Backtesting Ivan Sherman's Trading Strategy: Best Stop Loss Revealed

[00:03] 46-year-old Argentinian who just won nothing less than the most important trading competition in the world, where 500 traders have been vying for the title for over four decades. In 2023, Ivan generated a return

[00:19] of 491%, surpassing the return of the runner-up by more than 200%. In a previous video, I explained one of his best trading strategies, revealed by him in a seminar, with an

[00:34] by him in a seminar, with an 80% success rate and the three simplest rules I've ever seen, making it a perfect strategy for both beginner and

[00:47] advanced traders. However, in that seminar, Ivan didn't explain the exact stop-loss point. Since you indicated in the first video I uploaded about this strategy (which you'll find in the first pinned comment below

[01:01] and in the description of this video) that you were doing a complete backtest of the strategy to determine the best stop-loss zone, in this video we'll see if one of the best strategies is profitable.

[01:16] Trading by the best trader of 2023. What is the best way to set the stop loss for the strategy? And what profitability does it generate over a what profitability does it generate over a 16-year period?

[01:37] can assure you that they will impress you quite a bit. Let's start by briefly detailing what the strategy was based on. It was a trend-following strategy, meaning it looked for continuations of an upward trend exclusively in the S

[01:52] &P 500. It consisted of three rules and was executed on a daily chart. The first of the three rules was that the S&P 500 had to be in an upward trend, and this was determined by seeing that the price on the daily chart was

[02:08] above the 200-session simple moving average. The second rule was that in this upward trend, the S&P 500 had to fall for three consecutive days. For example, in this case, it has fallen for three consecutive days. Why? Because the close of

[02:24] three consecutive days is below the close of the previous day. Here you can see that these last three candles have all closed below the close of their respective previous days. In this other scenario, it is true that the

[02:41] price It has closed three consecutive days in negative territory. However, the first close was above the previous day's close, so regardless of the red candle, it was a bullish close

[02:55] compared to the previous day's close. Once these three consecutive closes were formed, Iván executed a market buy at the opening of the fourth day, that is, at this precise moment. He closed the

[03:11] position when the price closed above the price closed above the five-session simple moving average, waiting for the next day's opening to be above that close.

[03:23] So here we have the first close at the opening of the next day, and Iván would close the position. As you can see, if the price goes in the direction Iván expects, there's no problem because

[03:37] we have a clear way to exit with a profit. But what happens if the price goes in the opposite direction? What is the way to exit with a loss? What is the point at which Iván closes the position to avoid losing more money? Well,

[03:51] actually, in this type of strategy, it's relatively easy to predict where the stop loss could be placed, since if we have executed... Taking into account these last three candles, it's common to place the Stop Loss below

[04:05] some low of the previous candles, but the reality is that we don't know exactly what process Iván follows to place the Stop Loss, since it could be based on some indicator, another Moving Average, for example, it could be

[04:18] based on a previous support or resistance level (we would have to determine exactly what that level is), it could be based on a specific number of pips, or it could be based on a certain risk/reward ratio; that is, if he wants to

[04:32] gain 2 to 1, he sets a Stop Loss based on an approximate percentage relative to the Take Profit of the five-session simple moving average. But by mathematically structuring both the entry and exit rules regarding Take

[04:47] entry and exit rules regarding Take Profit, I find it quite difficult and unrealistic to calculate the Stop Loss based on such subjective concepts. So what we are going to do next is run a test that will

[05:00] automatically take into account the data of the last 16 years, execute the rules we have set and that Iván Sherman establishes as one of his best trading strategies, and tell us, based on that objective data, what it

[05:14] is. The best area to place the Stop Loss will be determined based on two parameters: first, the distance from the entry point, and second, the volatility. Regarding the distance from the entry point, we will

[05:28] execute each and every trade from the last trade from the last 16 years and automatically, based on that data, determine the most efficient Stop Loss. That is, it will execute

[05:43] each and every trade since 2008, calculating different Stop Loss configurations, and based on the data obtained from all those trades, it will objectively determine the best possible Stop Loss for each and every

[05:59] trade. The distance from the volatility will be calculated by averaging the percentage change in the closing price over the last 14 days. For example, here you see a candle that closed at -0.14%. and the

[06:14] previous candle closed at -0.82. If we subtract, the -0.82. If we subtract, the percentage change difference is 0.68 per. This would be calculated not only in reference to the last two

