I reverse engineered and back tested the strategy of a prop trader that is straight making a living off my prop firm. Now hold on. He isn't making millions [music] of dollars and buying Ferraris.
He's just making a steady full-time income, which is the step you have to meet before you start buying Ferraris. Here are his numbers. Four payouts over 2 months, 17,439 total P&L, 1.
25 profit factor, 703 trades. And today I'm going to break down his exact strategy in three stages. The entry model, the exit model, and the riskmanagement process, both for the long strategy and the short strategy.
And weirdly, they're completely different strategies. I tested what happens when you simply invert the long strategy for [music] shorts, and you'll see why he doesn't do that. starting on the whiteboard, then on the chart, and I'm even going to show you live back [music] test data so you can see exactly what the historical test [music] produced.
And later, I'm going to share the single most important upgrade to this strategy that I found that could make it work even better. It's important, so be sure to get there. And for the sake of anonymity, we'll call this guy trader MNQ.
And obviously, nothing in this video is financial advice. First things first, micro NASDAQ or traditional US futures and explicitly fiveinut time frame and you will see why soon. Now the philosophy of this strategy is hybrid scalping.
I know hybrid scalping isn't really a thing but it's the best way for me to describe it. I'll explain why in the exit strategy section. On the long side, trader MNQ uses an intraar ATR signal.
And there is one rule to this that makes or breaks this strategy. But first, we need to understand what ATR actually is. Even if you already know, don't skip this part because it lays the foundation for everything.
Now, ATR is basically a measure of volatility. This is ATR. This is usually what it looks like on a chart.
And when ATR is low, as it is right here, candles are generally a much smaller range. The open, high, low, close are more compressed. But when ATR is high like this, candles are generally much larger.
The open, high, low, close are usually more spread [music] out. That's not a perfect technically accurate description of what ATR [music] measured, but it is a good heristic. So, if the NASDAQ is moving, let's say, 20 points per candle, ATR is going to [music] be relatively low.
But if it suddenly starts moving 100 points per candle, ATR rises. But the most important thing, ATR does not care about price direction. Big moves up and big moves down both increase [music] ATR.
We're just focused on the magnitude of movement. So this traditional ATR indicator is essentially asking how much has price typically been moving per candle recently. [music] Because a 50point move in a compressed market that looks like this could be absolutely enormous, but this same 50point [music] move in a highly volatile market might be completely normal.
ATR gives us the context to know the difference. And you can find this indicator on any charting platform. It's not some big whoopity secret.
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Now, the way this ties into the entry model is using ATR bands. This is an upper ATR band. This is a lower one.
There's tons of indicators that do this. They're just price envelopes based on what the current measurement of ATR actually is. Obviously, this is ATR.
Now, let's say this specific data point of ATR is $50. For this ATR measurement, the upper band piece right here and lower band piece will both be $50 [music] away, whatever the current ATR measurement actually is. But, and this is extremely [music] important, you always calculate the distance of the ATR bands based on the [music] previous candle's closing price.
This is important because you must [music] use a static reference point or else the bands will just go up and go down infinitely [music] and never get touched and they become completely useless. Now, and this is very important, look at ATR. It is increasing.
It started at $50 over here, but let's say it's increased all the way up to $100 at [music] this very top point. Final example for drawing these bands. We have 100 ATR and right here is our most current candle.
To draw these bands correctly, we look at the previous candles close. For the sake of simplicity, let's just say that's right here. Then we go $100 upwards.
And from here, we would go $100 downwards. And that is exactly where our ATR band measurement is. This is important.
Now, I did keep it symmetrical just for the sake of example, but this lower band would be a little bit higher if this is the close we used. And of course, this process continues indefinitely forever and ever and ever. Now, I'm about to show you exactly how he enters a trade.
This black line is price. This is our lower ATR band. And obviously, this is ATR.
Now, let's say that right here ATR is 50. Up here, it's 100. Down here it's 75.
Up here we'll just do 100. Again, you get the point. These numbers are all ATR at the current time that this price data was developing.
But what Trader MNQ actually does is takes each of these ATR numbers, whatever ATR was at the time, and multiplies it by 3. 1. Trust me, this seems [music] suspiciously specific.
So obviously, I tested it. So, and this is absolutely crucial to the success of this strategy for him. Trader MNQ takes whatever ATR is at the time and always multiplies by 3.
1. He didn't tell me specifically why that number, but [music] again, I tested it. It checks out relative to his performance at IQ Capital.
For a simple example, take our ATR measurement of 50, multiply by 3. 1, and that equals 155. Again, there's an indicator that does all this stuff for you.
