Still Following The Rules...

Up 5.5% for the year.

Like always, I'm still following the rules exactly.  Sometimes it works in my favor, sometimes not.

In times like this (big drawdown period), it is important to remember that anything can happen.  You can do everything right when developing a great system, you can have perfect psychology, discipline and mental control, you can execute your plan flawlessly, and yet YOU CAN STILL LOSE!

Why? - Trading is all about probabilities.  People who forget that will lose in the long run.

Excellent Question From a Reader

A reader asks:

"Does your in-sample testing account for almost a 50% drawdown? If not at what point do you say the strategy is not working any longer?

Thank you for your blog and your transparency. It's encouraging."


Thanks for the question.  The transparency unfortunately sometimes makes me look like a fool.  Seriously, what kind of "professional" trader has a 49% drawdown, and a 41% drawdown?  Having to post my equity graph the past week has been awful - really, it is 10 times worse than the $5,000 I've lost during the drawdown.  It is an ego deflater (which is probably a good thing, in the long run - I know arrogant traders, and I know rich traders, but I do not know any rich, arrogant traders.).  


Many people would have quit after that first big drawdown.  Emotionally, I can relate.  BUT, if the numbers predict it could reasonable happen, then it doesn't make sense to quit.  That is the case here.


Let's look at the system I am trading.  I started with only $10,000, which I knew would likely put me in a precarious drawdown situation, sooner or later.  But I was going for absolute percentage return, so it makes sense to start with the least amount of capital you can.


There is an important lesson here, and it all goes back to what your goals and objectives are.  My goal was percentage return.  If the goal was risk adjusted return, I would have done things differently.  Started with more money (probably not a help), or likely traded a whole different system (one that had more limited upside, but less drawdown potential).  


Anyhow, I ran the contest system through my Monte Carlo spreadsheet (free, on my website), and I determined that within a year, there was a 65% chance that I would have a maximum drawdown of at least 50%.  In other words, there was a very good chance of a 50%+ drawdown.  The graph is below.


The flip side, is how much gain could I get out of this system?  The same analysis shows I have a 60% chance of at least tripling my money.  And that assumes that I keep trading 1 lots through the year.  I'd probably increase size, so I might do even better.


Basically, I decided that these were odds I could live with.  Not everyone can.  And I certainly would not have these types of odds for my other accounts.


For this system, since it is a contest, I am going to quit only if I cannot place a trade.  Again, in my "normal" accounts I'd never do that, and I don't recommend you do this.  But this approach fits my objectives, which is the key.


If this analysis in confusing, please feel free to ask questions.  I want to make sure readers understand.

"You're Going The Wrong Way!!!"

Why do I feel like I am riding in the car with these guys - Steve Martin and the late John Candy?  Along with my contest trading system?

http://www.youtube.com/watch?v=_akwHYMdbsM


The ironic thing is May was a terrible month for my contest account, but overall (multiple accounts, 11 total systems) was my best percentage gain month so far in 2012 (over 13%).  Yes, it has been a tough year - last year, I had 5 months over +13%.


Maybe June will have everything go the right way!

New Week, Hopefully A Good One

Very small gain today.  Hopefully the rest of the week will be better!

By the way, if you like my view on trading, I have a whole boatload of short articles and trading tips that I share with my mailing list.  It is free, you can opt out anytime, and I promise not to bury you with info or sales pitches.

Go here to join my mailing list: http://www.kjtradingsystems.com/signup.html

The Reason For My Drawdown

I figured out the reason for my latest drawdown.  This is a surveillance photo of my trading crew, taken during market hours, when Tradestation and E-Signal should be running.  No wonder!!!!

Downside Breakout

The past week was pretty brutal, and most of that was due to 1 position (see previous post).  Not only did I get in at the peak price, but I entered as a double position (per the rules), and it has lost more money every single day I have held it, except for one.

Am I disappointed with this past week?  Yes.  Am I panicking? NO!!

I'll just continue to follow the rules, to the best of my ability.  That's where having a valid backtest helps.  I know that if I just keep pushing on (following the system), things should turn out all right.  There is always a chance things won't go right - even a casino can have a losing streak - but making decisions outside of the system would be far worse.

If nothing else, I hope readers of this blog learn to stick to the trading plan.  It is by far the clearest way to success, although it does not guarantee it.  It is much, much better than just "winging" it.

Just for reference, my initial margin/equity ratio is about 91%.  A few weeks ago, it was at 40%.  If it reaches 100%, I won't be able to add new positions.

I am in 11 positions right now...

Big Winners:  3  (2 are doubled, and the other I will double on Tuesday)
Small Winners: 5
Small Losers: 2
Big Losers: 1 (1 is double position)


As always comments and questions are encouraged!

Look Out Below!

Contest Update:

Once again, I have proven quite adept at buying at the high.  I did this last week for the trade signal I missed, and it was a double position, so the total loss right now for this one position stands at -$3,080.  

YES, I AM A GENIUS TRADER!!!! HA HA HA HA

****************************************************************

The Trading Process - Conduct Preliminary Research - Step 07

(Note: to see any of the previous steps, look for the heading "Trading Process" in the column on the right.)

At this point in the process, you should have a decent Trading Plan, and you should realize that you need a trading strategy with an edge to succeed.  So, how do you develop an edge?

Edges are all around us.  They can be as simple as trading in the direction of the prior day's close, or as complicated as a multi node neural network based on 5 uncorrelated instruments.  The trick is actually finding them, and then evaluating them.

My best edges come from simple market observation ("hmmm, it seems like the market moves up after candlestick pattern X"), trading books and magazines and from other traders (it is amazing how successful traders freely share - maybe it is because we all realize how difficult trading really is).  Let your imagination run wild, and your mind will come up with some creative ideas.

A couple points to keep in mind:

1.  No idea is bad, dumb or stupid.  Be non-judgmental in this phase.  Be open to anything.  Your later analysis will weed out the bad ideas.

2.  Make sure it fits you.  If you like trying to pick tops and bottoms, don't develop a long term trend following system.  Remember, these are your ideas, so be comfortable with them.

3.  Ideas in books and magazines rarely work as is.  BUT, they are a great place to start.  You can modify core ideas, and create your own winning strategy.

4.  Make sure you have the right tools.  If you are data mining, make sure you have the right software.  If you are looking for patterns, make sure you have an objective way to define and measure them.

Next: A simple formula to help you "see" good strategies.

Big Drop Today

I figured a breakout on my equity curve was coming.  I had hoped it would be up, not down!

Looks like a bunch of new trades will be occurring this week, so I expect the equity volatility to shoot up a bunch.

It Figures

So, last post I explained how I missed an entry signal, and missed out on a 2 day $1,000 open profit.

It gets better...

Thursday at the close, I entered a double position (1 contract for the missed signal, additional 1 contract for the  "add to winners" scheme I am doing.)

Guess what happened?

The price moved against me on Friday, temporarily (hopefully!) causing an $1,100 loss.

It seems like this happens to me a lot - is it because I conveniently forget the times when mistakes go in my favor (and dwell on the negative times), or is the market out to get me?  I know it is the former, but many times it feels like the latter.

Maybe you can relate to this experience.  If so, just realize that it happens to everyone!

Ugh!

I just realized I missed a trade on Tuesday.  So, I just entered it today.

Of course, it was a quick winner, one that I would have added onto.

Total cost for my mistake was about $1,000.

UUUUUUGGGGGGGGGGHHHHHHHH!!!!!!!!!!


(In a future post I'll share how I track fills, mistakes, etc.  It has saved me thousands over the past few years.  But not today.)