Portfolio Boss

The Ultimate Strategy Checklist: How to Build Worldclass Trading Strategies that Continue to Work for Years to Come

Veteran Trader Reveals 8-Steps to Clockwork-consistent “Hands-off, Profits on” Trading Strategies

Dan Murphy - Portfolio Boss

Dan Murphy | July 20, 2024

If you’re looking to consistently beat the markets, then you’re going to love this checklist.

26 years ago, I dipped my toes into programming my very first trading strategy. It's been a wild ride ever since.

Since then, I've invested more than $4 million to create a supercomputer with a whopping 3,500 CPUs. This supercomputer's prime job? Crafting robust trading strategies from scratch.

In these 8-lessons I am going to spill the beans on what is PROVEN to work. This is not theory. These lessons come from the trenches.

I can without a doubt tell you that lesson #2 is the breakthrough that will completely transform your trading from choppy and stressful, to clockwork-consistent and having fun. I learned it directly from a hedge fund manager 20 years ago, and now I'm passing it on to you.

And then there's lesson 6. This one is bound to piss off the most people because it's so out of left field that you may think I belong in the loony bin. However, dear reader, I've been given the nickname “The Price of Proof” for a reason: I bring the receipts.

Why should you listen to me?

Before writing two #1 best sellers on trading (one hitting 500,000 copies), I was a broke economics student living in a dump of an apartment on the bad side of town.

During my senior year, I made a discovery, and made a b-line straight for my econ professor.

I was shaking with excitement. I handed him an article I had torn out of the Wall Street Journal. It was the most incredible track record from a firm in Long Island.

They were practically minting money every month for nearly a decade.

My professor snapped at me: “impossible!”

“The Efficient Market Hypothesis says markets are random and can't be beaten.”

“The odds of these returns being random are impossible”, I blurted.

He shuffled away, mumbling under his breath.

I stood in utter shock as I watched him drive off in his old beat up Honda.

Here I had presented him with irrefutable proof of a hedge fund that was using computers to make a fortune, and he decided to plug his fingers in his ears.

“I gotta get outta here,” I thought to myself. These people weren't going to get me rich.

But what was I going to do? I invested years into getting my degree. What would my parents say?

I had always dreamed of becoming a trader, but I didn't have much money saved up, and I had already blown out my trading account using half-baked trading ideas.

Yet later that night as I was scouring the web for ideas, something caught my eye.

It was an ad to become a beta tester. One of the original Turtle Traders (who made a fortune back in the 70's and 80's) created new software that allowed you build and test advanced trading systems.

I was at a crossroads: Should I finish my degree, even though I questioned its usefulness? Or should I take a leap of faith and join a group of professional traders even though I was broke?


The Opportunity of a Lifetime

I applied to be a tester, and I was accepted. Man, the software was buggy at first, but I didn't mind because the traders in the group were amazing. I learned more in the first year than the past five.

I didn't tell a soul, but I ended up dropping out of school and worked full time building trading strategies.

I documented my journey to making $1 million on an old blog. It's so long ago that we called them ‘zines back then. 

There was a lot of nonsense published regarding trading back then. Come to think of it, it's even worse now. So I ended up showing my actual brokerage statements to show that what I was doing worked. I even went through the trouble and expense of having my track record audited by a 3rd party CPA…

…that's when the blog really took off, and people started asking me to teach them how to trade.

Fast forward a decade, and I had the fancy cars, living in my dream home in the jewel of Newport Beach, ate at the best restaurants, flew private…but I was stuck. I mean really stuck. I wasn't coming up with new trading strategies. 

I had semi-retired after working my butt off, and I felt like I wasn't going anywhere. You ever feel stuck in a rut?

Since I had been running out of trading ideas, I was experimenting with machine learning. That's where you let the computer discover trading rules for you. That's what the multi-billion-dollar funds were doing. Like the one I told you about in my University days. 

