Like most, every year I like to analyse my trading data for the year. Figured I would post my review here to keep me honest.
This year I changed things around a little as I moved my review period to align with my financial year to makes things easier for tax. So effectively this review covers 1.5 years.
It wasn't a good 1.5 years for me. I'm in the midst of my largest drawdown to date. Luckily the drawdown is soaking up prior year profits, so I still have enough trading capital to keep going. Nevertheless, something needs to change.
Briefly, my trading strategy comprises 3 set-ups which I trade on individual stocks:
1. Breakout retests - I have found these to be a reliable pattern. Look for the breakout from a good basing pattern and then wait for a meander back to support on low volume (if it happens) before entering a position.
2. Continuation patterns - straight from Curtis Arnold's PPS strategy. Has served me well in the past but finding it a wash cycle in these market conditions. I'm avoiding these patterns until the market established a clear trend again.
3. Divergence patterns - Need's confluence between the indices and individual stock to work. I typically only trade these patterns when the market is severely oversold or overbought.
FY 2011 review
1. Profit and loss summary
An ugly year and a half all round for me. Gave up a prior year profits and had a large draw down. There are three obvious ways to increase my account balance:
1) Increase win rate
2) Increase average win amount
3) Decrease average loss amount
Iím fairly comfortable with riding my winners once they get going so my focus should be my average win rate and average loss amount. Itís hard to properly analyze my average loss as part way through the year I reduced my risk from a fixed risk per trade of $1000 to $500. Nevertheless, $792 average loss is too high.
As will be shown below, Iím taken out of a lot of trades far too early. My stops were too tight this year and I didnít adapt for the increased market noise to the downside. If I become more conservative with my stop placement this should increase my win rate. However this will at the same time reduce my average win amount. Therefore, in order to make up for a reduced average gain, I also need to reduce my average loss. Hopefully by having a wider stop this will reduce the amount of times I am stopped out in the first few days. Nevertheless, I will need to focus on bumping my stop up very quickly at obvious signs of failure to keep the average loss amount down.
2. Profit & loss timeline
My P&L followed the market too much. I took too many trades in the period of May to August 2011 and didnít get defensive quickly enough.
Mining tax announcement led to an outlier loss, but I also had an outlier gain in February 2011 so I shouldnít focus too much on this.
At least things have steadied since around September last year. Capital preservation is number one focus again. I may need to add a filter of some kind Ė whether it be a market filter or a filter where if I have X losses in a row I reduce position size.
3. P&L scatter chart
The above chart confirms that things have steadied since September 2011. Also it is apparent that trade frequency has also decreased. One of my takeaways here is that until I find my edge again, be selective and on the conservative side when talking trades.
I also need to get that average loss down. Only very few trades should slip past my stop.
4. Days in trade summary
Days in trade.jpg
Itís clear from above that my sweet spot is when a trade lasts 10 days or more. That gives time for a trend to develop.
Iím kind of conflicted with my takeaway here. One thought is that my initial stop placement is too tight. Specially when considering my average win amount isnít that high, so whether a tight stop increases my account balance is questionable. The other thought is that at least my tight stops have kept the majority of the losses small. Nevertheless, something is not working so a wider stop is necessary. My positions are obliviously getting taken out by noise in their initial stages too often.
This year I'm going to test/monitor whether my stopped out positions ended up being profitable. I'm going to work out the average day held of my profitable positions. I will then record the price of positions that were stopped out early (i.e <5 days) at whatever that average day figure is.
5. Long/short mix
Pretty clear from above that I should stick to long only. The only short positions I would consider is a divergence set-up but to be a reliable signal it would also require the XAO and individual stock itself to also show a rejection of recent highs.
6. Focus for this year
1. Conservative stop placement. Looks for ways to avoid the noise. Explore using the ATR to help place stops.
2. Conservative trade management. Strictly adhere to my set-up criteria and don't get caught up in market hype.
3. Be quick to cut a loss when there is an obvious sign of failure. My deifntion of obvious failure requires volume to be above the 15 day simple moving average and price action to be either a down-trending day or a clear rejection of higher prices.
4. Focus on long-only. Be happy to spend time on the sidelines and use this time to analyse my results etc.
5. Investigate the following-
a) Index filter
b) Monitoring the price of positions stopped out early relative to my average hold time for profitable positions.