You do not need to do it on a whiteboard with my terrible handwriting. And I'll show you all this on the chart anyways. But because we're multiplying ATR by 3.
1, that means this lower ATR band is always going to be further away from price than just a one ATR band on its own. Now, finally, this is how he enters trades. Let's say this is where price currently is and we get a candle body that forms and kind of looks like this.
It doesn't really matter. And remember, we always anchor the next ATR band measurement based on the [music] previous close. So, let's say this is the next ATR lower band measurement.
If the lower wick of this candle touches the ATR lower band, this is a long entry. There is literally no other [music] filtration method to this and I thought it was crazy but you'll see the results soon. Now this is important.
[music] Trader MNQ only uses the lower band. He does not use this on [music] the short side. And again quite literally whenever price clips the ATR lower band at any point that is where he goes long but not on a market order he does this with a limit order.
This means wherever the lower band goes, there is a dynamically updating limit order always following it. Whenever it's touched, boom. And hopefully price does that after, but we can't guarantee that part.
Remember, this is on the fiveinut chart. So, it requires an updating limit order every 5 minutes. Now, as for the exit model, which of course are the target and the stop-loss, I wish you guys would always stick to hard rules with these so you can actually test and verify or validate your strategy in some way, but no one seems to do that.
[music] That includes trader MNQ. Now, obviously, it's extremely difficult to figure out how a guy is exiting his trades, so I had to email trader MNQ. So, no, I'm not just guessing here.
He [music] told me what he does. Now for his target, he looks for a 2 ATR fixed limit order target. For his stop, 1.
5 ATR traditional fixed stop-loss. Now, everything we just discussed regarding ATR and volatility for the entry bands is generally applicable to the exact same idea for this 2 ATR target and one and a half ATR stop. It's all about volatility.
Now, here's price again. Here's our candle. And let's [music] say we get a lower wick, hits the lower ATR band.
This is our long entry. Remember, the ATR band [music] itself is the exact entry point. So, when setting the target, you go to whatever ATR is at from the previous bar.
Let's say it's 100. For the target, go to the entry price, multiply 100 * 2. Obviously, that's 200.
And that's where the trade's target is going to be. For the stop loss, you multiply 100, which was ATR from the previous bar, times 1. 5.
Obviously, that is 150. Go from the entry down $150, and that is where the stop is. [music] These numbers, these targets and stops do not change ever.
[music] ATR is always fluctuating up and down every single tick. But you use the previous bar's ATR measurement for [music] everything in this strategy because it is static and does not change. Obviously, this is not financial advice.
And obviously, if ATR is 50 over here, for instance, you would multiply that by two for the target and by 1. 5 [music] for the stop. Now, why specifically these two numbers?
Honestly, he didn't tell me. He might have determined these arbitrarily, but testing corroborated his performance. But there is one extremely important rule to this model.
He never [music] trades the opening candle. Even if all of these conditions are met, opening candle volatility and fluctuations are too [music] unpredictable for him. At least that's what he said.
But before I show you the back test, I want to take one of his actual trades and reconstruct it because if what he told me is accurate, we should be able to calculate his entry target and stops ourselves. Now, this is a perfect example of a trade that trader MNQ actually took. You can see it in the log here.
But first, this is ATR. This is the lower band, and this is the upper band. And I configured the ATR bands to specifically use a period of 14, which is traditional, and [music] a scale factor of 3.
1. I have my setup just like trader MNQs. Now, now focus on this particular trade.
We can see the red lower band here moved down and the lower wick on this candle clipped the lower band. Now, here's what's important. ATR on the previous candle was 17.
85. Now remember the stop and the target are calculated before the trade is even taken because we have that static ATR measurement from the previous candle. As I said 17.
85 so multiply this number by two which is 35. 7 obviously and of course this number that we multiply and calculate has to conform to the minimum tick size on MNQ or whatever futures asset it's 0. 25 for MNQ.
But once we figure out that distance, we go right here to where the long entry was taken. I will use the Trading View long tool here and we put this right where that green line is. You can see I have this algorithmically.
So from the entry 17. 85 * 2 upwards, that's about 35. 7.
That's right where he puts his [music] targets. Then obviously we would multiply 17. 85 by 1.
5, which gives [music] us 26. 775. And we would use the exact same process to mark where the stop is, which is right where that red line is.
This is how trader MNQ takes all of his long trades. This exact process. Obviously, you can see this blue arrow here, which is just where the long was taken.