The problem was that it was s-l-o-w as molasses on a cold winter morning. Off the shelf software tools would run for days with little to show for it.

About that time, I was reading an article about a startup that was renting computers in the cloud to do animation. By utilizing low priority “spot pricing” they were saving 80-90% on their cloud computing bills.

That's when it hit me like a ton of bricks: Why don't I create my own machine learning software and harness thousands of computers in parallel so I could build strategies in minutes instead of days?

My back of the napkin math said it would take millions of dollars and at least a few years time. Yet again, I was at a major crossroads in my life. The last time I made a leap of faith, it paid off in spades…

…so I assembled a team, rolled up my sleeves, and got to work.

Five years later, over $4 million spent, and thousands of strategies built…I can tell you more about what works in computerized trading than just about anybody on the planet.

In fact, I can honestly say that what's taught by the majority is quite literally 180 degrees backwards…

Lesson 1: Trust Nothing. Verify Everything

Case in point: I was told I should buy when the popular MACD indicator went above the zero line, and sell when it goes below.

MACD Indicator

Doing the exact opposite (selling the buy signals and buying the sell signals) results in more than DOUBLE the returns.

See for yourself:

Lesson 2: There’s only ONE Free Lunch on Wall Street

This may sound weird coming from me, but STOP trying to build the ultimate strategy. Read on to discover why…

Back in the early 2000s, imagine me, a bumbling beta tester, rubbing elbows with an original Turtle Traders — a group of gents who had made a killing in the 80’s (we're talking north of a cool billion in today's dollars) using their trading systems.

Now picture this place, teeming with the movers and shakers of the hedge fund world, the battle-hardened veterans who've seen it all. It was like stepping into the major leagues, and I was just a rookie. Boy, did I feel like I'd hit the jackpot just by being there.

It was in that whirlwind of finance and numbers that a lightbulb moment hit me. I stumbled upon a nugget of wisdom that I feel compelled to share with you – there in fact is a free lunch on Wall Street.

The secret to consistent trading…

  • ISN’T building a complicated strategy with 20,000 lines of code
  • ISN’T using a new indicator
  • ISN’T hopping onboard the latest fad like NFT’s.

The key to achieving a level of consistency that would make a Swiss watchmaker green with envy? It's a simple, yet powerful concept: diversify your playbook and trade a variety of strategies simultaneously.

If one strategy decides to go rogue, the others step up to the plate, ensuring your portfolio remains on a steady upward trajectory.

Picture trading multiple strategies as a well-balanced diet. Each strategy is a different type of nutrient – proteins, carbohydrates, fats, vitamins, and minerals, each playing a vital role in maintaining your financial health.

Just as a balanced diet incorporates a variety of foods to ensure your body gets all the nutrients it needs, an assorted collection of trading strategies ensures your portfolio remains healthy, regardless of market conditions.

Some strategies may not perform well under specific market conditions, but the others take up the slack, providing a consistent energy source, helping your investments grow and keeping them safe just like an immune system in a healthy body. This is the nourishment your financial future needs, the sustenance that leads to a prosperous and secure retirement.

In all my years, after building thousands of strategies in a wide variety of markets, I have never seen a strategy that wins every month. In fact, the best strategies tend to win around 70% of months.

Yet here’s a group of strategies, created by one of my students, that when combined together have 100% winning months:

Let's back up a minute because I want this to sink in. Here's a list of 100 world-class strategies sorted by their monthly win rate. Each of these strategies could easily beat a typical fund manager:

Notice how the best monthly win percentage is 75%. Most are in the 60-68% category. These are FANTASTIC strategies. Extremely high numbers that maximize gains and minimize the pain.

Yet it's not until you trade them together… that's when the magic of up to 100% winning months happens. And this is the ONLY way you'll ever see your consistency skyrocket to these levels. Are you getting it?  Is this making sense?

