Thursday, May 16, 2013

Stairway to Heaven

A few weeks ago in this post I showed a chart of my cash equity curve, which I maintain along with my own performance metrics (see here for the detailed statistics, which are now updated weekly). As you can see, the equity line is forming a series of 'steps' on its way up. The reasons as to why this is are straightforward:


  • The horizontal parts, or those showing a small decline, are the periods where trades initiated have failed, resulting in small losses. It is critical that any losses incurred are kept to an absolute minimum, to avoid any nasty drawdowns; 
  • I wrote in my e-book about how 80% of your trades over the course of a year will cancel each other out, and it is the remaining 20% of the trades that generate the overall profit. The problem is that, you never know which trade will trend in your anticipated direction;
  • When a trend does develop, those trades are left open until such point that the trend has finished, and an appropriate exit signal is given. No profit targets are used, and these trends can run for a matter of days, or even better, weeks or even months. If you are fortunate to get into several of these trades, they will tend to generate exit signals fairly closely to one another. When this occurs, this provides a sharp jump in the equity curve, creating another 'step' up along the way.
Currently I have a few positions showing small profits - these do not have established trends in place as yet - they are initiated as per my system rules, which try to identify those stocks trying to develop a new trend. I do some some other trades comfortably in profit, where the trailing stop I use has 'locked in the bulk of those profits. When those trends have exhausted themselves, then they will give an appropriate exit signal, and those profits will then form the next jump in equity.

As mentioned on several recent posts, my goal is to control my risk and keep any possible drawdowns to an absolute minimum. The profits will take care of themselves.

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