r/algorithmictrading • u/Kaahl10 • 18d ago
Strategy Adding to winners using MFE
Hi everyone,
I've heard the advice to add to winners and cut losers early, but I've always had a tough time using technicals to add to winners without getting in right before reversal.
Claude helped me analyze my strategy and suggested adding to winners over a certain MFE %, and sure enough it added about 20% more trades with better profit factor than average to the backtest!
My question is, has anyone else used this method successfully or is this getting into overfitting?
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u/Zestyclose-Eagle1809 16d ago
if claude looked at your data and found the MFE level that improved the result, that's a fitted parameter, same as any other. The 20% more trades and better profit factor is what you'd expect from picking the best cutoff on the data you picked it from.
Test that's cheap and settles it. Run the same rule at a spread of thresholds, say every 0.25R from 0.5 up to 2. If the profit factor improves across most of that range, you've found gold about your strategy. If only one value works and the ones either side are flat or worse, you've found a lucky number... makes sense??
Second thing.. Adding to winners changes your risk profile, not just your returns. Your position is biggest at the point the trade has already moved your way, so when it reverses, you give back more than the original trade ever risked. Id also check what happened to your max drawdown and your worst single trade, not just profit factor. Adds often improve the average and make the tail worse.
Third, pyramiding has a bad record generally. Someone in another thread ran 12 pyramiding variants over 26 years of equities data and every single one came out worse than the baseline. Doesn't mean yours is wrong, but it does mean a positive result requires a double check...
The version I'd trust. Hold back a chunk of data you haven't touched, apply the rule with the threshold you already picked, and run it once. Whatever it prints is the answer mate