[06:30] candles but also in reference to the last 14 days. When we execute a position, we would set the stop loss based on the average distance of those last 14 days. To help you understand, there are two different methods for calculating

[06:45] the best possible stop loss. One is based on calculating all possible percentages and determining the optimal percentage, and the other is based on calculating the average volatility of the last 14 days. Backtesting will

[07:00] not only tell us the optimal percentage for the first option but will also indicate which of the two options is the most valid and profitable for determining the stop loss in this

[07:13] trading strategy by Ivan Sherman. But before revealing the final returns, I assure you they will not leave anyone indifferent. We'll see them in the last part of the video. What I'm going to do is briefly explain the

[07:27] most important points of the automated code that will allow us to access these numbers, simply so you understand a little about where the conclusions we'll see come from. The final part of the video, from line 8 to line

[07:39] 28, sets the parameters of the trading strategy that we mentioned earlier in the chart, as well as other interesting data such as the account being $1,000 as indicated by line 13. From line

[07:55] 30 onwards, the entry parameters and other data are established, such as the position size and the Stop loss, which in this case is adjusted based on a fixed entry price, calculating what would have been the best stop loss of all

[08:09] would have been the best stop loss of all the trades, which is stipulated at 0.40 . Changing the type of stop loss and moving on to the volatility type, we can see that we start from the same basic strategy as in the other

[08:23] strategy, obviously setting the same initial parameters. From initial parameters. From line 29 onwards, we are calculating the same entry parameters, but adjusting the stop loss based on the

[08:36] average volatility of the last 14 days. Finally, on line 96, you can see how this volatility-based stop loss is calculated. As I mentioned, it takes into account the percentage change in the daily close from one day to the next,

[08:50] and by taking an average of the last 14 days, it would be like a kind of ATR (Average True Range) indicator. From here, the only thing left is to run both strategies to determine which of the two stop loss types is

[09:06] more profitable: setting the stop loss at 0.40, since the code itself has indicated that it is the optimal stop loss for that type of stop loss, or, on the contrary, varying the stop loss based on the average volatility of the

[09:20] last 14 days. So, starting Based on the 0.40 difference in Stop Loss, we can determine that the chart is extremely bullish, but not only that, it is also quite consistent. It has certain

[09:35] moments of decline, as in any trading strategy, but it tends quite well upwards with a total profitability. Look at this data: total profitability. Look at this data:

[09:50] 29.60, that is, a 2300% profitability executing 156 2300% profitability executing 156 operations with almost 63% success operations with almost 63% success and a total drawdown of 17%. By

[10:04] executing the strategy based on the average volatility, we see that the graph is also quite similar. At first glance, it may seem that it has fewer periods of decline, or at least that the periods of decline are not

[10:19] as aggressive, but in general terms, it also tends quite well upwards. In this case, the final result is 2,800,000 8 22.39, that is, a return of

[10:34] 22.39, that is, a return of 2700 percent. In this case, the 2700 percent. In this case, the success rate is 73% with a success rate is 73% with a total drawdown of 10%. Therefore, if

[10:46] we compare the two graphs, we don't see much difference. However, in terms of profitability, the first stop loss gives us a return of a return of 2300%, while the second stop loss, based on average volatility, yields 100%.

[11:00] The success rate for the first stop loss is 63%, and for the second, based on average volatility, it's 73%. Finally, the total drawdown for the first stop loss placement is

[11:17] 17%, and for the second, it 's 10%. 's 10%. Therefore, we can confidently state that placing the stop loss based on the average volatility of the last 14

[11:31] days is clearly better than placing it based on a 0.40% distance stop loss. Just to give you some perspective, we are trading the S& P 500, and you might say, "Hey, but in this case, the graph will be very

[11:46] similar." In fact, the The S&P 5500 has also tended to rise considerably at any point in history, but from 2008 to the present it has tended especially upwards; in fact, the return of the S&P 500 from

[11:59] 2008 to 2024 is approximately 300 percent. In contrast, these two strategies are generating returns that are practically ten times higher than what you would have obtained by investing in the S&P 500. Remember that

[12:15] below, in the first pinned comment and in the description of this video, you'll find not only the first video I made about Ivan Sherman's strategy but also other videos and links of interest, such as courses,

[12:27] tutorials, training, and other profitable trading strategies—all 100% free content so you can continue learning as a trader without investing your own money. I'll leave this video here. I hope you liked it and that it was

[12:41] helpful, which is the important thing. If so, please like, subscribe, share it with friends and family, and I'll see you in the next video. Goodbye!