June and Second Quarter 2010 Trading Review

Market volatility continues in June. I took a more aggressive approach this month and executed more trades in my RRSP trading account. The monthly return is excellent but I noticed a few issues with my trading. These will be the main topic of this post.

Let’s go over some performance data. Seeing that it is the end of the second quarter, I will do a quarterly statistical report. I couldn’t do a monthly review like I used to because I trade much less frequently now.

Note that the October data is from last year’s forex trading. That was the best month I’ve had. I am attaching the data here just for comparison.

Quarterly Metric Q2 October
Sarting Fund $8,000.00
End of Quarter Fund $9,404.87

Total Net Profit $1,404.87
Gross Profit $1,800
Gross Loss -$395
Profit Factor 4.56 1.75
Net Profit % 17.56% 4.19%
Max. Drawdown % 3.36% 2.32%

Total Commission $155.1
Commission / Net Return 11.04%

This highlight the bane of my problem trading my RRSP. Although Questrade offers the best commission in Canada as far as I know, it is still much higher than those offered by brokers in the states. However, this is a self-directed RRSP trading account, so it’s not like I can just switch broker. I will just have to stop being so active in my trading for this particular account.

Sterling Ratio 1.44 0.65
Excess Return 17.46% 4.14%
SDev Return per Trade 2.21% 0.79%
Kurtosis -0.93 8.53
Skewness 0.72 2.49

These statistics above show my second problem. Although I am very profitable so far, my return per trade is not consistent. The distribution is too flat and not skewed enough to the positive for my liking. A standard deviation less than 1%, a slightly positive kurtosis, and a skewness above 1.0 would be ideal.

95th Percentile P&L $421.15 $70.11
5th Percentile P&L -$102.13 -$33.60
Net Profit Mid 90% Only $0.29 $46.34

Total # of Trades 14 34
Percent Profitable 61.54% 44.12%
# of Winning Trades 8 15
# of Losing Trades 5 19
# of Break-even Trades 1 0

Average Trade Profit % 1.18% 0.12%
Average Winning % 2.59% 0.66%
Average Losing % -0.83% -0.30%
Ratio Win% / Loss% 3.12 2.21

Max. Conseq. Winners 5 4
Max. Conseq. Losers 3 6
Largest Winning Trade $464.05 $171.79
Largest Losing Trade -$116.75 -$44.17

Most of my winning are due to this Cenovus short in May and this CIBC short in June.

Avg. Time Held 5.17 days 2.18 hours

Aside from trading my RRSP account, I have finally opened a live forex account at Dukascopy. My time remains split between developing automated strategies for trading forex and manual equity trading as usual. My JForex contest strategy in June ends up near the bottom again as I took the wrong side of the move on USD/CAD.

The JForex contest will start with a new set of rules for July. Namely that strategies need to be fully automated and winnings from each trade cannot be excessive (50%) to prevent an all-in approach that’s been dominating the contest. My revised strategy is ready. It is now version 2.14 since the first release in April.

Goal for July

My goal for July is to learn the indicators part of the JForex API and to program my first custom JForex indicator from my other collection.

I will be away in Hong Kong for two weeks in July for some family matter. So there’s not much time to work.

May 2010 Trading Review

May 6th was a historical day in the market. The Dow tanked 9% in minutes but climbed back up near the end of the day. We have since closed below that level later in the month. The bears seem to have finally awoken.

I closed two trades in May totalling a decent gain of 10% in my RRSP trading account. The first was shorting CVE.TO, which made me 10%. The second was long TCK/B.TO, which ended in breakeven. I took the second half of the month off for my wedding in Dominican Republic.

I opened two positions before leaving for vacation. I shorted CM.TO and bought some HND.TO. The market made a roller coaster run up and then down while I was away. So I wasn’t able to cash in on the move.

As for my forex endeavour, I bombed the JForex contest this month. I started well with a 60% gain in the first week but I got greedy and tried to go for higher. My contest account (demo only, not real cash) whipsawed around breakeven a few times afterward. Then I just gave up on this month’s contest. I verified with the official that my startegy wouldn’t have qualified anyway because I was manually intervening too many times.

Nevertheless, I updated my automated trading strategy for June before going on vacation. I will be back at it again competing in June.

But not until my wife and I can settle down in our new home first. We are still unpacking, buying furnitures, and tidying up our new place as of this first weekend in June.

An illustration of what it means by missing the boat in trading

As I wrote last Friday, I took a long position in Teck Resources (TCK-B.TO) at $36.03 but got stopped out at breakeven. In hindsight, the retracement after testing the $37 resistance held the 50% level near the close. That was a bullish sign that I missed at the time and only realized during my weekend review.

