Friday, January 10, 2014

Updated R curve

Below is an updated chart showing the progress of the overall returns generated, expressed in terms of R, for all closed trades since July 2012.

There has been some volatility in existing open positions over the last few days, with big gains in a couple of positions quickly followed by sharp counter-trend movements (one such trade is discussed here), but that element of volatility in not reflected in this chart. These fluctuations in open profits are also not taken into account when determining position size, as the risk per trade is based purely on the cash equity held.

It can be easy to get angry or frustrated when quickly gained profits vanish, but that is part of being a trend follower. Chances are, if you close those trades following a move against you, that would have been at the extreme of the price reaction. That is an example of self sabotage - you have an exit strategy based on your system parameters, yet you are overriding those same rules.

Providing the trends in those positions are not invalidated (resulting in an exit signal being triggered) there are no restrictions placed on how those trades progress. I'm not going to try and time the exit for maximum profit. All I am worried about is controlling what I can control - namely, ensuring that any losses are kept as small as possible. I do not try to place any control over the profitable trades.

As you can see, by making myself play great defence and cutting any losing positions short (as discussed by Paul Tudor Jones in his Market Wizards interview), and by letting the profits run, the returns have shown a steady path upwards, punctuated by a couple of big jumps when the biggest trends have come to an end.

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