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.