And [music] thankfully for trader MNQ, price quickly reversed upwards afterwards and ended up hitting his [music] target. Great trade. Now, as for the historical test, which I promised to show you like five times, obviously nothing here is financial [music] advice, but I did run this test simple in Trading View, and it's actually not that bad.
Again, this is not indicative of future performance. And I tested a [music] fixed four contracts per trade. Trader MNQ doesn't always use four contracts.
I'll get into that later. But at a 1. 33 to1 RR, the strategy [music] had slightly more than a 50% win rate, which with this RR is actually quite strong.
$2,614 max draw down. Again, that's with a static four contracts. It's not always that way, but this does meet IQ Capital's maximum draw down threshold for 100K accounts and a 1.
527 profit factor, which by all means is pretty good. Now, for position sizing, it is largely contingent on what ATR is itself. [music] Because ATR determines his stop-loss distance, which as a byproduct helps him determine how much contracts to actually [music] get in the market with.
Now, obviously, IQ Capital limits the loss on any single position to 0. 5% of the account's starting balance on a funded account, 1% on a challenge account. So, Trader MQ always adjusts his position size to make sure he does not breach that threshold if his stop-loss gets hit.
And he does that with ATR. As you can see on my screen, as ATR increases, volatility increases, trader MNQ uses less contracts per order. But when ATR is lower, which means the stop-loss will be closer.
[music] Trader MNQ scales up the amount of contracts that he enters [music] into a position with. Now, this is important. Here's how simple that math actually is.
Five MNQ contracts are worth $10 per NASDAQ point. So, a 40point stop risks roughly $400. But an 80 point stop risks roughly $800.
Same five contracts, but twice the stop distance, which consequently means twice the risk. So, he adjusts the number of contracts to make sure he doesn't hit IQ [music] Capitals maximum loss per position threshold. He didn't give me an exact formula for position sizing.
It might just be a little arbitrary, but this is the basic philosophy [music] of what he does. But here's where things get weird. Remember when I told you his long and short strategies are completely [music] different?
I inverted this exact strategy and tested it short and it [music] completely fell apart. And apparently trader MNQ already knows that because he uses a different short strategy entirely. What he does instead is almost stupidly simple.
Now, with this short model, Trader MNQ is literally looking for one thing, [music] a long upper wick candlestick. That's it. But hold on, there are specifics to this.
He's basically shorting a candle that increases aggressively intrabar, but fails to hold at these higher price areas [music] and obviously closes all the way back down here or down here. So, this can be a green or a red candle. So you get a relatively small candle body down towards the bottom of the entire candle range with a very large upper wick.
Some people call this a shooting star pattern. Whatever it is, who cares? It's the implications of the price action or the candle structure that he's actually concerned with.
And of course, the lower wick itself has to be very small or non-existent. If you know me by now, I like objective rule-based systems. [music] Unfortunately, this is not an objective rule-based system.
He ultimately eyeballs this candle based on his own personal interpretation. This makes it very difficult to replicate exactly what he's doing. Now, because there's no objective rule set, I can't actually back test this in a way that perfectly replicates how trader MNQ does it.
But I invented an objective rule set all on my own and I tested it. So that is the interpretation that I will be explaining. Now in this model the upper wick has to be at least two times larger than the candle body and the lower wick has to be about 110th of the size of the upper wick.
Again, you don't need to stick to this objective structure, but it is what I will be testing and showing you. So, conceptually, this entire setup is extremely simple. [music] Once this pattern actually forms and the candle closes, whether it's green or red, that is when trader MNQ decisively takes a short.
He does that on a market order and usually gets in at the opening price of the very next bar. There is no complicated confirmation layer here. No order flow, no secondary indicator.
This candle is the entire trigger. What makes this different is the exit [music] strategy. It's how quickly he gets out of this trade because there is no profit [music] target and there is no stop-loss.
It's completely timebased. That's a stopwatch. Now, no matter what, once a short is taken, trader MNQ gets out on the very next [music] candle, right at the close of it.
Let's say this is the close here. As soon as this candle finishes, the [music] next bar will open. And that is right where trader MNQ gets out of his trade.
So, it's a five-minute hold, a single candle holding time, and then the trade is exited no matter what. Don't call me crazy, call him crazy. This is what he does not mean.
So, if this next candle falls, let's say, 50 points, that's phenomenal. Everyone would be happy. If it falls five points, well, that still works out, too.
But if price goes up instead, as we all know, that's not good with a short position. Now, this is why I called all of this a hybrid scalping approach earlier. His long model uses an ATRbased target and stop.
So, the amount of time he's in a trade can actually vary. But on the short side, the exit isn't determined by how far price moves. It's determined by time.
