Wednesday, July 24, 2013

Are you too lightly or too heavily invested?

Some of you may have watched my video discussing my performance for the year up to the end of June 2013. This covers all the trades I took and forms the basis of the performance statistics, which I regularly update here.

One of the aspects that characterised my performance was the very low level of open risk I carried. This is partly down to the stop methodology I use, but was also due to having a very small number of positions open at any time. This meant, for example, that I felt I was too lightly invested during the decent uptrend that characterised the early part of 2013. More often than not, I had no capital at risk during that period.

Was there a reason for this? I think, subconsciously, I was trying to ensure that anyone who has access to my trades was not piling into too many positions, too quickly. This has been something I've noticed when reviewing other traders' own trading history - especially when a new trend has been signalled in the indices.

During favourable market conditions, and people see how the system can work,  I end up receiving correspondence from those who have achieved great performance, but I'm not 100% certain whether they have followed the position limits I set out. My own position limits (or portfolio heat) have been, based on personal experience.

If the markets (and your existing positions) go in your favour, then it is very tempting to carry on opening more and more positions. Profits can easily ramp up in these market phases. However,there will come a point when the markets reverse, and as a result, you may lose a big chunk of profits - quickly. Are you able to live with that? If you can't stand the (portfolio) heat, get out the kitchen!

The whole rationale for posting my own trades in real-time is solely for educational purposes. I want those who have access to them to go look at the charts, and understand WHY I took them. I do not want people to blindly piggy-back my positions. For one thing, I am not regulated to provide investment advice.

In my own trading, I had gone totally the other way - I was being too conservative with the level of market participation I had. Ensuring that others were sticking to the system rules regarding portfolio heat had affected my own trading. Therefore, I resolved to ensure I was participating more in the markets. This hasn't meant I've piled into a whole bunch of positions in one go. I have kept within my own discretionary rule on limiting the number of positions I can open on any given day.

The results have shown an immediate improvement in the overall returns generated. While there have still been losing trades this month, a number have started trending nicely, with the total accumulated profits now closing in on 200%.

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