This month has been
quite incredible, forcing upon me a
range of challenges and associated
emotions!
First my telephone company, in the
process of installing a second
service, accidentally disconnected
my main phone line for 48 hours! If that wasn't bad
enough I then went into a hefty
drawdown, as soon as I was 100%
operational again.
Around
mid-month I started to claw my way back to what I
thought, if I was fortunate, was going to be about
even, but then I had two
exceptional days trading - in fact
my best since starting these
reports - finishing off with a
respectable +15% for the month,
and taking my year-to-date return
to around +224%.
Getting away from any possible
euphoria of the last couple of
days, it was the earlier
experience I consider more
important. I've often said that traders don't
learn anything of consequence when
they are winning, but only from
their periods of drawdown - I
still think this is true!
The strange thing about this
business is that you can make
100%, 200%, 400%, 800% - whatever,
but if you lose 100% you are
history. In fact, the
percentage is far less than
that. There's a point that
is referred to as the 'uncle
point'; and that's where we throw
in the towel. The really
scary thing
is, we simply don't know where
it is. It's different
for all of us, and it's so
intertwined with our psychology,
we have to get there to know
it. An experience to
be avoided like the plague.
Also the laws of asymmetric
returns kick in with vengeance
when you start approaching say the
-40% mark.
All this is a long winded way
of saying I'm very cautious about
drawdowns, while realising I have
to be relatively bold to achieve
world-class results. Getting
risk management right is akin to positioning oneself on a knife
edge.
Those who have followed these
reports will know that my money
management method is something I
call VFP, or variable fractional
percent. It's similar
to fixed fractional percent (FFP),
but the percentage runs up and
down a scale, depending on how I'm
doing - I trade heavier if I'm
making money, and more
conservatively if I'm losing
it. Last month my
accounts came off an equity high,
and as a consequence I was trading
towards my maximums when the month
commenced.
Unfortunately the character of the
market seemed to change and I
started to accumulate losses in the
opening two weeks.
Losses are an integral
part of this business, and I've
always considered that a traders' true worth is reflected to
a large degree on how they
handle these inevitable periods of
drawdown; that and how they adapt
to change, but that's another
story. All traders
will have their own pain
thresholds; in my case I went into
stage 1 damage control when I hit
-10%, forcing me to trade off a
far more conservative risk
percentage (about a quarter of my
maximum trade size). Only after my
account started to come back, did
I inch up my risk
profile. Many market
commentators say never lose more
that 10% in any given
month. While I
understand this figure for public
funds, it somewhat
limits potential returns as
well. With my own
trading, I don't have any
fixed rule of thumb, but I suspect
my threshold lies in the region of
-15% to -20%, provided I'm already
profitable for the year. It would
be far less if I wasn't.
Another pet theme of mine is
'never break the rules, unless it creates new rules'
While my money management algorithm
was adapting to the situation, it
didn't do so as quickly as I would
have liked, hence the 'damage
control' intervention.
This month's experience has given
me the opportunity to correct
that, and I've made some changes
to it's calculation.
Leaving all that aside: I
finished up on a new equity high,
and for a trader it doesn't get
better than that!
