Trade week in review: 22 April to 28 April 2013

I ended this week in profit with an increase of 1.1% to my equity. I received a glut of entry signals this week, which presented an interesting trade management dilemma. You can't trade every signal because of correlation. If you trade two highly-correlated pairs at 2% risk each, it's almost the same thing as a single trade at 4% risk.

 

I entered a total of 12 trades with risk levels varying from 0.5% to 1%. Most won and a few lost. I still have three trades left open over the weekend, although they are currently in negative territory.

 

Posting 12 trades would be quite tedious so I'll just give a few examples.

USDCHF

This trade was based on my new system Set. This system focuses on the two-bar reversal pattern on the weekly time frame. The above setup doesn't visually look like your conventional two-bar reversal, but according to my mechanical definition, it qualifies. You essentially want the open and close of two bars to occur within the top or bottom 40% of the two bar range. I used a 0.25:1 reward-to-risk ratio and bagged a win.

 

Some more trades were opened like this. A few won, and I have three trades left open on the AUDUSD, NZDUSD and EURUSD. I'm a little concerned about the first two because of high correlation between the AUDUSD and NZDUSD.

 

USDJPY

 

I saw some low volatility signals on the USDJPY and other pairs throughout the week. I used my Hermes low volatility system and bagged a few wins. However, I also lost two trades. Here is how I traded the signal on the USDJPY. I used a 0.5:1 reward-to-risk.

UPCOMING SIGNALS

System "Set"

Three bearish two-bar reversal patterns have appeared on the EURNZD, AUDCHF and USDCAD weekly charts. Looks very promising and I will probably trade the EURNZD and USDCAD independently (correlation between EURNZD and AUDCHF would be too high, so I will ignore AUDCHF).

System "Daikoku"

There are two low volatility signals on the weekly chart that I find intriguing, the XAUUSD (gold) and CADJPY. There is also a signal on the AUDUSD, but I'll ignore it in favour of XAUUSD due to traditional correlation between gold and the AUD.

Performance update @ 25 April 2013

I spent today reviewing my performance from late August 2012 and actually discovered that my return on equity is currently 11.32%, and not 7% as I initially assumed. Calculating your return on equity can be distorted if you're routinely depositing money. If you're continually adding money, then the magnitude of your earlier wins diminish compared to your more-recent wins. To make them comparable, you need to standardise your wins and losses throughout the review period. This will allow you to calculate an accurate return on equity.

System development: focus on one system at a time

When developing systems, it's always a good idea to focus on one system until you reach a conclusion as to whether to trade it or scrap it.

 

As an example, suppose it takes you an average of 50 hours to design and backtest a system. Halfway through your system development (25 hours), you discover a new idea. Lured by excitement, you pause the development of your current system and focus on creating a new system around this idea.

 

You are now halfway through your second system  and another 25 hours have passed. In total, you have consumed 50 hours. What have you to show for it? Two half-complete projects, but nothing tradable to bring in some profit.

 

On the otherhand, if you had focused on your first system to completion, you may have a trading system ready and running, hopefully generating profit in the background as you start work on the second system.

 

Looking back at my research folders, I've realised that this has happened to me a few times. The tragedy is that you can completely forget about finishing the first system.

Trade week in review: 15 April to 21 April 2013

It's been a good week. I opened five trades using my re-optimised Daikoku low volatility system and all closed in profit. There was a glut of entry signals, so I limited my trades to 1% risk and focused on five pairs, providing a nominal exposure of 5% for the week.

 

What's interesting is that even though there is some correlation on paper, some of the trades opened and closed at different times or days, reducing overlap. I think this is mainly due to the small profit target of my trades. If your trades are small, pip-wise, then your potential for overlap is reduced, even if you are trading correlated pairs or similar setups. That was an interesting lesson. I would like to try a variation of this system with a smaller stop loss, but won't have time to backtest for awhile.

 

The five trades were done on the EURCAD, EURJPY, GBPJPY, USDCHF and USDJPY pairs.

 

EURCAD, EURJPY, GBPJPY, USDCHF and USDJPY

 

 

Rather than post five charts of the same setup, here's one example of what I traded (EURCAD).

My life goals

I think it's important as a trader to have a long-term goal in mind. We all want money, but what is it that we truly yearn for to compensate for years of hard work, pain and tribulation?

 

Value-based Goals 

 

1. Independence. Being able to enforce your life mandate without debilitation or restriction from others. Once you're self-employed, earning a good income with a healthy bank balance, you answer to no-one.

