Thursday, April 07, 2011

A period of reflection and anticipation

Although I have traded very little the last two or three weeks, the time has been productively spent reviewing previous trades, and generally looking at what could be improved upon. This has included reviewing past trades prior to starting the performance log on here. It is a process that can be very revealing, raising questions, and causing you to look at things in a blunt, objective light. It is periods like these that form the basis for future improvement. I would also say that speaking to other traders, including one or two that I correspond with on a daily basis, has reinforced the awareness of what other traders look at, and how they respond to price action.

Trend following historically has a low percentage success rate, however the size of the winners far outweight the size of the losers. It is these big winners that generate the winning records, and the positive overall expectancy. The past couple of months has seen an erosion of the average R per trade I have achieved in my own trading, and I am keen to reverse this trend as soon as possible. To achieve this, I need to ensure the winning trades are larger - ideally with the percentage of winning trades also increasing.

I believe Van Tharp is quoted as saying that a system with an average expectancy of at least 0.8R per trade can be considered to be an excellent system. The trading history recorded on the log peaked at 0.79R, before falling away. As I write this it currently stands at 0.55R - still good, but a mile away from where I want to be.

Trading is basically a 'game' of odds, and you want those stacked up as far as possible in your favour. In order to attain this, the potential improvement identified does not come from any changes in my system scans, the entry signals or even the exit signals, but ultimately from the trader themselves, in the one part of the process that is ultimately discretionery - if you get a selection of 5 potential stocks to trade from a scan, which one do you select? Again by simply focusing on price, and it's historical ebb and flow, you can separate the excellent opportunities from the merely good, and give yourself the potential to significantly increase the size of the winning trades. This is the area I will be concentrating on going forward.

Later this year it is my intention to update my e-book 'The Trading Triangle' to include further examples of winning and losing trades since the log started, and to point out how I feel the results achieved so far can be improved. Everyone who has purchased the e-book will automatically receive a free copy of the revised version.

In the meantime, I am anticipating the next few trades to show a the start of a sustained reversal in the trend of my average R per trade.

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