would be higher. Commissions would cost more, and the above assumes we always did get the opening price when buying and selling, which will not always be the case.

Variations on MACD might also be unprofitable

Tradestation, and thus maybe Supercharts, include a system that buys on MACD. It does a buy instead of exiting on the MACD signal as described above, and then exits on a diminishing change in ADX.

Interestingly enough, running the same test on that system shows that matters in some way got better, but in other ways became even worse! The maximum loss is lower, the total loss is slightly lower, the percentage of trades winning is slightly better, but: The average loss per trade is worse, now losing on average 110 SEK per trade, thus still on average fooling the trader to play a system that will lose money instead of making profits.

Optimizing MACD on a single index or stock might make it look profitable

When doing optimization, you might optimize an unprofitable system so that it looks profitable in the test environment you have done the optimization in.

Doing the optimization that way might mean overoptimization that does not work on other stocks. You might be losing more money after optimization than before. This can easily be done with for example MACD on the main index of Sweden, making it look profitable while it in fact returns an even higher loss than before.


Never trade stocks without having tested your system. In fact, most trading systems are not profitable if tested over many stocks. Full story...

Do not invest in heating equipment without having compared the alternatives, not only to current situation, but also to each other. Full story...

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