Post-mortem 2019Q2

Another three months has past from my Q1 review just like that. We’re already halfway through the year and the market seems getting better, giving us more opportunities. But we don’t want to jinx it, do we? Just always be prepared and plan your trades for better results, no matter what the market situation is.

So, Q2. There has been interesting things that happened from the past months. I took a vacation and went back home for 3 weeks to attend a 2-day technical analysis workshop. It was really helpful to learn their full-system as my current TF strategy is adapted from theirs. There are a lot of new strats thought in that 2- day workshop. I tried virtual trading other setup in the past months but for some reason, I choose to stick with my TF setup for now. This will be the last month of my virtual trading. I will be jumping to live trading with real money but using a small account first. This will be me going into Step 3 of my newbie journey. Where Step 1 is backtesting (pattern recognition), Step 2 is forward testing using paper/virtual trading (practice execution), Step 3 is trading with a small account (get used and control your emotions) and finally, Step 4 is trading with a big account (practice conviction).

So how was my performance during those six months virtual trading?

Let’s look at the numbers…

Q2 Portfolio up by 11.58%

 

Q1-Q2 Equity Curve

 

Q1-Q2 Analytics

 

Average profit v. Average loss…

This is more like a reflection of my previous post about trend following paradoxes where trend following is a strategy where you’ll experience a lot of small loses and few big gains. I closed 30 trades since the beginning. But when you look closely at it, 20 of those trades are losing trades, 4 free trades (breakeven) and only 4 of them are winners. But my average win (11.86%) outweighed my average loss (-3.31%).

Profit Factor…

Profit factor is an index of trading skill. It evaluates the relation between your results and the risk you take to get those results. In general, a profit factor greater than one is profitable. But is it a ‘good’ profitable? Let’s take my profit factor during Q1, Q2 and combined:

My Q1 performance gave me a 0.02 profit factor (oohf) while Q2 performance gave a 6.42 profit factor (woah!). This can be attributed to the fact that my winning positions taken during Q1 were closed on Q2. Resulting to a far bigger profit factor in Q2. That’s why, as advised by YZ before, you need at least 6 months of minimum data to evaluate a TF strat and your performance using that strat.

Now, Q1 and Q2 performance combined gave me 2.32 profit factor. This means that I tangibly lost PHP 1.00 for every PHP 2.32 earned. Is it profitable? Generally, yes. But is the risk worth the reward? I say I need a little bit more. The general idea we are targeting here is high reward with minimum risk. Ideally a profit factor of 3 (1:3 RRR). It is still better to make an average of PHP 3000, with a profit factor of 3 (making PHP 3000 for every PHP 1000 loss), than making an average of PHP 4000, with a profit factor of 2 (making PHP 2000 for every PHP 1000 loss).

Maximum Drawdown…

It simply refers to the worst case scenario for a trading period. In investajournal, Max Drawdown refers to the highest loss realized in one day. In my case, for a period of 6 months, my maximum drawdown is -1.27%. But what does this tells me? This tells me that the biggest loss I made during those 6 months was when I closed a trade or several trades on the same day that incurred a -1.27% damage on my port – at least that’s how I understand investa’s definition of a max drawdown. And it’s well within my 1-2% limit of value at risk (VAR).

Accuracy & Profitability…

…or Hit rate or Win rate! Is the probability of each trade to be profitable using the strat. My performance with the strat gave me a 23.33% accuracy. Not exciting, isn’t it? Now, you might think that a higher accuracy of 70% will give a better result against a lower 23% accuracy. Well, it depends. It depends on the trader’s risk management and trade management or how we cut his losers and how he let his winners run.

Well, you see, trend followers keep their losses as small as possible because a trend following system is expected to have more losing trades than winning ones. While they let their winners breath and run as long as their strat is not giving them the signal to sell. Hence, the 23% accuracy rate of a trend following system will still be profitable because the average wins will be far larger than the average loss (as discussed in point number 1).

So what works and what doesn’t…

Adaptation and Trade selection…

I started my backtest for this TF strat with a minimum of 3 months boss breakout. But during the first few months of forwardtesing it, the market was still going sideways and proved to be not suited for TF players except for a few outliers. Most of my trades at the beginning were failed breakouts. One factor I observed was the overall market sentiment during this period was still not strong or bullish enough to push a stock past their shorter boss resistances. So I slowly refined my entries. Instead of the minimum 3 months breakout entry at the beginning, I shifted my focus on stocks breaking out on their 52 week highs, multi year highs and all time highs. My result started improving but still there are 52WH, MYH and ATH plays that are having a hard time breaking past their boss resistance like DMW and MAC. So we just have to stick with the plan. Cut if the stock goes against your bias which gets us to point number 2...

Trade Management...

...is the process of efficiently completing a trade sequence. It includes screening stocks for your certain setup, putting them on your watchlist, planning out the trade (entry/exit), calculating your position size, execution when signals are triggered, monitoring and exits. A proper trade management can mean the difference from a good trade to a bad one.

Screening and watchlisting. Since Q1, I have already developed the habit of doing my screening and watchlisting every weekend before Monday. I screen stocks that are near or at their 52WH, MYH and ATH. These are the easy trades. During these time, I am also planning out my trade for each stock. Identifying entries, cut loss and initial TP or potential RRR and calculate my position size. I then put these values on my InvestaWatcher.

Entries. This is the part where I am still struggling. I am still not that confident in entering on the actual breakout. I always wait for something - a 'confirmation' - before buying. Which most of the time resulted on me buying on the higher end of my buying range. But to manage my risk, I normally shrink my position to compensate for the late entry. And most of the time this strat save me from having bigger losses when the stock went against my bias. The downside - my gains are not maximized when my bias is right. Which gets me to my next point...

