Sunday, July 17, 2011

Portfolio Performance - June 2011

# of Entries..........12
# of Exits............10
Portfolio's ROI.......-7.72%
Market's ROI..........-1.83%

June felt like a death by a thousand paper cuts. The month of June stands as the highest system entries, lowest win ratio, and largest monthly drawdown. It's always difficult to continue taking trades when your system is performing badly. Especially, when you can clearly see why the market is a mess for your system.

The slippery slope is to stop trading until the traffic clears. Do that and sure enough you will miss the turn. I have entertained in the past a more systematic trading halt. Stop taking trades for the month when some trading metric hits a filter. The trading metric could be a win ratio, profit factor, expectancy, drawdown, and a host of others.

Problem is: I have never found a way to improve systems by trading the equity curve outside of Anti-martingale fixed-fractional position-sizing. Even when the system exhibits a high trade dependency. That's not to say it isn't something to explore for your systems. Especially, since improving a system is dependent upon your own definition of improvement.

No, experiencing a big drawdown is the toughest thing a system trader will encounter. Mostly because there's nothing you can do about it but sit on your programming hands, continue taking entries despite how you feel, and patiently wait it out.

Later Trades,


Tuesday, July 12, 2011

Monk Traders

Michael Martin wrote an interesting post on the importance of fundamentals in trading. Its a good post with solid points. Especially, the part about using your knowledge of the fundamentals of the market in build trading systems.

What struck a chord was the author's take on system traders. Now, I understand who Martin was really writing about. He was referring to the traders who take the easy way out. Those traders who build Rube Goldberg machines rather than a trading system.

But, there are system traders out there who spent time in the trenches learning as much as they could about the markets they trade. Only to give up that knowledge in order to trade the systems they build.

I had to give these trading monks a plug...and comment on Martin's post.

Martin edited my comment; making me sound smarter than I am. Thanks. Below is the unedited but less eloquent version:
You're likely right...the title/moniker of the "expert" systematized trend follower could be their way to mask insecurity about their ignorance of fundamentals. But, let me present another side...

I agree with your point that understanding fundamentals are important; even for a systematic trader. But, believe there are levels of system trading that have to be considered.

If a person wants to become a non-system trader; then yes...long years of study of both technical and fundamental.

If a person wants to become a system trader; then yes...long years of study of both technical and fundamental.

Both sets will need to trade and gain experience putting their knowledge to use and more importantly the timing of that knowledge. The system trader is really an automator in this case. Taking intuitive rules the non-system trader has and standardizing them into something the computer can understand and spit out. From there, the system trader can evaluate the results and as you mention review the fundamentals. Trade based on the combination. Many system traders fall into this category.

There is another level of system trading. Requiring an additional set of skills in addition to the technical and fundamental.

These system traders must forego all their hard-earned knowledge and allow the system to work as designed once placed into production. They cannot care that Sugar fundamentals are aligning with price. They are indeed working on the average expectation of all their trades. And cannot get caught on the slippery slope of asking "why" they've lost money on the trade.

So, there is a remote chance you were talking with this level of system trader. Whose title/moniker wasn't created to mask insecurity. But, to shield themselves from things which make trading the system hard. In some ways, these system traders are monks. Having to purge all trading belongings and follow only the rules given by their system.

But, I did mention it being a remote chance you were talking with this level of system trader. Anyone in this category would not use the word "expert" in their title. The longer I trade this way the less of an expert I become.

Look forward to your book. Of course, only in designing my systems.

Later Trades,