Trading multiple strategies at once also dramatically reduces risk. Like having multiple engines on an airplane in case one fails.

I taught this lesson to a student, Josh Jarrett, and he went on to place #3 out of 18,981 traders on Fundseeder. Fundseeder is looking for professionals to trade their fund’s money. In return, they get a cut of the profits.

Pros look for stable returns. Amateurs focus on raw returns, and tend to blow up their accounts.

Here are his audited results (Blue):

Lesson 3: Trade Different Assets with Ease

In my early days as a beta tester for a Turtle Trader, our primary emphasis was put on futures trading.

This gave us the opportunity to dabble in a wide array of assets – you name it, oil, gold, stock indices, even agricultural commodities like corn and wheat, not to mention natural gas, bonds, and currencies.

But let me tell you, it was no walk in the park. Each market was its own beast, with its unique set of rules. We had to juggle varying expiration dates, keep tabs on different contract roll over dates, and navigate through different leverages. It was like playing chess on several boards at once.

A silver lining has emerged in recent years, however. Enter the era of Exchange Traded Funds. These little gems have grown in popularity and come to our rescue, taking the wheel, and handling all the intricate details behind the curtain.

The beauty of it is, they trade with the same simplicity as any stock, turning a previously convoluted process into a smooth, effortless transaction.

Moreover, amassing substantial gains is a cinch with several ETFs utilizing leverage to the tune of 2x and even 3x. This means your investment can potentially catapult to two or three times the regular rate of return.

Here's just a partial list of ETFs:

You can also build strategies to trade individual stocks, sectors, and more. Here are some of the annual returns of strategies we've hit pay-dirt with. With these kind of returns, financial freedom is just around the corner.

Lesson 4: Use Inverse Funds to Hedge Your Bets

I've listened to conversations with top-tier hedge fund managers from around the globe, where they proudly tout a win rate of 51%.

At first, it left me scratching my head. “What's the cause for celebration?” I found myself wondering.

Especially considering most of my strategies boasted a win percentage hovering around 65%, a figure specifically designed to increase the size of winners while reducing the magnitude of the losers.

This particularly struck me with one fund, Jim Simon's Renaissance Technologies, which has averaged a staggering 66% return since 1990. It made me dig deeper, to decipher the secret behind this seemingly modest percentage.

A light bulb moment occurred when I realized that a win rate of 51% inherently provides a safety net against abrupt jolts to your portfolio in approximately 49% of your investments.

In other words, it's actually helpful being WRONG because it smooths out your results, and safeguards you from rare events known as Black Swans.

It's similar to having a financial airbag in your vehicle, ready to soften the impact of any unexpected bumps on your financial journey. A delicate balance that keeps your portfolio steady, even when the market's rhythm becomes a chaotic dance.

I once turned off hedging when I was testing a multi-strategy portfolio. Instead of getting into inverse funds, I had the strategies go into cash. Big mistake.

The maximum drawdown (the worst percentage decline) went from 7% to 26%! That's when I quickly realized how important hedging is to smooth, steady returns. Needless to say, I'll never do that again.

Now I realize I haven't talked about “inverse funds” yet, so let's get into this important topic…

Adopting this Singular Step Safeguards You from Infinite Risk

Many budding algorithmic traders have this tendency to craft a strategy that alternates between going long and short.

Let's say, you buy Microsoft stock (MSFT) at an opportune moment. Then, you go short on MSFT to profit when the stock takes a dip. The hitch here is that short selling, particularly with stocks, exposes you to unlimited risk. It's like walking a tightrope without a safety net. You could end up with a negative balance in your trading account and find yourself owing money to your broker. They could even claim your assets, such as your house.

Even the mighty Jim Simon's fund was ensnared during the Meme stock frenzy of 2021. They were holding short positions on Gamestop and several other companies. Gamestop stock rocketed over 3,000% in a mere month. Fortunately, Renaissance Technologies had employed mark to market options for their trades, limiting their loss to the premium they paid. Otherwise, they would have faced a catastrophic loss and gone out of business like Melvin Capital.

