Sunday, 4 August 2013
After many years of trading I had come to the conclusion that what one needs to succeed as an independent trader is a) a good system, i.e. a set of rules that defines clear rules for entry, exit and order size for each trade; and b) The mental discipline to stick to those rules every time. Over the years I had already tried and tested dozens of specific ‘methods’ using many kinds of indicators, or ‘trade setups’ involving chart patterns, indicators, cycles, etc. I have also tried ‘black box’ systems. All the while I was developing my own ideas and they were good trade ideas. However, I always stumbled when it came to executing the trades. The emotions always led me astray. The past 5 years have been spent understanding my emotions, my weak points and working on overcoming those weaknesses. Over late 2011 – early 2012 I researched all the major FX pairs going back 10 years to 2001. I discovered patterns and time relationships that led to consistently successful trades. That formed the basis of my trading system. More research into the optimum order size, i.e. risk for each trade, led to my complete system. After finding out how well it worked in back-testing, I had to test it in real-time. To do that, and also as part of improving my mental/emotional skills appropriate to trading, I started this blog to serve as my journal and to keep me honest 😉
The test involved tracking system trades in real-time while at the same time trading real money as close to the system as I thought appropriate. Initially I over-ruled my system often, but almost every time the system proved to be right and my ‘gut-feel’ decisions would be wrong. Over the period of the test I learnt tough lessons in my real account while the system account steadily grew at an average of more than 150% per month. Trading against my system rules on a few key occasions cost me very dearly, essentially busting my account. On the flip side, this testing and research have helped me a lot. I have improved my trading HUGELY through this process. I analysed my trading using the ‘theoretical’ system as a reference and improved my real money trading. The system testing of the past year+ has given me solid confidence that I can grow my trading account by at least 50% / month, more likely 100% per month, i.e. double it each month.
After the 15-month long live-testing I am now ready to trade my system fully, with real money. I am starting small, with an account of only $10,000. This is actually a trial for a fund, with capital from someone I know personally. The unique thing about this trial is that all trades will be actual trades involving real money, with the attendant problems of slippage, missed opportunities, sleep, family life, etc. (no more separation of theoretical ‘system’ trades and real money trades). I will be able to show broker account statements that will be identical to the trades blogged here.
As I’ve written before, in my method the capital is divided between the 5 pairs I trade: EU, EJ, UJ, GU, AU. My system does exceptionally well at 20% risk in each pair, i.e. ~5% risk of the combined account equity per trade. In the live testing over the past 15 months I’ve been conservative and used only 10% risk of each pair’s equity. In live trading I will use my discretion and risk something between 10 – 20% of each pair equity, i.e. between 2.5 – 5% of total account equity risked per trade. Each pair will be tracked separately and a summary worksheet will show the combined account value. The currently open trades (GU, UJ) will not be included in the new account.