Weekly and Month review – May 2013

Sunday, 2 June 2013

The month started off on a great note with +69% in the first week, but after that it went downhill and I end the month at a loss of -16.4% 😦

Attached is the trades log for May.

Throughout May, I was getting frustrated with the market, and blamed it on slow choppy summer holiday markets. That might be true, but when I checked how my ‘system’ was performing, it was doing well. The number of trades have reduced, but the trades are still profitable. So I figure the problem is with how I trade, not the summer markets.

A serious trader is always looking to improve, and I firmly believe in that principle. That is one reason for this blog – to record, review and if possible learn from past mistakes. I have improved substantially in my trading from say, 2 years ago, but I get tripped up every now and then and suffer a major fall. For the past 12 months I have been keeping a ‘theoretical’ trades worksheet, one that follows my rules mechanically, without fear or greed 🙂 That ‘theoretical’ performance is a good standard against which to compare my ‘real’ trades and see where they diverge, why, and which proved correct in the end. It has been the best source of learning for me. Analysing my trading over the past 12 months my conclusions are as follows:

1. I follow classical technical analysis; chart patterns combined with a little insight about time of day/week/month cycles. It’s mainly trendlines, Support/Resistance and Fibos. In the past two months I’ve increased the importance of S/R and Fibos which seem to work well in ranges. Given all the ups and downs and the trade-offs required for successful trading, my method has proved to be pretty good. The theoretical trade results for Jan – May are as follows, broken down by trade pair:

EURUSD: Jan +774 pips/+353.2%; Feb +690 pips 265%; March +311 pips 37.6%; April +143 pips, +16.1%; May +265 pips +59.3%.

EURJPY: Jan +1294 pips, +219.7%; Feb +518 pips, +82%; March +597 pips, +69.9%; April +1302 pips, +291%; May +118 pips, +14.8%.

USDJPY: Jan +421 pips, +18.4%; Feb +300 pips, +55%; March +243 pips, +31%; April +825 pips, +223.4%; May +640 pips; +226.4%.

GBPUSD: Jan +518 pips, +126.2%; Feb +728 pips, +143.3%; March +444 pips, +66.6%; April +742 pips, +304%; May +690 pips, +304%.

AUDUSD: Jan +217 pips, +41%; Feb +118 pips, +46.5%; March +224 pips, +52%; April +282 pips, +88.2%.

(I got so frustrated with the small ranges in AUDUSD over the past 9 months that I decided in April not to trade it and not to track it. And would you believe it, it finally  broke out of its range in late April / early May and has been the best one-way trade since then! I’ve missed the big gains in May.)

So the conclusion from this is that my method works well, IF FOLLOWED STRICTLY! 

2. The next conclusion is that I don’t follow my own method very well. The real question is WHY! What are the factors that prevent me following my own rules? Going over each of the divergences, I have observed the following behaviour patterns that are damaging to my trading:

a. I Enter/Exit trades prematurely. I monitor the markets almost all the time. This is bad. Watching a candle spurting energetically or dropping like a rock induces fear (of potential loss) and greed (loss of potential profits). My mind says to me: this pair will surely hit the stop level, so better enter/exit right here and reduce the loss (or gain extra profit). After a flurry of activity that lasts perhaps half an hour the markets settle down and in 99/100 cases they reverse back and we’re back to the original levels in about 2-4 hours. My rules insist on the close of the candle and I have to learn the patience that this rule requires.

b. I tend to close trades on weekends or when I need to sleep, and then cannot find a good entry again. This is a more tricky issue. Not keeping trades open over weekends is indeed good risk mitigation. I suffered my big loss in March because of large moves over the weekend. (That’s not the real reason for the loss in March: My systems had indicated the correct directions, viz short EU and EJ, but I had ignored my system and kept those losing trades open over the weekend. That was the real error.) The technical patterns do capture most impending moves very well, hence my system actually benefits by keeping trades open over weekends. As a compromise, I will close trades if there is a known event risk over the weekend e.g. Eurogroup meetings, etc. In other cases, I will keep the trade sizes manageably small if I leave the trades open, or the second approach is to close the trades on Friday NY afternoon session and if nothing’s changed over the weekend enter the same trades again on Monday morning Asian time. I may lose a few pips, but be protected from totally unexpected events like a tsunami or bomb explosions. I prefer the second approach: at least the weekends will be stress-free!

c. Get impatient when a trade does not go anywhere for a few hours. This weakness is related to (a). Too much screen time is detrimental. If my attention was occupied elsewhere and I look at the chart only once per session or when an alert is triggered, I would not feel this impatience. Sometimes the market treads water for days before picking a direction and the charts are usually correct in determining which direction it will pick. The solution is to not monitor the markets continuously.

d. I get convinced that a move is imminent based on some data release or news item, and plunge in even when my rules have not indicated a trade entry yet. This happens when for example the NFP data indicates the dollar should strengthen, so I jump in right away. But big data releases are often used by the big players as the occasion to dump huge positions and the price action is often completely counter-intuitive. The best solution is not to enter/exit trades in the half hour before and one hour after big events. For events like the ECB press conference, I stay out until at least the half hour AFTER the press conference is finished.

e. I use larger than indicated order size. This is another manifestation of greed. My account is still small, I haven’t made my million yet and I am impatient for that big winning streak! So greed often overrules caution and I jump in with a bigger than justified order size. My theoretical system is tracked by the performance of each pair and my system risks 10% of that pair’s equity on each trade. If I am trading 4 pairs and allocate my capital equally to the four pairs, that translates to a risk of 2.5% of my total account per order. I often trade much higher than that. The bigger order makes me more nervous about a potential loss, and combined with my habit of monitoring the markets constantly, it leads to the error of premature exits. The solution is for me to look at the results of the ‘theoretical trades’, i.e what would have happened if I had stuck to the trade size and the entry/exit rules. This always shows me how foolish I have been and how much better it would be to stick to the rules. Compounding works wonderfully and looking at the potential results motivates me to make it happen. The theoretical account has grown hugely, and that should appeal to my ambition to grow my account.