But here's the thing, you and I, we're not billionaires. We can't engage in special option deals. Instead, we need to be savvy and turn to inverse ETFs. Think of them as your Kevlar vest. The worst-case scenario with inverse ETFs is that they can only drop to zero.

For instance, instead of short selling Microsoft, you could buy the inverse NASDAQ 100 ETF (PSQ). Given that 80% of stocks move together during downturns, this strategy seems logical and prudent. Remember, in this financial arena, it's not just about making the right moves, it's about making smart moves.

You’ll often find that almost every popular ETF has an inverse.

For example, the S&P 500 ETF (SPY) has SH.

The natural gas ETF (BOIL) has KOLD.

The leveraged bond ETF (TMF) has TBT.

Oil (UCO) has SCO.

You could even trade real estate (DRN) with its inverse (DRV).

Take a look at the annual returns from strategies built with these long/inverse ETFs:

Lesson 5: The Road Less Traveled Leads to Untold Riches

Every novice dipping their toes into the world of machine learning has a rite of passage, a common initiation if you will – attempting to predict the stock market.

Eagerly they gather price and volume data of their most admired stock, and with a sense of naive optimism, they attempt to forge a neural network that can foresee the stock prices of the coming week.

Unfortunately, that works about as well as a screen door on a submarine.

The real secret sauce lies in leveraging elusive data. I mean the kind of information that's so rare, it's practically unheard of in mainstream circles. Obtaining such data usually comes with a hefty price tag. Now, don't let your mind wander to common indices like AAII sentiment, index option put/call ratios, NYSE up volume percentage, or any other data you might commonly hear on CNBC. I'm talking about unique, peculiar stuff – like ETF mispricing data.

Real Estate ETF (DRN) Daily Mispricing

It might come as a shock, but ETFs are mispriced to the staggering tune of $43 billion each day. The trading value of an ETF on the open market often deviates from the actual value of the assets it holds. It's either selling at a premium or at a discount. While most ETFs like SPY instantly correct any mispricings, some can hold onto their incorrect values for a day or two, especially those owned by the colossal BlackRock fund.

As the largest fund in the world, any movement of money by BlackRock leaves a fingerprint. Like a financial Sherlock Holmes, tracking these fingerprints has led to the creation of some of the most steady and lucrative strategies of my career. So, the key isn't just in knowing the data, but understanding where to look and how to interpret it.

That leads me to…

Lesson 6: Keep it Stupid Simple

I’m going to show you something strange…something few on this earth have ever seen. This strategy trades between Novo (NVO, the maker of the popular weight loss drugs like Ozempic) and the inverse S&P 500 (SH). Nothing strange about that.

What’s strange is that this strategy is defined by one simple line of code. It has nothing to do with earnings, economic data, or even daily stock prices. There aren’t even any parameters to fine-tune. Instead, it compares an ETF mispricing with another ETF’s mispricing – in another country!

return get(‘EWP Premium') >= get(‘EWI Premium');

I know it seems too simple, but I’ve got actual client brokerage statements to back up this claim:

At this point, I may be the source of your utter shock — and hopefully amazement. Wasn’t mechanical trading with a computer supposed to be about MACD, RSI, stochastics, and a bunch of price indicators? Isn’t a great strategy a complex set of rules?

The answer, of course, is a resounding “no.”

I will remind you of Lesson 5: The Road Less Traveled Leads to Untold Riches.

Lesson 7: Always Make Sure You 
Can Get Out in an Instant

You’ve probably heard of a “fat finger” trade? Where a sudden explosive move in a security is blamed on a trading firm doing something silly like entering 2,000,000 shares to buy instead of 20,000. It actually happens. But why does the stock or ETF move so quickly?

It’s all about liquidity. There are only so many shares above or below the current price.