As you know, the TSX market gapped about 2% up and S&P gapped about 4% up right at the open. The market traded in a range all day but managed to hold the gap.

However, EUR/USD closed its gap and is testing 1.27 support as I write this. The EUR/USD pair will be an important pair to watch as the European Union drama unfolds.

With regard to TCK, Figure 1 speaks for itself. It gapped up about 8% and closed up 8.78% at $39.53. I decided not to chase the market early on today as the reward/risk ratio just isn’t as appealing anymore.

There are always opportunities sailing around the corner. So there is no need to go out of breath chasing that one missed boat.

Tech Resources (TCK-B.TO)

A scientific method to calculate how much capital do you need to start trading

I typed a rather long reply on the SMB Training blog to the question of how much capital one needs to start trading. So I thought I might as well expand on this frequently asked question for traders visiting here. Here is my process.

The first thing to realize is the fact that trading is a business. And like any business, the single most important question to ask is — what is your bottom line? That can be simplified to two parts. What do you expect to make and what are your costs? Let’s consider your expectation first.

You can’t estimate your expectation if you don’t know what you did (that would be a haphazard guess). When I dipped my hands in trading forex the first time. I started by paper trading a demo account for a few months. As I was unfamiliar with trading forex, that provided me with a risk-free opportunity to learn. Equally more importantly, it serves as a Monte Carlo experiment (perhaps more on this another time) to figure out my expected performance statistics in this particular market (for example, here’s my January 2010 review).

That is how you can scientifically derive your trading expectation. Based on history. Yes, past performance is no guarantee of future return. But at least it should give you a ballpark figure. So unless someone can suggest a better method, you need to seriously grind it out on a demo account first. (I only said this is straightforward. I didn’t say this is easy.)

Fortunately, that is the hard part. Next step to figuring out your costs is easy. Just calculate your trading commission, data fees, etc. Then estimate how much fees you are paying per trade. This is the cost basis of your trading.

Then here are the steps for calculating your initial capital need.

1. Calculate your average return percentage (of total principle) per trade from your paper trading.
2. Make an educated guess on your capital need, just to initialize the numerical process.
3. Calculate how much average amount of money you expect to make per trade using #1 and #2.
4. Divide your cost basis per trade with #3 to get a percentage of cost per trade.
5. Reiterate steps #2 to #4 until your percentage of cost per trade is acceptable. i.e. increase your capital (#2) if your percentage of cost is too high, and vice versa.

For example, say you expect to make an average +1% of your total account per trade (step #1). Then let’s say you thought an $10,000 account is enough (#2). $10,000 x 0.01 = $100. So you can expect to make an average of $100 per trade (#3). And let’s say your fees is $5 per trade. A round-trip (buy and sell) would cost you $5 x 2 = $10. Thus, #4 is found by $10 / $100 = 10%. Which means you’ll be set back by 10% on every single trade. That cost percentage is too high. Then let’s double the capital to $20,000 and go through steps #2 to #4 again.

Assuming your fees per trade is fixed, which is most likely for small accounts. You’ll find that your cost percentage is 5% for a $20,000 account based on the same conditions. Perhaps 5% is acceptable for you? If not, raise your capital estimate again and re-do the calculations (a spreadsheet would be useful).

The process is straightforward and unambiguous. Once you’ve done your paper trading, the actual calculation should take less time to do than reading this post.

April 2010 Trading Review

I made my first RRSP trade to short Cenovus Energy (CVE.TO) using puts in April. I also made my first careless mistake in my RRSP by buying more contracts instead of closing the CVE.TO position as I intended. As of this writing, I am still holding my puts options as the slow decline seem to be underway. China’s decision to hike reserve ratio is also helping by strengthening the dollar and putting another warning on recent risk appetite.

Despite putting my real money on the line, my main focus lately has been the Dukascopy JForex Strategy Contest. According to their rankings page, I finished at 4th place for April’s contest. Which means I may receive a USD $1,000 credit to my trading account at Dukascopy. Even if I were to trade a $5,000 account as I have done in my paper trading, I couldn’t have earned 20% in a single month based on my past performance. This contest is a great way for me to fill my forex account with no monetary risk.

Frankly, I was just hoping to squeeze in a top 10 because I started late in the April contest. So I am very happy to finish at such a good position and receive (hopefully) a decent sum of prize money!

For anyone interested, I have discussed about my winning automated strategy previously. Feel free to take a look at it to see what got me a 4th place finish.

I will be away on vacation in the last two weeks of May. I don’t expect much to happen with my trading this month as I’m inundated with personal matters. My primary focus is still the JForex Strategy Contest. I will be using a new semi-automated strategy this time. My goal is to finish in the top 6 again.