For the month of Jan’10, the return on this account was about 17%. This time, I experimented having no explicit take-profit levels specified; positions were closed based on certain technical conditions signalling a possible reversal or a potential exhaustion of the trend. Such an exit rule serves the same function as trailing stops, so that we minimize losses when the market moves sideways, and allow profits to run when the trend is strong.
Most traders are very preoccupied with making their entry points as ideal as possible, using elaborate screening mechanisms (including all kinds of fanciful indicators) to help them develop supposedly superior entry techniques. However, it is worth noting that despite more elaborate and sophisticated entry techniques being developed over the years, the overall success rates among traders have remained largely unchanged.
One main reason for this phenomenon is that people usually do not have any idea when they are going to get out of a position they have entered into. In fact, a trading system is hardly a complete one if a well-defined exit plan is not available. A systematic exit plan is needed to ensure you know how to take profits and cut losses. Quite simply, the cardinal principle in trading, i.e. to cut losses short and let profits run, is all about having a good exit plan.
Most people ignore or underestimate the importance of exit strategies. It is no wonder traders continue to struggle to make money despite being so knowledgeable about all kinds of indicators and entry techniques.
Apologies for having overlooked the updating of the trading records. Have been busy fine-tuning this strategy. The return in November ‘09 was lower than in previous months - at about 20%. As noted from the statement, the win rate in the trading outcomes was actually rather low. In fact, the proportion of winning trades was less than 50%. The reason why it was still profitable was that the exit strategy was designed to cut losses short and take advantage of the occasional occurrences of strong trends. Psychologically, a trading stategy like this is very hard to follow, as you would be taking losses very often.
In my numerous back-testing experiments, I’ve realised that changing the entry setups doesn’t change the trading performance much. It is very often the exit strategy that will significantly change the trading performance. As such, my focus has been on improving the exit plans.
I am still in the midst of fine-tuning the exit strategies in this trading method to enhance its long-term profitability and reduce its vulnerability to sideway market conditions (although it’s never possible to totally predict and avoid ranging conditions). While doing the fine-tuning, this strategy was not traded in December. This account has resumed trading in Jan’2010. Hopefully, this year will produce good and consistent returns without increasing risk exposures too much.
For the month of Oct’09, the return on this aggressive trading account was about 32%. Many of the trades were based on trailing stops, designed to cut losses short during adverse movements, and to ride trends when they happen.
The age-old axiom of trading is that we are to “cut our losses short, and let our profits run”. I’ve realised that what we tend to do best is the exact opposite! If we don’t condition ourselves to overcome our most natural trading insincts, chances are that we tend to “cut our profits short, and let our losses run”. Indeed, latest research in behavioral finance has revealed what traders and investors of all ages have always done, i.e. the fact that we tend to take more risk with losing positions, and become very risk-averse with winning positions. This “asymmetry” or inconsistency causes us to be unwilling to take losses and also to take profits too soon. Traders are unwilling to let a trade hit a stop-loss point, because humans are conditioned to avoid immediate pain; moving (or even removing) a stop-loss order allows one to delay the pain of taking a loss, and hopefully avoid it! With regard to profit-taking, many traders fear that a profit might “evaporate” away and take it too soon. This habit gives the immediate relief or pleasure of “locking” in profits.
If you think about it carefully, these two habits will guarantee that our profits are not sufficient to pay for our losses. Even with a high win rate, you could end up losing money!!! The right way to trade is to ensure that our profits are , on average, bigger than our losses. This is why many winning traders can be very profitable despite having a modest win rate of only slightly more than 50%. Winning traders really practise the basic principle of letting our profits run and cutting our losses short!
For the month of Sep’09, my return on this aggressive trading account was about 35%. To date, the USD10k account has been compounded for 6 consecutive months since Apr 09.
In this month, I tested the effectiveness of using a trailing stop to maximise how much I can benefit from the riding of strong trends when they happen. Over time, I will fine-tune the trend-following techniques I am using to maximise the gains in strong trends, and to minimise the losses when false alarms happen. Indeed, this is what the age-old axiom of trading is all about: “Let your profits ride; cut your losses short”. It has become a cliche in the trading community. I believe one of the reasons it has become such a cliche is that so few traders really practise it!
July was a relatively inactive month for me, as far as trading is concerned. In this trading account which I started in April, I managed to do 4 trades in July, all of which were profitable. The return for the month of July was 20%. It’s not bad, although it pales in comparison with the returns in April, May and June.
All traders who use some form of technical analysis (i.e. chart-reading) rely on the underlying rationale that there are patterns embedded within the seemingly random ups and downs in the price movements. Somehow, we have to believe that there is order within chaos. Certainly, the existence of such order is what we rely on in order to have a trading method which gives us an edge over the market.
However, all too often, our attempts to discover patterns are overdone. The human mind is created to recognise patterns within chaos, causing us to be too eager and hasty in coming to conclusions about certain patterns on the charts. As we eye-ball the historical charts, we will certainly be able to to find many profitable trades based on some technical conditions, thereby leading us to arrive at a strategy. The thing is that our eyes are under the influence of selective perception, i.e. we tend to see the trades that work, and visually bypass those that don’t. The technical analyst is often deluded by illusions of order.
In this way, the trading rules that one arrives at tend to be too simplistic. The market is so dynamic that we often need to apply some filters to the trading rules; such filters cannot be clearly seen in our “visual backtesting”.
Another thing to note is that correlation does not imply causality. This means that the often-noticed phenomenon that two currency pairs tend to move in tandem does not imply that movements in one of the pairs “causes” movements in the other. Any strategy based on assumptions of causality cannot work consistently.
We should be reminded that although there are patterns within the ups and downs of crowd psychology in any liquid market, such patterns do not exist like they do in an exact science (e.g. laws of physics), and are therefore still full of randomness. This is the reason why we should make allowances for losses in all trade decisions (regardless of how we filter trading signals); such losses occur when the “randomness within patterns” works against us. The fact that such losses occur from time to time does not mean that we don’t have an edge over the market. Having an edge over the market means that in the long run, the wins will more than cover the losses. Much of the diffilculty in trading is learning to accept this simple principle.
Too many traders simply overlook or gloss over the importance of discipline and stringent risk management. When we consistently keep to the rules despite losses, and keep losses to a minimum via stringent risk management, any simple strategy that gives us an edge will be profitable in the long run.
This is my performance for the third month ever since I started my trading adventure in early April. The trading style involved here is riskier than usual, so the returns are higher. The return for June’09 was 43.2%.
Are there any magical strategies that lead to such high returns? Again, my answer is always: No, there are no magical strategies in the world. Those who keep trying to find them are going on a wild goose chase, simply because successful trading is not simply about a good trading method. As I’ve said before, part of overall winning is about taking losses, and avoiding doing the “most comfortable thing”.