Here's a real life example from Apple's order book. The bars are in two cent intervals, and show how many shares are being offered at that price.

If you're trading a few hundred shares — no problem. You're not going to move the price all by your lonesome. If you're trading 10,000 shares on the other hand, you may move the price of AAPL several cents. This is known as slippage.

Apple (AAPL) Bid/Ask Order Book

Pro tip: When I'm designing a strategy that holds for a few days, I'm typically looking for a 1% minimum average gain. That way I can easily overcome both commission and slippage. That way my broker isn't making all the money.

Now imagine if you tried to buy 100,000 shares of the wheat ETF (WEAT), which averages only 100,000 shares per day as I write this. Their order book may only have a couple hundred shares at each price level. You would drive prices up considerably, right? That’s exactly what happened when traders bought WEAT as Russia invaded in 2022.

See how premium exploded by a mind-numbing 8.77%? This is when the dumb money got in. They had no idea they were paying 8.77% more for the same thing they could get in the futures market. Prices quickly collapsed afterwards.

Despite the fact that many ETFs come equipped with an automated process to balance the spread between ETFs and the assets they hold, I've learned to stick to a simple principle. I don't trade more than 1% of the average daily volume of a stock or ETF. This straightforward approach effectively steers me clear of the risky world of penny stocks.

Lesson 8: Conceal a Segment of Your Data or 
Risk a Portfolio Meltdown

Oddly enough, as the power of computing increased exponentially, the reliability of trading strategies appeared to be on the decline. You might wonder, what was happening?

The fact of the matter is, it's incredibly easy to overfit your trading rules to past data, particularly if you're parameter stepping. This is when you test an indicator with a range of values to identify what performs best in a backtest. For instance, assessing every possible value of a moving average from 20 to 200 days.

Regrettably, the Turtle Trader who mentored me was caught off guard by this phenomenon. The fallout was so severe that he never really recovered. He changed, and not for the better. The last I heard, he had given up trading altogether and was going through a rough patch. Substance misuse, alcohol problems… it's a heart-rending situation. It's the reason why I talk about over-fitting in almost every talk I do.

The remedy to this conundrum is pretty straightforward. During the optimization phase of your strategy development, you keep a chunk of your data under wraps. It's like keeping an ace up your sleeve.

Once you've hammered out your strategy, that's when you bring out your hidden data. You then measure up how this “out-of-sample” data performs against the data you used when cooking up your strategy.

Here’s how to best explain: you're an esteemed aerospace engineer, tasked with designing an advanced aircraft. You've spent countless hours honing your design on cutting-edge CAD software, ensuring every curve and angle is perfect.

But your work doesn't stop at the design stage. You know that the true test of your aircraft isn't in the computer simulation, but in the sky. So, you bring in an ace test pilot to put your creation through its paces. This is your “out-of-sample” testing.

The pilot takes the aircraft through a series of rigorous maneuvers, testing its limits, and giving you invaluable feedback that you simply can't get from a computer model.

And only after passing this demanding test do you dare accept passengers on commercial flights.

Similarly, in the world of trading, before ever trading a red cent, we put our strategies through rigorous “out-of-sample” testing, ensuring they can handle the unpredictable turbulence of the market.

Here's what this looks like when I’m using my supercomputer to build strategies. Notice how the orange and brown lines are close together and improve over several generations of evolution.

On the flip side, let's turn our attention to a test that illustrates a lack of improvement in out-of-sample results, creating a considerable gap between in-sample and out-of-sample performance.

Picture this as Pac-Man's mouth gradually widening – a clear signal that there's something amiss. It's a classic case of a test that doesn't meet our stringent standards and, therefore, should be disregarded.

Bonus Lesson 9: Only Trade What You Test

Once your high-tech strategy has sailed through a gauntlet of rigorous tests, it's time for you to step back and get out of your own way. I've often found it's easier to mentor a rookie with a clean slate than to retrain a seasoned trader bogged down with old baggage. See, established habits, like being tethered to the news, can throw a wrench in the works by tempting you to meddle with your strategies.

