Archive for the ‘Risk control’ Category

Looking back 2010 performance

Merry Christmas. The year 2010 is ending, so here goes the performance report, and a little retrospective:

Rational Move made 12.1% on short term trade. I also made 2% on mid term trade that was not accounted into the short term trade. So, total capital growth is about over 14%.

Q4 result was 0.41%.

I concluded the trade for 2010 on December 9th, and in terms of currencies, I was mostly trading AUDJPY, AUDUSD, and EURUSD pairs. So here is the chart of those currency pairs plus S&P500 index from January 4th  to December 9th. (Note: Stock index rallied further in the latter half of December, S&P500 was +10.98% as of December 23rd.)

The next graph is performance by month. I made most of the return in January (8.47%), and made a gradual growth later on. Down moths were 3 out of 12 (February, April, and November).

The next graph is the number of trades by month. The total number of trades was 46, and 35 of them were from March and May only. I think I try to catch a potential big wave after the flash crash of May only to see such move did not happen. After that, I decided to be selective in taking positions, and the number of trades reduced very much.

The number of winning trades were 31 and losing trade was 15. The wining rate was 67.4%. I believe this number is higher than the last year, thanks to selectiveness in taking positions.

The last graph is the drawdowns of the last 100 trades. So latter half of the graph represents the drowdowns of 2010. I clearly learned from the lessons from 2009, and stabilized capital from the over fluctuation. This year’s worst was -3.31%.

Though I do not have a record at hand, I think I kept my bet size small; the maximum exposure I took was lower than 2.5%. Here, what I mean by exposure is the capital loss (%) when the  stop loss is triggered.

This year (again), I was anticipating really a big crash – a crash that would have been much bigger than flash crash of May. So, when I thought it was coming, I did not book profit even when I had 400 pips unrealized profit per lot. After the fact thought is that I should have taken at least a partial profit if I could for the slightly better annual return…I need more capital to be able to be flexible in operation to be honest.

How to reduce drawdown

Be aware of non-profitable period

I wanted to show the graph of the drawdown rate:

This graph is filled with mostly negative values, as the value is at zero when the capital is making new high. Recently, I started to make the new high from July 26, and it is a good news after the months of what I call a “non-profitable” period. The last non-profitable period started on March 15 from where you can see graph draws zigzag in the negative range. The negative number shows the decline from the historical high of the capital. The biggest drawdown was -3.31% on March 15. This is a great downside improvement as the worst drawdown of the previous non-profitable period (Oct-Dec 2009) was 6.39%.

How did I manage to reduce the drawdown this time?

The answer is simple. I simply stopped trading and become a mere market observer. I did trade in the non-profitable periods, but I was very selective when to trade. Besides the reduction of the frequency of trading, I also kept the betting size much smaller. I only risked 0.5% of the capital per trade typically, and never bet more than 1% during the period.

How did I know that I was entering the non-profitable period?

I think non-profitable periods varies from traders to traders. It is the characteristics of the strategies and market conditions that determine if the period is profitable. In my case, I’m looking for a big price move using the radar of Elliott wave principle. I think there are two cases that I would sense that I am going into non-profitable period.

The first case is when Elliott wave tells me that the market is in non-impulse wave. When this happens, the reward/risk ratio gets smaller, and this makes me willing to make smaller and smaller bet, eventually I will stop trading until the next anticipation to impulse wave. Elliott wave principle serves me as a great indicator to see the market is profitable.

The second case is when my prediction turns out to be wrong. As far as Elliott wave is concerned, this is when my Elliott wave counting turns out to be wrong. In this case, trading loss trades twice or three times in a row is inevitable. But every time I did a losing trade, I would cut the betting size smaller and smaller, and eventually to zero, and I will decide to stop trading until I would see really a good opportunity.

Do the opposite of gambler’s ruin

In summary, I would suggest traders to always keep the gambler’s ruin in mind, and do the opposite as hard as he or she can.

Average gamblers may make money first and keep betting bigger when he feels lucky. Of course the big bet eventually embarrasses him with a big loss. The emotional gambler bets even bigger to get back the loss only to lose everything.

Good traders do exactly the opposite. He or she always has the upper limit on the bet size regardless of how lucky he or she has been. When a loss trader happens, the good trader would reduce the bet size rather than trying to get back the loss, and just wait for the market to turn favorable.

This requires clear self observation as well as great discipline. But without discipline, no trader would survive the cruel market.

Market crash scenarios, and correlation between AUDJPY and S&P500

For market observers, it is well known fact that AUDJPY and S&P500 have quite high correlation.

Here is the chart from Yahoo, and high correlation started somewhere around 2003 as far as my rough visual observation goes.

There is no guarantee it will be this way in the future, so we have to be careful in using this “temporary” fact.

The readers of this blog know that I’m very bearish AUDJPY. And in my experience, Elliott wave principle saved me from losing money even more than helping me to make money. Here is the recent example in gold market.

Elliott wave practitioner like Robert Prechter even go so far as to say,

The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said. That unraveling, combined with a depression and deflation, will make anyone holding cash “extremely grateful for their prudence.

I’m an ordinal being, and still (and probably never) convinced that the market crash will go down such a monster cliff that Ralph J. Acampora would describe as

I don’t want to agree with him, because if he’s right, we’ve basically got to go to the mountains with a gun and some soup cans, because it’s all over.

in the same New York Times article.

Still, I think my view is categorized into super bears compared to the median’s view.

I’m keeping the majority of my 401k and Roth IRA as the cash equivalent position until I change this view.

Postscript:
I had time to trace the A-B-C zigzag correction scenario to S&P500 chart with logarithmic scale. The bottom of C wave in this case points to 550:

Real time trading tweets

The plan in the article may get rejected any time, so please check out my tweets on Twitter.

Current risk exposure:

"","","","","$29,058.30","","","","","","","","","","","","","","","","","","","","41.95%","","","2.00%","","","","","","","","","","","","","","","","","","","","","","","","","","","",""
Rational Move always use stop loss orders, and this is the worse case potential loss over the capital for the currently open positions. This is unrealized loss is less or equal to the risk exposure.

Capital growth

From recent 100 trades (%) The growth right before the 1st trade is set to 0%.
About this graph

Drawdowns

From recent 100 trades (%)
About this graph

Total returns

Since inception
(Aug 10, 2009)
Year-to-date Quarter-to-date
0% 0% 0%
This is a normalized value: the return on each trade is normalized against the capital just before the trade execution. This way, it is eliminating the effect by the capital change from deposits and withdrawals. The calculation thus reflects the trading performance of each trade. The value does not contain unrealized profits and losses. RM's trading strategy never risks more than 5% of the present capital. Not including subtraction by tax.

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