And I actually really like framing the strategy this way because now we have something extremely easy to test. We can objectively define the wick, enter after it happens, measure [music] exactly what price does over the next candle, and see whether there is actually any predictive value there. And I'll be honest, when I coded this, I expected it to be garbage.
It's literally a traditional candlestick pattern with a 5-minute exit. But the results surprised me, and they'll probably surprise you, too. Here is a perfect example of a short trade trader MNQ actually took.
A long upper wick candle formed here with a small body, almost no lower wick. And after this candle finished and the next bar opened, trader MNQ immediately took a short. Obviously, [music] it's near impossible to get right in at the close of a candle.
So, the entry is almost [music] always the next bar's open for him. I'm sure if he really wanted to be cheeky, he [music] could try to get in right before the candle closes, but he said he normally gets in at the next bar's open. And of course, he exits at the open of the next bar right after that, as [music] you can see here with this pink arrow.
That is literally the entire strategy. Okay, so one trade means absolutely nothing. So, what happens when we make the computer take every single one of these?
As I said, I thought this back test would be terrible, but surprisingly, it wasn't that bad just using a simple candle formation. Of course, this is not financial advice, but if you look at the equity curve here, this strategy started out very strong weeks ago, but something clearly changed recently because it is basically going sideways now, even though it's still working for Trader MNQ with some discretion. And [music] this is where I think there's actually something that we can improve because the question isn't just whether this setup works, it's when it works.
I'm going to come back to that because I found something interesting when I started separating these trades by market condition. Now, before we look at the results, let me actually make this just trade one contract so we can get the correct numbers. But before we get the right numbers, let me change the default order size to [music] four contracts.
That's what we've been testing with Trader MNQ. And with that static position sizing, 1. 413 413 profit factor, 52% win rate, a $1,142 match draw down, and this [music] is the P&L.
But there's actually a problem with this short model that does not show up in profit factor or in win rate. And if you're trading a prop account, which this is a prop firm channel, it's very important [music] because the short trade is only being held for roughly one bar. It does not use the same ATR target or ATR stop-loss as the long model.
It simply enters on the long upper wick exits on the following bar. So, position sizing becomes extremely important here because without a fixed stop inside of the strategy logic. The amount you lose during that 5minute [music] candle depends on how far price actually moves against you.
And obviously, this can be a problem with the maximum position loss rule. So, even though the short model is incredibly simple, the contract [music] size still has to be kept to a reasonable amount. And I've seen Trader MQ go anywhere from one contract to several [music] when using this short model.
Which finally brings us back to that equity curve. Because if we're going to improve the objective version of this strategy, I don't just want to throw any indicator on this and cherrypick until we get a prettier back test. We want to know why it performs well during some periods and not as well during other periods.
Now, the problem is MNQ tends to have a more macro bullish bias, which makes short trades much more difficult to pull off timing-wise because Beta can't bail you out. So, what if the short setup isn't actually [music] failing here? It's just being taken in a poor environment.
I tested exactly this by adding the simplest rule ever to this strategy to [music] act as a filtration method. Now, before I show you the test, a short trade can now only be taken when the previous day's candle closes red. All that means is that the previous day's return has to be negative.
If it is, that gives the short model the green light to be able to take a trade. Obviously, this here is the daily chart. I'm pointing at a red day.
And when I added this rule, it actually significantly improved the historical performance. Of course, not financial advice. Now, when I did this, far less trades were taken, only 60, but the equity curve obviously isn't as flat anymore along with the other numbers in this test.
[music] That said, 60 trades, so the sample size isn't exactly statistically significant. Further exploration would be absolutely necessary, but still this additional condition tries to filter towards a more long-term or higher timeframe bearish environment. It won't always do that perfectly since it's just a one candle requirement, but you get the idea.
But hold on, there is an important caveat to everything trader MNQ is doing. He doesn't follow these exit rules for the long model and short model mechanically on every single trade. The two ATR target, one and a half ATR stop for longs and one bar short exit are basically objective targets that he tries to follow.
The fivem minute hold time and the structure of the long upper wick candle for the short model aren't always perfectly met. In reality, sometimes he stays in a position longer, sometimes he gets out earlier, and importantly, he can close a trade early if staying [music] in it risks violating IQ Capital's maximum position loss rule. So, what I'm back testing all throughout this video isn't a perfect recreation of every decision this guy makes.
It's the objective framework he gave me, stripped of some of the discretion he uses when he's actually trading. You can start your first challenge for as little as $9 at IQ Capital. Built by traders for traders.