That's why I've got a golden rule for traders new and old: I set up my orders first thing in the morning. My broker takes care of the rest. I DO NOT fiddle with them during the day. In fact, I steer clear of news, tips, and opinions as much as I can.

Just me and my broker. No outside influence creeping in

As the wise veteran trader Ed Seykota said in his famous Whipsaw Song:

“What do we do with a hot news flash, honey?”

“We stash that flash right in the trash.”

A Special Invitation

Given that you've journeyed this far, I gather you carry a steadfast resolve to bring more stability to your trading game. It's not just that, though.

You're intrigued by the idea of employing strategies that have been rigorously validated by computer algorithms – strategies that leverage every element I've detailed in this checklist.

Now I have a question for you:

Would you like me to build money-making strategies for you?

That way all you have to do is trade the buy and sell signals.

If so, I wish to extend an invitation to you for my new…

Strategy of the Month Club

Each month, I craft a fresh strategy for you with the rules fully revealed. The more strategies you have, the better—because it boosts the odds of hitting that perfect setup, which increases profits and consistency.

Each strategy I design undergoes strict “out-of-sample” testing to minimize the risk of it just fitting past data—a mistake many other strategy builders make and a leading reason why most trading strategies flop.

I'll walk you through the complete strategy rules, detailing every step and explaining the logic behind them, all through crystal-clear video tutorials.

Best of all, the strategy will automatically download into your Portfolio Boss app, making the whole process a breeze.

Remember what I proved in Lesson 2: The more strategies you trade, the more consistent the results. This is the only free lunch on Wall Street, and the secret to finally obtaining financial freedom.

Simply allow our machine learning technology choose which strategies to trade for the month. It's completely automated, and is included with your subscription.

And I only build strategies with stocks and ETFs that are highly liquid and predictable (see Lessons 7 & 5).

As a Charter Member, you receive 80% off the retail price. Just use this coupon code for a massive discount (Expires soon):

🎟️ Discount Code: sotmspecial

Go ahead and click the button below and get started with Strategy of the Month Club now:

Bonus: Country Boy NASDAQ 100 (QLD/QID) Strategy ($2000 value)

You're going to love this…

I received a message the other day, asking if there would be bonus strategies for charter members of Strategy of the Month Club.

So I thought about it for awhile.

What strategy would be a fantastic bonus? One that is truly unique, can be easily traded, and could bring some certainty to uncertain times.

So I've decided to give you my favorite NASDAQ 100 trading strategy: Country Boy QLD/QID ($2000 value)!

I made this strategy in 2022, and it made new all-time highs as of last week.

The 80.2% annual returns are very high for three reasons:

1) It uses the BlackRock mispricing method for generating trade signals

2) The use of 2x leveraged ETFs

3) Goes long and inverse so it can make money whichever way the NASDAQ 100 decides to go

The strategy is available right away when you become a Charter Member of Strategy of the Month Club. 

Hurry, the 80% discount ends soon.

100% Money-back 30-day Guarantee

You’re also covered by my full 30-day guarantee. If you don’t love the strategies, just tell me and you’ll get a full refund. I'm not happy unless you're absolutely loving these strategies.

Trade smart,

Dan “Prince of Proof” Murphy

P.S. Time is of the essence, my friend. See, if you don’t act and secure your spot before this month's curtain falls, you'll lose your chance to access this month's highly sought-after strategy.

Remember, only those who join the club within the current month get privileged access. Miss this window, and the strategy gets securely locked away in our vault, only to be retrieved for a standalone price of $997. So, I urge you to make your move while the clock is still ticking.

P.P.S. Charter Membership pricing ends soon! Don't forget to use discount code: sotmspecial

🎟️ Discount Code: sotmspecial