I will be trying to put these lessons into practice, starting by reducing order size. I am looking at ways of keeping myself busy and yet in touch with the markets. The one downside from the second point is that I will have less time to update the blog if I am busy with something else away from the computer. Let’s see how it works out.

Weekly Review April 13; + 34%

Sunday 14 April

Last week continues my slow climb back up from the hole I fell into in March. The account is up +34.6% for the week which makes it up 114.2% for the month. More than double in 2 weeks. Not bad, but I realise that this period has been special due to the BoJ news and the easy money that could be made from it. Attached is the updated account worksheet.

Now, to a post-mortem of my trading this week. First to what is working right for me:

A) I am getting more disciplined at both entries, exits and not chasing trades. There were several trades that I could have taken which I didn’t because they had moved well away from my preferred entry level. In a way, having a small account forces that discipline more easily – I simply didn’t have the funds to take all the opportunities that came up, and I am not going to risk more than my trading rules allow just to chase a trade.

B) I am also becoming more habituated to taking losses early. The great positives about taking losses early are a) one’s mind becomes clear and can view the market more objectively, and b) Very often taking the loss will free up one’s mind and account to take the opposite trade and recoup a good portion of the loss immediately. After all, the loss indicates that I am on the wrong side of the trade, so flipping early will get me on the right side and help recover some of the loss. c) The first loss is invariably the smallest loss a trader will make on a losing trade.

C. Over the past year or so, I have noticed that the close of the New York session produces significant moves in most markets. I often miss a good entry or exit as that time is 5 am in Melbourne. Starting this week I have adjusted my hours so that I will be awake until 5.30 a.m. on most days. This lifestyle issue is one of the most difficult for traders, especially if we live in unfriendly time-zones like Australia or California. I have got used to living on 5 hours sleep, sometimes just 4 hours!

Now for some things that didn’t work out right:

A. In the early part of the move in the yen pairs, I took profit and re-entered a few times which reduced my overall profit compared to staying in all the way until my rules indicated the exit. I consider this an acceptable compromise, given that I am in the process of rebuilding my account after a crash.

B. The AUDUSD short trade after the negative employment numbers was a big loser.  I took a larger than usual position and entered the trade before the candle close, which was against my rules. In fact the candle stopped right at the trendline and then bounced back, so the system actually never indicated a short. And when it went above my Stop level, I was a bit slow to take the loss immediately, and ended up suffering a loss double of what I should have taken. This is a good lesson again in never entering fast-moving markets after data events. One must wait for the dust to settle and the big money to show its hand.

Some comments on the Friday market action:

I was fortunate to stop trading in the early session of Friday. The NY afternoon session market action was very strange, to say the least. I am referring mainly to gold and silver, although the action in EU and UJ was also very whippy. Gold and silver broke HUGE Support levels. This, happening late on a Friday afternoon NY session when Europe and Asia cannot participate makes me conclude that it is mainly driven by option plays and big funds playing around. It’s better for us tiny fish to stay out of the water when the sharks and the killer whales fight. Interesting to note that the AUD, which is strongly correlated to gold and oil, suffered only a mild dip even when gold plunged.  My personal opinion is that the support will hold. There may be a brief dip below and we may spend some time around the support levels for a few days but eventually gold and silver will rise from this and the rise will be spectacular. While the battle for paper gold + silver rages in New York, the Asian buyers will be lining up  their boats and trucks to buy the real shiny stuff at such bargain prices! Given the fundamental picture of unlimited money creation around the world, gold and silver cannot go down. Not even governments can hold it down for too long, if indeed governments are behind this.

The USDJPY failed to break 100 last week and it closed the week at the lows for the week. This is bearish for the pair but I am not going to enter the bearish trade – it’s too late for that. The UJ will break 100 one day soon; only thing is, it’s not clear when that day will be. I will probably spend Monday just observing, I don’t think there will be any good trades until after NY closes on Monday.

Good luck to all traders out there!

Weekly review, 16 March

Sunday 17 March.

The updated worksheet is attached below. The account shows a realised loss of -5.2% for the week but the real story is in the unrealised loss on the open positions.

This has been a stressful week, all brought about by my decision to not take the losses in the USDJPY and EURJPY trades last week. There was an opportunity to get out with a small loss this week, but my system was indicating a long, and I stayed long. But there was an immediate reversal in UJ and my system deals poorly with sudden reversals, so I was back with the same loss. In EJ, the system indicates a long, so I am in sync with the system there, but it looks precarious. If EU turns down, the EJ will immediately turn into a sell, and I will have the same problem soon.

I have spent the weekend analysing my options carefully and working out an action plan for each possible scenario. This week has the BoJ transition, which should be uneventful, and the FOMC which is usually surrounded by a lot of volatility. I hope to be either out of my trades, or hedged flat around the FOMC event. Depends on how Monday / Tuesday pan out.