Friday, November 13, 2015

One year on - have the changes worked?

"The great thing about being a trader is that you can always do a much better job. No matter how successful you are, you know how many times you screw up. Most people, in most careers, are busy trying to cover up their mistakes. As a trader, you are forced to confront your mistakes because the numbers don't lie." - Marty Schwartz

It is about a year since I start making some changes to my own trading approach. This followed a poor run of losing trades over several months which eroded most of the gains I had made in the first part of 2014. So, did those changes work?


These changes were discussed here, and followed a period of review and thought, with the help of a couple of other experienced, successful traders.

Less reliance on the major market averages

 

This was the key element of my changes. I posted some thoughts as to why you may not want to rely on using the indices as part of a 'top down' type of trading here. I made a tweak to my scans to help facilitate this, and I believe this has worked well. There are always stocks breaking out regardless of what the major market averages are doing.

My own thoughts and beliefs on this have now evolved to the point where I believe the direction (or lack of it) in the indices is not something I need to consider, but that the level of volatility in the general market is.

While I follow price trends, identifying and interpreting volatility forms an important part of my trade selection process, and again, this forms one of the conditions included in my scan criteria.

Certainly when market volatility picked up in August/September, I went through a period where almost no set ups were being picked up, primarily to the jump in volatility. On that basis, the scans did their job. The odds were not in my favour (or at best reduced) and they kept me out of the market.

Diversification

 

I have attempted to trade some other markets in the commodity or forex arenas. As it happens, none of the signals I have taken have generated a profit, but that's fine. I was giving myself the opportunity to make some profits based around signals which met my criteria.

There are also a couple of additional factors to consider: 
 

Have the markets been favourable towards trend following?

 

It is also important to put the performance in context of the prevailing market conditions. 

We have seen a lack of direction in the major market averages in the first part of the year, followed by an explosion of volatility in late summer/early autumn, where those indices threatened to indicate the start of a market downtrend, which for the time at least, has been held off.

A review of well-known trend followers also shows that the approach when applied to the indices, commodities or forex has struggled - quite a few of the big-hitters were showing a negative performance up to the end of September 2015 - this can be seen here

Learning from previous experience

 

In 2011, I suffered when volatility picked up - in that year, there was a quick downward move in the indices in August/September, before things chopped around for 2-3 months.

I carried on trading as normal and suffered a string of losing trades and breakouts which quickly failed.

This year, I have learned from that and have, for the most part, been very lightly invested, if not completely out of the market when similar conditions came along.

With that as a backdrop, the year-to-date positive performance I've been able to achieve is more than satisfactory.

But, as Marty Schwartz's comment shows, you should never stand still. They is always something to consider which may lead to small refinements in your approach, which can help you improve your performance. This is where my focus is now, with a view to 2016.

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