Successful Trading and Compounding

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gmst

Background:
Standing up and falling like a kid: I started trading in 2009 and have had many blow-ups since then. The biggest reason for blow-ups was I did not understand risk.

Some of my initial blow-ups:
1. blew up one 5k account within 15 days of opening
2. blew up another 4k "testing the waters" account within 5 days of opening - actual blow up happened within one night - trading Norwegian Krone.
3. Took another 3k "testing the waters" account to 20k in 1 month, then blew it again within a week. Multiple losing trades.

I was convinced now I have discovered the way to trade and so:

4. Put all my savings, borrowed money and opened an account with 55k. Had a 70% drawdown within a month. Then recovered and went to 80k and since history repeats itself - very quickly came back to 10k. Basically another blow up - caused by a lot of futures in gold and silver. Till this point I did not understand position sizing.

Learning to Walk:
All the above was enough to get this into my head that I need to find a positive expectancy strategy before I trade ever again. I started back-testing and quickly found a strategy (within 2 days) that was able to produce high 200-300% profits with big 25-40% drawdowns. I read Ralph Vince books and absorbed them.

I read many books since I didn't have any money left to trade, including Soros, Livermore, Market wizards, Inside the house of money etc.

At this point, I was 6 months into my trading career and had following positive and negative things:
Positives: Understood position sizing, some understanding of global macro, what great traders had written about their approach to markets etc., a very strong numbers background
Negatives: Casual attitude towards money, ZERO discipline

Walking on a ridge:
Funded a 3k account and started to trade again, following the back-tested strategy and improving it on the go. Very good results for 2 months, went to 6k with 10% drawdown in 2 months and 70% positive days. Prototype testing was successful and it was clear that if I only do this, I should have made 8x-12x my money in 1 year. However, my confidence was going high and I decided to take a discretionary long term trade and let the trade go against me and I was leveraged. Quickly lost 80% again :)

But the upshot was my strategy was proven, negative thing was my discipline was so outrageously bad. (as a digression - It was a highly curve-fitted strategy and I was very well aware of it, but I was still trading it since I understood strategy so intuitively that I was able to change the conditions of strategy just by looking at the current market. Also I was very conscious to note any regime change and was looking to modify/stop my strategy if a regime change happened).

Meanwhile, I had an epiphany and discovered one more strategy, which in back-tests and forward tests has proven to be very reliable.

This experience gave me a lot of strength but I was broke by now. It was middle of 2010. By this time, I had developed 3 to 4 strategies in all. I went and took a job, funded my account twice again in 2010, and both times lost the account again. The culprit these two time were again the same : doing things other than my strategy and too high a leverage. After this I went and traded under the strict observation of another trader, and I was to report my results to him every day. It was purely discretionary trading, but I made money in 3 out of 4 months and came out highly positive overall. That experienced trader began to respect me for my market insights and my risk management. End results: I proved that I can make money doing both systematic trading and discretionary trading. Also, I believe my risk management has improved a lot since then. Before elite traders attack on this claim on the premise that 4 month is too short a period to claim that I can successfully trade markets discretionarily, I ask you to wait and see after 6 months and again 6 months after that and so on.
 
I claim that I will never have a blow up again.

Aim of this Journal:
1. I started trading again for a personal account one month back with 5k in it. Now, I am looking to document every week some of my salient trades and trading results.
2. Today start value is 7k.
3. I am looking to grow my account somewhere in the range 30k to 60k in one year. With my current strategies, I should be able to grow it comfortably to 30k. 60k is a more lofty aim - I am hoping I will be able to develop more strategies and put them into production over the course of the year. So, aim is to make around 5x-10x of capital. Acceptable MDD: (40% once in 10 years)
4. I hope this journal will force me to be very careful about my risk and will keep me disciplined.
5. In this experiment, I plan to trade my intra-day strategy, have a few swing trades (2 to 10 every week, holding period days to weeks) based on global macro.

Future Longer term Aim:
1. A big area of improvement from the risk side is that I currently trade only 10-15 products. If I can devise a systematic stock trading system, I might be trading 100-200 names on a given day. This should ensure that my blow-up risk gets reduced a lot.
2. Incorporate systematic options trading into my strategies
3. Look to move into spread trading over time
 
I will update the journal every week or maybe even every 2 weeks, as anything below that will be daily noise and won't result into a trend. Time for mid-week update, since markets have been very volatile this week and as a result I am putting in one very important risk management tool.

