Sunday 3 February
At the beginning of the week the account was up 45.8%. Today it is up only 1.3%. I feel frustrated and deflated. I’ve had a busy family week, with one daughter coming back from holiday and then preparing for her next Uni term, and another daughter’s birthday, etc.
I’m disappointed with this month’s results, and have given it quite a bit of thought. I will do a careful post-mortem analysis tomorrow (after family life settles down). My first impression is that the key reason for the poor performance is the very unusual markets we have had in the past 3-4 weeks. The Euro strength and the yen weakness have momentum that is not ‘normal’. When markets return to more ‘normal’ two way moves I will do well again. For most of this month I followed my system rules pretty closely, except in AUDUSD which I stopped trading due to very small ranges. Here’s how my system has performed in January:
EURUSD: +96.2%. I missed the one big move from 10-14 June which netted 297 pips for the system.
EURJPY: +219.7%. The system caught more of the big moves in the early part of the month. In the past week I went short in anticipation of candles closing, it cost me dearly.
USDJPY: +18.4%. Most of the big moves happened in late December when I didn’t trade.
AUDUSD: +40.9. The system has made more than 20% since the middle of the month when I stopped trading the AUD.
EURCHF: -9.9%. I’m not trading this any more, and the results vindicate my decision.
I know that my system performs well in a very liquid and primary market (hence the poor results in the less liquid, derivative crosses like EURCHF, EURGBP, AUDJPY). In such a market, the system performs well when there is a discernible trend, i.e. the market swings between higher highs and higher lows, or lower lows and lower highs. If the reader is familiar with the basic tenets of Dow Theory, you know that markets have primary trends, intermediate trends and short-term trends. Primary trends go on for months and years. Intermediate trends for a few months. Short term trends from a few days to a few weeks. Another metaphor from the sea for this is the idea of a big underlying current, the surface wave, and the ripples along the edge of the water. This theory was created in the age of the ticker tape, but it does capture the crowd psychology very well. In the modern forex market which moves faster and has wider range of moves, the ripples of the Dow theory correspond to swings of 100-300 pips in 1-5 days. These are the moves my system is designed to capture.
What we have witnessed in the Euro and the Yen over the past 6 weeks are almost uni-directional markets. If I had recognised this early, I would remain in the long trades and not exit or go short, which have cost me most of my losses. In hindsight, it was silly to go against such a trend. But hindsight is wonderfully deceptive – it makes things look simple and clear. Hindsight completely misses the fog of uncertainty a trader faces when the trader is at the right-side edge of the chart. That’s the acid test, where the road meets the rubber. We have to make decisions about the future, not view the past. One can’t be sure of the future! We have past behaviour only as a guide to what might happen. And based on past behaviour, one could not expect the trend to be so uni-directional.
Of course, nothing ever moves in a straight line, and these uni-directional moves will surely end one day soon. But while such moves continue, my system will do relatively poorly, as will any swing trading system. Long-term trend catching systems will have done exceptionally well in the past six weeks. But the correction is coming, and I will do well then.
I will be analysing each of my trades, comparing each with my rigorous system rules and think about ways of improving my system. One obvious thing to do is to devise a filter that will figure out the nature of the trend as soon as possible. This could mean taking fundamental / political events into consideration. The difficulty here is that it opens the system to subjective opinions – i.e. no rules. Big risk. Unless I can define precisely the rules to analyse such events.
Anyway, here is an updated worksheet for the end of January.