Scaling up - or buy up or adding up to your position. To make up for my reduced initial position on late entries, I try to scale up every time there's another confirmed breakout or confirmation of strength. This is how I started with reduced intended position size for HOUSE then scaling up three times along the way up. Growing my allocation for the stock to almost 50% of my port. I also scaled up on my position for HLCM to complete my 25% allocation.

Exits. It is either a Stop Loss (cut loss) or a Trail Stop for a trend follower. For me, I tranche my selling into two trail stops. For HLCM, I used a candle stop and a whole number stop when it went parabolic and produced a few gap ups, sold half. Then sold the remaining when 20MA snapped. Same with HOUSE, except the 20MA snapped first - where I sold half. Then sold the remaining shares when DB support snapped. For GSMI, I sold on break of DB bottom, but sold near EOD where price was already way below my trail stop - a disadvantage of EOD trading. For the losing trades, it is a combination of 4% and a technical stop - I sell when my bias is already invalidated.

Embracing the losses…

I’ll start this with a quote from Mark Weinstein – “You have to learn how to lose. It is more important than learning how to win.”


Being profitable is not all about collecting huge amounts of winning trades. It is also about controlling your losses. New traders should understand that it is unlikely to win all their trades. There are just things that we can’t control. Don’t view losing trades as problems that need to be fixed. Accept them. It’s just how trading works. It’s part of the whole process. Wins and losses go together. It’s like spaghetti and meat sauce. You can’t eat the pasta noodle without the sauce. But put too much sauce on it, then you’ll hate to eat it. So just enjoy your spaghetti with the right amount of sauce, yeah? Controlling the amount of sauce is one of the secret to a good spaghetti. Like controlling how big your losses is one of the key on your trading success.

Here's a list of my closed trades for Q1 and Q2, just to give you an idea of how much losses outnumbered my wins. It took 18 losses, for me to actually close my first win. I wouldn't have gone this far if I hadn't endured those losses and learned from them.

 

Take a look on the size of my 'many' losses against the size of of my 'few' wins...

Enjoying the process...

I can imagine you thinking, "Ugh, here we go again with the process". It may sound cheesy, but that's how I survive my trading journey so far without a direct mentor. So I suggest you start loving what you do by enjoying the process and stop seeking perfect results. Results are actually out of our control. We don't know which trades will be a win or a loss before we take them. Our job as a trader is to make sure our process lets us win more than losing. And if we do lose, a good process should protect us from losing big.

Process is everything that goes into making a trade. This includes the answers to the questions, how
do you prepare? What is your screening process? What is your strategy? How and when will you enter/exit a trade? What's your risk management and position sizing? How do you record your trades? How do you review them and make your strat better?

Process is a routine. A collection of good habits that when combined together, it creates a well organized structure to your trading process. Focusing on the process keeps you focused on things you can control. If the trade is executed as planned, even if it is a loss, then you already did your job as a trader. Focus should always be on the process of the trade and not the outcome. Focusing on the process is what dictates the outcome.

What to work on (Q3)...

As I've mentioned at the beginning of this entry,  this will be my last week of virtual trading and will be jumping to the next level - live trading with a small account. Through virtual trading, I've practiced my trade execution for 6 months. Though I can honestly say that I still need more time to perfect my execution, I feel that it is time for me to add emotions into my trades and experience the real deal. Using a small account will still protect me from losing big, but every loss and win will give me a glimpse of whatever emotions there are in real trading. So this list will include on new things to work on in preparation to live trading...

1. I still need to improve my entries. Work on minimizing the fear of entering during the breakout. Develop the correct mindset to have more trust and confidence in my trade plan and preparations. Be more decisive on executions. Execute as planned! Be like Spock - an emotionless and ruthless vulcan-trader.
2. Continue on practicing proper position sizing and port allocation of 25% each stock with 1% VAR. Get comfortable at this setup before moving into increasing port allocation with conviction. This goes hand-in-hand with point No.1 - right entry plus right position size plus good risk management equals better trades.
3. Work on identifying and studying the stocks DNA for better entries.
4. Continue focusing on the easier trades (52WH, MYH and ATH) and master this TF setup first before moving into harder setups.
5. Try to collaborate with other traders in my area. Create a support group that can meet at least once a month to develop and contribute on each others trading skills.
6. In transitioning into live trading, you execute JUST AS YOU PRACTICED IT in virtual trading.
7. My portfolio may have gained 11.58% YTD (an improvement from Q1's -5.55%) but my profit needs to be better to justify the risk that I'm taking. Target at least a profit factor of 3 by end of year (better if I get greater than 3). (related to output of points 1-4).
8. Continue collecting data for another 6 months using live trading with small allocation so that I can consolidate the data into a whole 1 year results.

Conclusion

Another three months has past from my Q1 review just like that. We’re already halfway through the year and the market seems getting better, giving us more opportunities. But what has the market taught me so far?

It's about having a trading plan that fits you, control risk and focus on the process. It all starts by keeping a journal of your trades. It kept me in the profit side even if I only won 2-3 trades out of 10 on a sideways market in 6 months. Embrace the losses. Use them as your motivation to learn so that you can adapt. Yes, losses may set you back. But it is up to you if it will set you back temporarily or permanently. Yes, it's frustrating. But, at the end of the (trading) day, that's how we become better.


#onepercentbettereveryday

(might post a trade review of my few wins and maybe a couple of failed trades soon)