I know that I shouldn’t be that concerned over such a
small sampling, but I have to admit that I am quite relieved to be in positive
territory for the first reporting period.This
month has been a very tough one for someone like myself who prefers
directionless and stable markets.GBP
completely changed character with volatility doubling(see Chart later in this document), and the US dollar
continued to get hammered.To
make matters worse Alan Greenspan sneezed and made the markets nervous and New
Zealand raised rates in line with Australia.
In many respects this month has been particularly
difficult because of the decision made in mid December to open up my trading to
family capital and their scrutiny.Before
I have had the luxury of virtual secrecy in my dealings, excepting the tax
authorities of course, but now all aspects of my trading are open to view –
the good, the bad and yes the ugly.
Before going much further I think it is necessary to
define what my goals are with my trading, and to give some idea of what I have
set out to achieve.Already
you will notice a certain amount of volatility in the performance above – for
example there’s an 8.5% drawdown in just 5 days.If representative, and if anything this month was probably ultra
conservative, this is obviously not the place for a conservative investor, nor
scared funds.
1.I want to give myself the chance of making spectacular gains, while
2.Ensuring that I don’t jeopardize my ability to trade in the future,
because of lack of funds.In
other words make sure that I’ll always be around tomorrow
The obvious question then is what do I
consider ‘spectacular’?
The way I approach trading is to generally first do
computer backtests, then (normally) computer simulations (Game account, or
nominal trade size), followed by live trading.From the first I can get an idea of not only whether a
system has merit, but what it will take to obtain 'spectacular' results.I must make it very clear that I'm well aware of the dangers of
optimization, so as a consequence I reject all methods that do not work across a
wide range of parameters, however even without optimization I have produced
backtest results that have taken $1,000 start amounts to multiple millions,
inside 5 years.That, by the way,
is even taking spread costs into account.So
to me, spectacular means anything along those lines - but let's say 500% pa or
above, just for a number..
The wording of the goal however is ‘to give myself the
chance of making spectacular returns’ so these cannot be assumed, nor even
expected, so for more down to earth expectations I'm looking for about 40-50% return pa.I'll be very disappointed with less than 30%, but if
it's a really strange year, I'll be happy just to survive, with most of my
capital intact.Anything over 100%
will make me very happy, and with luck this figure could be a lot higher.
Such
goals cannot possibly be achieved without considerable account volatility, so
significant drawdowns should be expected from the outset.
Individual components
The following charts show individual equity curves in
percentage terms of the various trading components traded throughout the period.
GBP/USD usually is the main
stay of my trading, because of very consistent backtesting results and
encouraging simulations.However
this month volatility exploded, and I was forced into damage control.I started the month trading 4 separate variations on a theme, and
dropped one mid-way through.Also
I was forced to cut down my exposure to the pair.The percentage returns for the period can be seen from following 3
charts, and a 4th one in the ‘ceased to trade’ section.The results are disappointing, but considering the circumstances
they could have been a lot worse.
AUD/NZD trading has been a
dream!My main AUD/NZD
account was up over 60%, and in a very new, and highly speculative
account, made an unbelievable 49% in just 5 days!Performance like this is really atwo-edged sword, because while wonderful while it lasts, it
invariably ends with some quite large losses.The biggest problem is that as an account grows, (and heads for an
inevitable drawdown); the drawdown will have a greater proportionate
impact on the consolidate balances.However there’s no much that can be done about this, if you
believe in supporting your best performing systems.
This account is being managed
differently from the others.The
account has been funded with a very small proportion of the available
funds, and is using extraordinary amounts of leverage.While I fully expect it to ‘crash and burn’, there is
always a small chance that the account will grow considerably.Whatever happens, wild swings are expected, and consequently I have
excluded it’s P/L from the consolidate balance.The Red Line shows what percentage has been included, and as can be
seen, this is currently none.The
rationale for this is that I don’t want the tail wagging the dog, should
this account make temporary short-term profits, followed by large losses.
Until half way through the
month I didn’t have the data to do any significant backtesting on this
pair.I was just trading it
very modestly more as an experiment than anything else.When I was able to do some backtesting, I wasn’t very happy with
the results, and I temporarily cease trading it for real.However it continued to do ok in simulation, and I resumed trading
a few days later.We’ll just have to see how things work out.
GBP/CHF has been a bit of a
disappointment ever since the beginning of January.This pair is the most successful of all my backtesting, but
had I not aggressively cut my exposure to this pair continuously during
the month, the result would have been far worse.Nonetheless backtesting results over the last 5 odd years have been
nothing short of spectacular, and its too early to give up on this pair.
Another example of how the
character of the markets changed in January.This pair was going along just fine, and then fell apart.Just one of the joys of trading!The last week seems to have resumed some normal lacy, so hopefully
the markets are beginning to settle again.
This
chart shows recent results from a long-term trend following method I have
been trading for about 7 months. I
have decided to cease trading it, as of the end of the month, but will
move it over to a simulation account. Psychologically I find that I cannot trade successfully as a trend
follower. Run any backtest on
MA's, or Turtle type breakouts, and you will see huge drawdowns that last
for ages. Not only do I
believe that these systems do not work (apologizes to those who do), but I
just cannot stand the losing periods, even if they do.
This a snapshot of the
Capital allocation as at 31st January, showing the majority of
funds allocated to GBP/USD and AUD/NZD trading.Long term Trend Following, also represents a fairly large
component, but as mentioned earlier, will now cease.
Ceased to Trade
The following pair/systems
were traded live during part of the month, but subsequently terminated.GBP/USD due to over exposure to this pair, and EUR/CHF EUR/GBP
while I do more research.(I have only just obtained the necessary long-term data for
testing).
Under simulation
Shown here are a few of the
methods I currently have in simulation.That’s to say I’m trading these on a daily basis in a
‘game’ account.Normally
simulation follows successful backtesting, although sometimes ideas cannot
be backtested successfully, and I go straight to simulation mode.Normally these are ideas that I have not yet adopted
live, although in some cases I keep simulations running in parallel, often
at reasonably high risk levels.A number of these simulations have been running for several months
Current Charts
Following are a selection of some of the more important
charts covering the period.Of
particular interest is the change in volatility I mentioned earlier in GBP/USD,
as evidenced by the rapid escalation of the 14 day Average True Range (ATR).
Comparison with an anonymous (but real) Oz Stocks portfolio
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