Saturday, December 01, 2012

The long and the short of it - reviewing trading performance

When it comes to reviewing my own trading performance, I try to be as objective as possible, therefore this summary will be in the same vein. When doing this exercise, my main concerns are to ensure that:
  • I have obeyed my risk parameters, both in terms of individual trades as well as in terms of my portfolio;
  • I have attempted to keep to a bias in my positions that coincide with the direction of the indices;
  • The trades on entry satisfied the various criteria I stipulate;
  • Stops are placed and updated correctly and observed when price hits them;
  • That I have not made any irrational, emotion-driven snap decisions and overridden my system rules in any way.

Having reviewed my recent trades, it is clear that all those points have been met - in essence, they were all 'good bets' and in accordance with my system rules. These are the only parameters over which I have control - once I am in a position, then it is left to the market to determine whether I (or any trend follower) will make a profit or a loss.

Over the last couple of months, the profits I have made have fallen away. Why is this?
  • There was a trend change from long to short that took place over several weeks, resulting in an erosion of open profits on my long positions;
  • I was too slow in opening short positions on US stocks (all the major US indices gave short signals themselves several weeks before the FTSE and the DAX did likewise);
  • After all indices were on short signals, there was a 'V' shaped reversal a couple of Fridays ago, and the markets have basically gone up uninterrupted since then, causing losses in short positions.
If truth be told, this period could have been worse, if I did not have a limit on the number of positions I can open per day. As it is, it has been difficult over the last few months to get fully invested, as there has been no trend in the indices that has lasted a reasonable length of time.

In performance terms, the size of the average wins and average losses per trade have not significantly changed, but the overall win percentage has fallen to 41%, as a result of these failed trades. Even then, the system is still generating a positive expectancy, and there's nothing that a small run of winners won't fix.

So, while it is frustrating and disappointing to have suffered the last few weeks, I am able to satisfy myself that, in the main, I have traded in accordance with my plan, and that the market conditions have undoubtedly contributed to the losses made.

I also know that those on the other side of my trades, who like volatility and range-bound or non-trending markets, will take the pain when a pronounced trend does occur, and the losses I have made will be more than recouped.

 And that, my friends, is the long and the short of it.

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