Story of my biggest P/L mover trades for this week: Eurchf

I went long at 1.11 bottomfishing, price went to 1.1206, my target was 1.121. I had a stop at 1.1150, so instead of 1100 made only 500. Then price moved quickly to 1.11. Entered again at 1.113, but it was the wrong trade because multi-day bottoms don’t get formed when price comes back from 1.12 to test 1.11. The classic signal for a multi-day bottom would have been that price would have continued to rise up w.o any significant retracement. Actually this retracement was a good signal that e/c is going down Anyways lost 800 or so on this trade, doubling and price moved v. v. quickly against me to 1.10 or so. VERY BAD TRADING!!

Some time later again went long at 1.1055 but price went to 1.095 or so, and did some cutting but still lost 500.
Then went again long with reduced size, hoping prices will rise after US debt deal is done, and I had decided to keep a reduced position for eventual bounce over a multiday period, but e/c went down to 1.08 and I cut my loss at 1.084 or so. My logic was correct, but patience was very less!! By this time, my account had lost more than 50% of its value since it was such a fast moving market. I wanted to be long for 2-3 days because this had to be absolulte bottom. Prices had moved from 1.24 to 1.08 in a matter of 2 weeks and such decline couldn't have continued. But due to my account size getting smaller and smaller and there being a real prospect of me busting the account, I decided to close everything.

Then the SNB intervened/cut rates and e/c began to rally. It was clear to me that this will be a sustained intervention, and prices will go up because SNB cant afford to lose immediately, so I went long at 1.096 this was a v. good decision, but by now I had decided that I am going to lose v. v. less amount of money on discretionary trading going fwd. Prices went to 1.093 and I was out and prices continued to go to 1.11 but I had lost my chance. After 1.11 I wanted to short as my experience was telling me that this mkt is going down, but I decided not to take any more discretionary trades for the rest of August. The reason being I might be able to make a decent run, but there is a high probability that my account will go bonkers if things don't go my way. So caution first!
 
After this experience (I currently have a 50% DD after 1 week of trading), I have decided to implement below rules for the next 6 months (to save my account from myself :eek:, I will review these rules after 6 months (on 1st Feb, 2012).

1. The account will run mostly systematic trading now onwards. Strategy average expectations is around 13% pm.

2. Maximum drawdown allowed from discretionary trading will be 4% pm. So, if I go up 9% from my discretionary trading say within a given month, but then few losses occur and I lose 4% from my discretionary trading; as a result, profits from discretionary trading come down to 5%, discretionary trading will stop for that month.

My Worst Case
So, my worst case is for next 12 months, first series of discretionary trades I take every month, I happen to lose 4%. This means my total annual loss from disc. trading will be 48%. (So, instead of losing this much amount in a week, I will lose this much amount in a year, which is a huge improvement). :cool:

Also, since on average my systematic trades make 13% a month, this means they will make 9% a month (13%-4%), still I will end the year up around 200%. If my discretionary trades do well, I might be able to end up 500%-800%.

We will see. So enjoy the show.

Just that don't expect much of a roller-coaster here (compared to say neke's journal), since having already burned myself in my 1st week, I am going to be in the ICU for next 6 months!

Start capital as of today: 5k

Edit: My main focus for next 6 months would be to research more systematic strategies across futures and probably equities.
 
Quote from jas_in_hbca:

what % of account equity do you risk per trade ?

thanks and GL.
More...

between 3% and 6% on systematic trades. Discretionary trades between 1% and 4%.

Also, I have decided to run a "pure discretionary" paper trader account starting with the same capital as my live account, so that I can compare performance at the end of each month to see how my discretionary paper trading is comparing to my less stressful systematic live trading. I will try to keep paper trading as realistic as possible in terms of risk, # of trades etc.
 
Quote from gmst:

between 3% and 6% on systematic trades. Discretionary trades between 1% and 4%.

Also, I have decided to run a "pure discretionary" paper trader account starting with the same capital as my live account, so that I can compare performance at the end of each month to see how my discretionary paper trading is comparing to my less stressful systematic live trading. I will try to keep paper trading as realistic as possible in terms of risk, # of trades etc.
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FWIW, that sounds extremely high. 1-2 % is most often cited as a good amount to risk (not position size but amount you would lose if stopped out) . Personally i think less than 1% is a good amount even with a small account and still provides good profits.
I'm not profitable but i'm not blowing up either.

JMHO.
 
% risk should be a function of expectancy and PF. So even though at the outset 6% risk might sound relatively high, for a high sharpe system, it might be a very reasonable risk to run. optimal f fraction for my strategy is around 15% of risk, so i am less than half of optimal f.
 
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