Last week was pretty bad. I won a few trades, but at one stage I had six trades open at 1% risk per trade. Five of those trades began to move against me and I was down -3%. Rather than wait for my stop losses to get hit and lose 5%, I decided to close all trades and take a break from trading.
My main goal for the next month or two will be to revisit my systems and see if I can tighten my stops and create reasonable R:R ratios. At the moment, most of my weekly systems use a reward-to-risk of 0.25:1 or less. While it looks profitable on paper, these sorts of ratios present a psychological risk in that when you encounter a loss, that loss really hurts. It would take a relatively large number of wins to claw your way back. Now, when I was looking at the prospect of five losing trades, the psychological weakness of a low reward-to-risk system became really apparent.
The other problem is that because losses are relatively rare, you can't really build a psychological immunity to losing. In contrast, say you have a system that wins 50% of the time, and loses 50%. You can expect a loss when you enter a trade. It doesn't bother you so much because it's well within your system's expectation. On the otherhand, if you have a system that wins 90% and you experience a loss, it puts you on pause. Suffer a few more losses, it makes you question your trading.
Trade management is also becoming an issue. Having five trades move against me at the same time is the result of short-term correlation.
These are new trade management rules that I am contemplating to minimise correlation:
1. Only have one trade open PER TIMEFRAME e.g. I can have one trade open using a daily timeframe system, and another trade on the weekly timeframe, but I cannot have two daily or two weekly trades open simultaneously.
2. Tighten my stops and create reasonable R:R ratios. Tighter stops means a shorter duration for trades, and thus less overlap and correlation. This will also allow a higher frequency of trades.
I will be going on a "semi-break" for the next few weeks at least. I'll continue trading with one trading system that I feel is robust enough (my Hermes low volatility breakout on the daily chart). I'll be re-optimising everything else with tighter stops. This may take awhile. :)