Saturday, February 07, 2015

A role reversal

It is funny how traders can move in and out of profitable phases at different times, even if they utilise similar trading approaches. In the second half of last year, I went on a record-breaking (for me) run of losing trades, whereas other traders were doing very nicely, thank you.

So far in 2015, the roles seem to be reversed. I've noted that some traders on social media who look for trends to trade have commented on how tricky the markets have been so far this year. Indeed, if you look at the chart of the indices such as the Nasdaq below, you can clearly see an increase in volatility and a lack of direction since 2015 started.

This is nothing new to us here in the UK, as the headline index here has been stuck for over 18 months with no discernible trend appearing. Yet, while that has been happening, there have been plenty of stocks that have generated decent, profitable trends in either direction.

Against this backdrop, I have been able to get into some recent trades where trends have started to develop. As of this weekend, the cumulative open profits on those trades stands at over +9R, meaning that the current performance for 2015 is almost +25% in only 5 weeks, and those profits, if taken now, would cover a big chunk of the non-performance in the second half of last year.

Now, those open profits could easily disappear or be reduced if price starts reversing, but now I'm in those trades, I'm sure as hell not going to lose my position for fear of losing those profits. No, I shall keep them until I get an exit signal. Who knows, maybe one of those trades may develop into a +20R winner, which could make my whole year...

What has caused the turnaround? Well, the following points may all be factors:
  • Diversification - I do not trade stocks in one country. My current holdings are all UK or European based. Interestingly, my recent US trades have all failed, with the exception of one closed last month which yielded a +5R profit;
  • Not focusing on the general market - this has been talked about extensively in recent months here. Had I been confronted by a chart of an index like that above, and used that to determine my exposure or even which direction I should look to trade, I may have stepped to the sidelines and hardly traded at all. As it is, by looking solely at the price action on those stocks I may look to trade, I have found it a lot easier to take new positions when they trigger, irrespective of the what general market is up to. I also haven't had to try and time the entry into a stock position simultaneously with a positive move in the same direction in the general market.
  • Part of my plan for 2015 was to simplify my trading - I felt it was getting too complicated. The motto at the moment is "See it, plan it, trade it", without worrying about other external factors that I can't control. I'm concentrating on those elements of trading where I have full control, and this has helped clarify my thinking and helped my overall mindset.
Now, despite all that some recent trades taken have failed - that is to be expected. However, the win rate is starting to improve, and those trades I have got in which have started to move in favour seem to be a lot more resilient to any fluctuations in the indices.

Is it pure luck? I have no idea. The sample size since I made those changes to my own approach is far too small at this stage. However, I know of at least three traders in our group who are holding bigger profits (in terms of R) than me at the moment. So breakouts are working in the current market, despite what others traders may be saying.

The one thing I am avoiding at all costs is getting into too many stocks, too quickly. I have limits of how many positions I can hold at any one time, as well as the number of trades I can open on any given day. Controlling risk is still my primary objective. If I do that, then the rewards will come.

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