 

2. Time Freedom. The most precious commodity on Earth is time. You can't produce it. Everyone only has a fixed allocation. Once you spend it, you can't get it back. Getting out of the rat race and "retiring" is one of my most urgent goals.

 

3. Financial Freedom. Earning enough income to live a comfortable life. It doesn't need to be "luxurious". I don't strictly need a villa or a sportscar or a trophy wife to complete myself. The urgency of earning money needs to disappear from my mind.

 

4. Empowerment. The ability to impress my vision onto the world. We all have pet causes and beliefs that we wish to spread. This takes money. The more money you have, the more empowered you and your beliefs become. The world incremently moves closer to your vision as you rise in wealth (generally).

 

5. Health. This isn't strictly related to trading, but a high income and free time will allow me to purchase top-quality healthcare, afford healthy food and provide enough hours to exercise.

Trade Week in Review: 8 April to 14 April 2013

I only opened two trades last week on the USDCHF. Both trades lost due to choppy conditions, and because of excess risk, my profit for this year took a significant hit.

USDCHF

I spotted some low volatility on the USDCHF daily chart on Monday's close, and prepared my orders for the break of Monday's high and low on Tuesday morning.

 

Monday's low and high were both broken, triggering a short and a long respectively. However, in each case, price retreated before reaching their profit target. The market chose to be choppy that day and both trades were shaken out, as illustrated on the H1 chart below.

Because I used 33% Kelly money management, my exposure to both trades was around 18% of my equity. I lost over half of my profit for this financial year. While I understand the Kelly criterion, when I try to explain how I intentionally risked so much to other people, I felt stupid. This is just one of those psychological factors. Can you 100% defend the way you trade? If not, this is a potential source of weakness that can shake your game.

Anyway, I've reduced my risk to 1-2% per trade. Now I can sleep a little more easy. :)

Prospects for the rest of the financial year (end of June 2013)

Spent last night reviewing my performance. I am up around 7% since ineption in August last year. Changing my risk level to 2% should allow me to finish the financial year around 10-12%. Not as fantastic as 40% as I originally aimed for, but still beats money in the bank.

 

I spent a few hours working on my new trading system Set, named after the Egyptian god of chaos. It's a two bar reversal system on the weekly chart. Since I'm now backtesting on seventeen pairs, system development will take 50% longer. On the upside, my backtests will be more robust and I can trade more pairs live.

Daikoku trading system re-optimised

I'm pretty exhausted right now. Pretty much spent all day working non-stop and I'm really happy with my results.

 

I spent most of today re-optimising my Daikoku trading system by extending the backtest to seventeen pairs and 12 years worth of data. Sample size was 600 trades.

 

The trading system is really simple. Look at the weekly chart at the end of the week and see if the current week's range is less than half of the previous week. Once the new week starts, go long or short if the top or bottom breaks, respectively. We place our stop loss at the opposite high or low.

As part of my (re-)optimisation, I experimented with different profit targets and R:R ratios. This included the new currency pairs that I had backtested. The profit factor for each R:R ratio is below:

A reward-to-risk of 0.15:1 seemed most optimal. It seemed really low, but those were the figures. But all R:R ratios were positive, so you can't really go "wrong" with whatever R:R you use. Slightly changing the reward from 0.15 to 0.2 or 0.1 didn't change my profit factor much, so this value seemed robust.

 

The equity graph of this system at 2% risk per trade is below.

Now that is a good looking equity curve, with an excellent R^2. I'm always wondering whether this has been over-optimised, but it has been tested over 12 years across 17 pairs. I suppose this is a "scalping" system since we are looking for small, consistent wins. Obviously the good news is that since trades open and close quickly, there's less chance of correlation and overlap with other trades.

Confidence building...

I've dedicated today to building my trading confidence and so far I feel pretty good. Probably the best remedy to a loss of confidence is to work your butt off and review your achievements. I'm dedicating the next few weeks to expanding my current trading systems onto other currency pairs in order to increase my frequency (at the moment I only focus on the majors and JPY crosses). I feel that this will provide the best return on my time.

A little more introspection...

I spent most of today at home just meditating and going over past business plans.

 

Late last year I had a "eureka" moment when I realised that wealth could be generated through a higher frequency of trades while decreasing my risk. An overall trading strategy that generated 1000 trades per at 2% risk would generate greater wealth than a strategy with 100 trades at 5% risk.

