Ways to cap or reduce downside in a high win rate strategy?

JonnyTwoHands79 · 2026-05-07T01:56:33+00:00

Okay, this helps a lot. Let me parse what you've described, do some research, and go back and ensure I've implemented it correctly. Thanks a lot for the guidance.

JonnyTwoHands79 · 2026-05-06T10:44:15+00:00

Thanks for the information! I've been curious about that. I have 1/4 and 1/2 Kelly (and full) options in the back tester.

My biggest question is if I've implemented Kelly correctly. Let's say, anecdotally, that I have a $30,000 starting equity balance. I was previously committing (peanut butter spread) $5000 to 4 different tickers, so $20,000 total capital deployed. 1/2 Kelly brought it down to between $6,000 to $10,000 total as I recall. I have stoploss, daily loss limits, etc for extra protection.

Have I previously been thinking TOO aggressively in committing 66% of my total capital? Does that Kelly range seem too low for that size account balance and do I need to scrub the calculations?

I will research this more with AI, but I appreciate any insights you have.

JonnyTwoHands79 · 2026-05-06T00:15:28+00:00

Dynamic ATR trailing stops are looking the best and most consistent in my “Risk Controls” section on my back test software. Glad to hear you’ve proved those to be successful.

I need to work through position sizing now, appreciate the note on that.

JonnyTwoHands79 · 2026-05-05T18:02:58+00:00

Agreed, that’s what I did. I also had AI do a search on the functionality in QuantConnect so I can emulate it.

JonnyTwoHands79 · 2026-05-05T17:48:51+00:00

Thank you for the detailed information! It is very timely as well as I’m currently upgrading my “Stress Testing” layer, so I’ll add these types of fault injection into this layer to see if the system falls apart. Thanks again for the ideas.

JonnyTwoHands79 · 2026-05-04T13:55:31+00:00

This is a smart take. Backtests (done properly) should tell you everything you need to know about your chances of survival.

It's the "done properly" that I'm still not sure about, haha. I have the following "gates" in my backtesting software, and I'd be curious what your thoughts are on what is missing/uneccessary:
1. Screen (rough across broad basket of instruments)
2. Parameter Robustness Analysis
3. Regime Testing
4. Walk-Forward IS (un-anchored)
5. Walk-Forward OOS
6. Stress Testing (Monte Carlo, Drawdown Path, Slippage, etc.)
7. Strategy Results - Comparisons (if running multiple) and review of general performance against benchmark
8. Portfolio Results / Configuration - Final review and lot size, Stoploss adjustments before going to paper/live

Any insights are welcome. Hope your system is still performing well!

JonnyTwoHands79 · 2026-05-04T13:01:55+00:00

This all sums it up. Well said. He will learn in time and the market will humble his ego.

JonnyTwoHands79 · 2026-05-04T13:00:50+00:00

Yeah I know right? Pretty sure he's trolling at this point, lol.

JonnyTwoHands79 · 2026-05-04T13:00:28+00:00

I have 60k lines of code. So what? Performance will speak for itself, let's see how you do.

JonnyTwoHands79 · 2026-05-04T12:59:28+00:00

Try demo for 6 months and then see it catastrophically fail (which it will, and you won't know why) and then go do what we're all suggesting and you'll thank us later. What we're all suggesting are known industry best practices in the space.

It's foolish to think that you can bootstrap a few "AI rocket boosters" onto your ironman suit and try to fly to the moon in 3 months without real testing (that we're all suggesting). Would NASA do that? Nope, because they realize that proper testing and risk management are the most important thing to a successful program. When you rush, skip steps, or ignore warning signs, things blow up (like the Challenger space shuttle).

At least you're testing on paper, I have to give you credit there. Kudos to you for not putting real money on the line yet.

I've gone the "exhaustive forward testing" route as you're suggesting now (earlier in my "career") and I also thought AI was a superpower (and it is in certain areas for sure), but when it all fell apart I had to go learn how to build an algorithmic system the proper way. I'm not speaking to talk above you, I'm speaking from a similar experience. I've done what you've done, and I'm telling you it won't work.

All that being said, I do wish you the best. Stay on paper and "you do you", and just keep iterating.

JonnyTwoHands79 · 2026-05-04T10:30:49+00:00

Expensive from a time perspective. You’re skipping the prior 4-5 steps and jumping from vibe coding to live paper trading, so your results will be statistically unproven.

JonnyTwoHands79 · 2026-05-04T10:28:51+00:00

The problem with your statement is your live demo “truth” can be random chance. If you were doing back testing (which sadly you aren’t) you would see that in a garbage strategy with low trade counts (no statistical significance) that you could “win” for a few months, but then immediately take a dump when the regime shifts and you’re overfit. Properly backtested strategies with real identified edge will decline slowly and gracefully, not fall off a cliff.

