As anyone who has seen my trades list will know, the last few months have been pretty poor for me. Small loss after small loss. Keeping losses small is an integral part of a trend following strategy, but the near complete absence of any winning trades in that period led to an erosion of profits built up in the earlier part of the year. To put into context, it can be clearly seen here:
It is obvious that this is the poorest period since I revised my trading rules after suffering an overall loss for 2011. That period led me to carefully review what had occurred and look to see if there were any ways where improvements can be made. That undoubtedly worked - my revisions to the stop methodology significantly cut the average size of my losing trades (in terms of R). It was a simple, but effective change.
It should also be remembered that trend followers returns ebb and flow, and they themselves can trend. It is also a fact that, with trend following, periods of non-performance can quickly be overcome if one or two trends start to develop - large returns can be made in very short periods. We seek to limit the downside but place no limits on the upside. I've profited from these surges in profits myself, and have no doubt it will happen again.
So, in recent weeks a lot of time has been spent looking to see what, if any, changes were needed.
The conclusion I came to is that, it was not necessarily the entry/exit rules, it was a combination of a subtle change in the way I looked at potential set ups, and how big an influence the current market conditions and the price action of the indices themselves should play in my overall trading plan.
I will have more to say on this second element in a follow up post, but because of this, I did not take some positions I had identified and had even gone as far as placing on watchlists, waiting for entries which came but didn't act on. And some of these very set ups did develop meaningful, profitable trends which would have transformed the recent performance.
I have previously mentioned the importance of maintaining good trading records, and that you use them as a basis for periodic reviews of your performance. This may highlight areas that need attention, and can lead to improvement. I also look for common denominators across the profitable trades or set ups, so see if there is something I should use going forward.
The comforting point however is that, despite all this, there is still a positive performance for the year to date. If a 26% gain over the year can be considered a poor performance, I will more than happily take it!
Finally, the other point is that, as I talked about here, every trader should be on a never-ending quest of improvement. Similar to 2011, this period of non-performance should be viewed as a minor blip in the overall scheme of things.