About my blue and red graphs. It's all about risk control and discipline.

Capital growth

Capital growth



Yesterday, I added my new graph to show the drawdowns from the recent 100 trades. I call it red graph, pairing with my blue graph that shows the capital growth. You can find those graphs in the second column under “Current risk exposure” indicator.

Both of the graphs are very important for me to sustain the growth and avoid bankruptcy. In the blue graph, you see the cycle of rapid growth period and stagnation period. At least with my current trading method, having stagnation period is inevitable because the market simply does not allow me to make easy money. What is worse than losing money is not knowing that I am in stagnation period and keep betting regular size rather than smaller ones or even stop trading. With the blue graph, I am reminded visually as soon as the market condition worsens. I would bet smaller and smaller and finally stop trading until the condition improves.

The red graph is about controlling myself and avoid taking more risk than I can. When drawdown is 0%, it means I am making new record of my capital growth (remember, the x axis is the number of trades, so if no trade, no new data to be added.) I cut loss as soon as I get the first evidence of the market moving against my prediction. No body can be right 100% in the market and temporary drawdown is inevitable even for a successful speculator. The most important think is keep the drawdown rate under control, and avoid gambler’s ruin. When the red graph starts to show a drawdown of some degree, I am immediately reminded that I should take a breath to see if I am emotionally compromised (a little Star Trek here).  Then I force myself to bet smaller and less frequently until I will have a new convincing breakthrough trade.

The blue graph tells me if my strategy is fitting to the current market condition, and the red graph tells me if I am disciplined. I think they are very powerful tool.

Just to touch on the techy part, I am using Google Chart Tools. I love this. You need a little skill to code it especially when you want to automatically feed the data to chart, say from Google Spreadsheet. Fortunately I code much more complicated stuff in my day job, and I don’t have much trouble using it. There are people who develops easier to use graphical user interface for this chart tool. Here is one example. Though I leave the instruction on how to use these handy tools to other web sites and books, I may provide a tool that would work with Rational Move risk control spreadsheet when I get a time and energy to implement it.

I never set numerical goals on trading

Happy New Year!

I am planning to focus on Forex trading this year, and am not planning to move my assets easily for mid term investments. Among the capital allocated for Forex, I will put 25% into actual Forex account, and the rest (75%) will be sitting as a fixed income securities. The important point here is not to expose the 75% to risks.

I never set a numerical goal for trading. People have different opinions on this point, but I think it would be a big psychological risk if I get pressure from the urge to accomplish the goal. I will just dispassionately repeat the process of entry, loss cutting, and profit taking according to the rules.

As I always refer to, here is an episode from “Reminiscences of a Stock Operator“. Jesse Livermore lost the fortune he had striven to make, and made a great deal of debt on top of it. One of the reason his decision was clouded was that he needed some money to pay the medical bill for one of his family members.

“What does a man do when he sets out to make the stock market pay for a sudden need? Why, he merely hopes. He gambles. He therefore runs much greater risks than he would if he were speculating intelligently…To begin with, he is after an immediate profit. He cannot afford to wait.”

For a similar reason, I will not set a goal that would be a psychological pressure. Looking back, because I made over 20% reason in the last 4 months of 2010, a 72.8% annual return sounds like a reasonable challenge (or estimate), but I take it as a light dream that would be nice if I make it, and if not, it’s OK too. That is how I take it.

The other take home message from Livermore’s episode is to calculate your regular expense and leave enough emergency expense, put them in saving accounts, and never use them for investing or trading. I also have the rule not to stretch my living standard beyond what my paycheck and savings can afford.

(Note: The capital growth in 2009 since August 10 inception was 21.72%)

How to "sit tight" in the market

I have been reading “ Reminiscences of a Stock Operator” – reminiscences of the legendary speculator Jesse Livermore.

Among his words of wisdom, this is the line I have been repeatedly engraving in my mind:

“The big money is made by sitting, not thinking. Men who can both be right and sit tight are uncommon.” 

The first condition is my tape reading is correct. The second condition is to go along with the speculation and just sit tight until the result becomes clear. 

So far, I came to the point that I do not have second thought when deciding the time to enter the market after waiting for the real chance…thanks to Elliott wave analysis.

The real issue with me is thereafter.

Whenever the market did not accelerate and were rather sluggish, I almost certainly used to start hesitating, and went out and in the market without a good reason.

The recent winning rate of my trading record is over 60%, so if I look back now, those hesitations were nothing meaningful, and the right move was not to jump out of the market unless the loss cut order that had been set at the first place was triggered. Keeping on taking glances on the chart was a total waste of energy.

So, from now on when I make trading plans, I will also consider for how many hours I shut the chart down from my eyes after setting limit and loss-cut orders.

Keeping me from opening the chart – I guess that is the only way for me stop being hesitant, and be able to just “sit tight”.

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:

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


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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