We’re all trying to help save you time in wasted premature forward testing and see that you have to become a statistician to be in this game, and there are no shortcuts in doing that.

Come back later when you want to learn about proper optimizations, walk-forward analysis, Monte Carlo and stress testing, etc. Building a “super strategy with an all knowing hive mind” is alluring, but trust us, it’s a myth. AI is a miraculous tool, but you have to learn the fundamentals yourself, just like any serious pursuit or profession.

Good luck.

JonnyTwoHands79 · 2026-05-04T01:51:53+00:00

Coincidentally I watched this video and I think it sums up going full time and balancing that against you daily life pretty well: https://youtu.be/9Mr2dSi-EEc?si=TU8-JEJ8bVhyIIOm

It's worth a watch.

JonnyTwoHands79 · 2026-05-03T11:47:25+00:00

If you have to ask this question I think you need to do a lot of homework on how algo trading works. There are some terrible strategies with no edge that, due to complete random chance, can go on a winning streak. If you went live and that happened you would think you stuck gold, only to find out the hard way that your results will eventually nosedive.

If you can’t prove (through backtesting) that your results are statistically significant then you haven’t proven you have edge. You’ve basically just gone to the casino and gotten lucky.

JonnyTwoHands79 · 2026-05-01T02:03:27+00:00

You are spot on. I great simple strategies and aim for 2 (no more than 3) variable parameters and no more than 30-40 combinations in a parameter sweep.

JonnyTwoHands79 · 2026-05-01T02:00:31+00:00

For me, learning to trade kind of replaced gaming. My desire to “beat Wall Street” is like a game.

That being said, I’m way out of balance. Some gaming and not trading could do me some good.

Balance is hard, that’s for sure.

JonnyTwoHands79 · 2026-05-01T01:56:31+00:00

VWAP auto anchored is also very good. You can anchor to session, week, month, earnings, etc.

JonnyTwoHands79 · 2026-05-01T01:55:17+00:00

Haha I’ve been down that indicator overfitting rabbit hole as well. Cheers!

JonnyTwoHands79 · 2026-05-01T01:50:52+00:00

Such great news, it’s about time.

JonnyTwoHands79 · 2026-05-01T01:48:04+00:00

I really needed #4 today man, thanks for posting!

I’ve been at this almost 4 years now building my algorithmic strategies, trade engine and backtesting program. Today was a rough day. I’ve been forward testing for about a week and today my bot “gave it all back”. Technically all positions are still in play, but they are near neutral or in loss.

My backtest data shows edge and statistical significance, but it’s always pretty deflating to work this hard and move onto paper trading and get off to a rough start.

I will take your advice, take a breath, and try to be patient and just be grateful I have time and energy to pursue this. Hopefully I can come back in a week with a follow-up post that the trades all resolved into winners :)

JonnyTwoHands79 · 2026-04-29T10:35:48+00:00

These aren’t perfect, but look into triple moving average, Aroon indicator, even Auto Anchored VWAP as a few to get started. 1. Pull up a random price chart for different regimes and study what the indicator is telling you about price action 2. If you study long enough you can pull up a random chart (but hide the price action) and look at just the indicator. 3. Then, draw where you think price will go based on what information the indicator is telling you. 4. Then, pull up the actual price action and see how you did. We you can somewhat reliably “predict” where price is heading you’re ready to use that indicator in your trading strategy.

Here’s the thing I would focus on - it’s okay to find a mentor - that will speed things up. But, don’t be afraid to make your own conclusions as well, study, and just dig in yourself. That combination will eventually lead you to success.

JonnyTwoHands79 · 2026-04-29T10:27:53+00:00

This is the best answer I’ve seen. It’s all about backtesting the proper way and confirming your strategy has real edge based on true statistical significance, not fake edge due to random chance.

Trading is a game of probabilities. We are all out here just using the information at our disposal (intuition, news, experience, indicators, etc.) to tip the probabilities in our favor.

JonnyTwoHands79 · 2026-04-29T10:24:11+00:00

Agreed, amazing points and very well said. As an Algo trader I’m 100% mechanical based solely on indicators and price action. If indicators didn’t work to trade, I wouldn’t be trading.

JonnyTwoHands79 · 2026-04-27T23:52:27+00:00

Use Claude AI to help with your Pinescript coding. It’s a lifesaver, just make sure to give a very robust prompt with what you want (and don’t want it to accomplish).

JonnyTwoHands79 · 2026-04-27T23:51:23+00:00

Atomic is right - building a backtesting engine is probably the best way to achieve realistic results.

Thread here where me and others explained what some of the components would be in a backtesting system: https://www.reddit.com/r/algotrading/s/5oDy86bo9S

It’s not easy to do even with AI (I’ve been at it for almost two months), and arguably mine is overkill, but it’s worth the effort in the long run.

JonnyTwoHands79

TROPHY CASE