Saturday, April 06, 2013

Why I'm disappointed with my own trading performance

This week we entered the phase where trend followers 'give back' a portion of their open profits, as the trends we are currently trading stall and attempt to reverse. While frustrating, it is all part of the trend following process.

There has to be a certain amount of 'wiggle room' given to instruments that are in a trend - too tight a trailing stop may mean you get stopped out on a minor retracement when the trend is still intact, too wide and you will lose too much of those hard earned profits when a trend finishes and/or reverses. This all comes down to the parameters chosen within your overall system rules.

I'd also mention again here the potential dangers of over-optimizing your system. I look to trade the 'hardiest', most robust system, that works well in differing types of market (trending or non-trending, stable or volatile), rather than continually optimize it to the most recent conditions.

Having said that, the addendum rules have again proved themselves, as actual cash drawdowns have been minimal, where the most recent trades taken have failed to act as intended.

So, having said all that, this week has been a good time to evaluate my own recent trading performance. And, even though my own trades taken since last July are showing a total return of +120%, I've been left a bit disappointed and frustrated. On reflection, I feel that my returns should have been much higher, particularly given the advance in the general markets in the first part of 2013.

I would stress that it is not the fault of the system - far from it. The scans and the methodology have identified lots of potential set ups in BOTH directions, which I have either missed or neglected to trade for one reason or another. Quite a few of these I know have been identified and traded by other users of the system. As a result of this I have been too lightly invested - I have not come close to reaching my pre-determined overall risk and position limits. In fact, given the addendum rules, more often than not I've been in a few position with absolutely no capital at risk! (Notwithstanding the threat of a gap through my stop levels).

So, I'm 100% happy with the methodology - the fact that performance is not as good as it could have been is purely down to the trader!

In my own case, one area I've identified is where I've not taken positions if I consider the spread to be too wide. This has hurt me particularly with regard to Investment Trusts, which have been mentioned several times (most recently here) as having very nice stable trends, but with spreads generally a bit wider than I'd like. There are also one of two other areas I will be concentrating on.

I'd highly recommend that traders periodically review both their own actual performance (which can identify specific errors or areas of improvement) by referring to your trading history or log, as well as a wider 'overview' of your overall performance.

That is the beauty of the game. Everyone makes mistakes when trading. It happens to us all, whether we admit it or not. Just read through Market Wizards and see how even these great traders have made errors - sometimes huge ones. However, they've been able to identify them as errors, and have learned from them. If you carry on doing the same things (especially things that are not working or are considered to be trading errors), you'll carry on getting the same results. So, while my performance may look more than acceptable to a lot of people, in my own mind I'm saying to myself "could do better!".

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