 

Instead of concentrating my energy in being a "hero" and using ultra-aggressive money management, I think I need to return to basics, dot my i's and cross my t's. Let compounding do the heavy lifting as I originally planned, and redouble my efforts in finding ways to increase my frequency of trades.

18% down...

I spent a few days mulling over returning to a 33% Kelly money management system. My Monte Carlo simulations make it look so alluring, even though I can expect significant drawdown. Yesterday I decided to return to trading at 33% Kelly for my next two trades, both of which lost.

 

I lost around 18% of my equity, according to MT4. It was a huge hit, although I'm still in profit since ineption.

 

What was my emotional reaction? My reaction to the loss itself was quite muted. However, I can feel a loss in confidence when contemplating the next setup at the same risk level.

 

I would love to continue this sort of money management style, but intuitively I feel I'm setting myself up for a fall, probably due to unforeseen, unmanaged risk.

 

Well, the good news is that trading at 1-2% makes it alot easier to manage simultaneous trades.

 

I believe my risk profile is very high. I just need to find the right balance.

Trade Week in Review: 1 April to 7 April 2013

I received a bit of feedback asking for a return of my trade reviews, so here it is. Hopefully it'll spark some ideas for yourself, and feel free to chip in your opinion if you see something interesting.

 

I opened three trades this week, all finishing in profit. However, there's one trade that spooked me psychologically, prematurely taking profit.

GBPUSD

This is the trade that I prematurely closed. A low volatility candle appeared on the 29th March, and my system Hermes told me to go long if the candle's top breaks during the next day. Which it did. However, price retreated just a few pips short of my profit-taking level and I closed the trade when price retraced to breakeven, resulting in a very minor profit.

 

Price resumed moving upwards the next day and hit my original profit target, so this trade should've won. They say successful trading is 10% technical, 90% psychological.

NZDUSD

A low volatility candle appeared on the NZDUSD's weekly chart. I personally love weekly charts. While the frequency of signals are much lower than the daily chart, their reliability is significantly higher.

 

Anyway, this was an easy win. I used my Daikoku weekly low volatility system. I went long on the break of last week's high and hit my take-profit during the same day.

USDCAD

This was a similar trade to the GBPUSD. A low volatility candle appeared on the USDCAD's daily chart after 1st April. Went short on the break of the low and snagged a win using the Hermes system.

 

As you can see, I like to look for significant decreases in volatility. That tells me the big money is staying out or quietly accumulating positions in anticipation of a big move. This is a good time to place pending orders in case of a breakout.  

Psychological introspection...

This morning I prematurely closed a trade on the GBPUSD. Price moved to within a few pips of my profit target before retracing. Once it retraced a few pips to breakeven, I became spooked and closed the trade with a tiny profit.

 

The result of the trade doesn't matter, even though I still won. This was a BAD trade because I diverted from my trading system, purely for psychological reasons. I last checked the market a few hours ago and price was again a few pips from my profit target.

 

Many traders have psychological weak points. Some are too scared to pull the trigger and enter a trade. Others are too impatient and enter sub-optimal setups. I hover somewhere in between. I can patiently wait for weeks for a valid signal, but when the trade is open, I want it to close as soon as possible, probably due to a combination of impatience + fear.

 

How to overcome my weakness? I noticed my emotional attachment to an open trade correlates with my time spent looking at a live chart. Reducing my "live" time to an absolute minimum will help.

 

A part of me also foolishly believes I can massage my edge if I manually manage my open trades, rather than stick to my systems. As a trader evolves, I believe they become more discretionary and less mechanical. But I'm not at that point and I definitely shouldn't be experimenting with live money!

 

I've also assigned myself a psychological goal. If I can finish the Australian financial year in profit (end of June 2013), then I think I can call myself a professional trader. It's a big call, I suppose, but I've already been trading live for seven months and generated a bumper profit (25%+ per annum so far, projection 40-45% by end of June).

 

However, I fear this goal may actually impede me. I can simply stop trading until the end of June 2013 and fulfill my goal of ending the financial year with good profit. But is this what a professional trader would do?

 

Of course not. A trader trades whenever possible. I think I will have to "delete" this goal from my mind as it is having an adverse impact, making me overly scared of losing trades (lose too many and I won't be able to call myself a "professional trader" anymore, an aspiration I clearly want).

 

Instead of shooting for "targets", I think I should focus on the consistency of my trading and sticking to my systems. This is what real professionals do.