One year down, nineteen more to go until I can trade for a living

Early in 2010, I discussed about my plan to grow my trading accounts organically and eventually trade for a living (i.e. live and breath in the market 24/7). Now that the first whole year of my long term plan has passed, I can update my visualization table as shown.

2010 was a good year. My starting capital for 2011 is 63% more than expected. This is mostly due to the $13,000 prize money from winning six of nine Dukascopy automated trading contests.

On the contrary to my fortuitous success, I revised some of my estimations noted in the table to be even more conservative. In particular, I reduced my annual deposit to reflect real bookkeeping data in 2010 and lowered my investment yield expectation based on my performance data throughout the past 10 years of my trading. To mitigate these reductions, I expect to continue depositing funds while I receive a salaried income rather than stop mid-way as originally proposed.

The effect of inflation is deliberately ignored in this table because I’m discounting its effect in my investment yield estimate rather than adding more columns. It’s all guess work for now anyway.

Nineteen years is indeed a long time. It is a worst case scenario assuming that I will grow my accounts organically and not do anything else. I doubt I will need that much time as there are means other than trading a personal account to achieve trading for a living. I might discuss more about this later in the year once something materialize.

My focus this year is to finish developing my proprietary Java trading platform with my partner and put it to good use in the forex market.

Nineteen years or not, the fact that trading for a living is even possible for a self-taught amateur such as myself is testament to these incredible times that we’re living in. I fully intend to enjoy every second of it.

Making the best use of my time

I pondered over this issue over the holiday as I’m finding myself juggling too many tasks. I was participating in two trading contests, developing an automated trading system with a team, managing an open-source project, actively trading, and writing this blog, all on top of a full time job. I got greedy in what I wanted to accomplish and it is negatively affecting my performance.

The first symptom popped up in my trading, not surprisingly. I made a bad call and missed a long-awaited opportunity. This was a wakeup call as the performance statistics from my recent trades is showing statistically significant deviations (I will publish the data soon).

So before anything gets out of hand, I’ve decided to manage my time more professionally rather than just do what needs to be done. Taking a page from my professional work, I will prioritize my trading and development work using the Eisenhower Method.

Basically, I mentally stamp an importance and urgentness ranking to each of my tasks. Then I will work on the important and urgent tasks first and leave the rest til later in order of the ranking criteria.

For example, the automated contest is important and urgent because I’ve won over USD$10,000 in 2010 and there’s a monthly deadline for it. So I work on it first if there’s work to do, which isn’t much. The manual trading contest, on the other hand, is urgent but not so important. If I were to participate in it seriously, I would need to allocate an hour or so each night to trade. This is time that I would rather spend working on other stuff.

On the other end of the importance/urgentness spectrum is my equities trading. I am rating it as an unimportant and non-urgent task. Although I’ve written the most about it and that my account has been up 21% in 2010, it takes a lot of my time and the absoluate return is small. That is because my equities account is the smallest of my various trading accounts. So 21% profit of a small account is still very small. Thus, this account isn’t worth devoting too much time for now. My plan is to use a beta strategy for my equities account. I already have some ideas on what to do with it. This will be discussed in another post.

Ultimately, here’s an excerpt of my priority list:

1. trading system development
2. automated trading contest
3. quant research
4. documentation and blog posting
5. trading strategy R&D
6. manual trading contest
7. equities trading

What this means to you as a reader is that there will be fewer charts and more technical discussion. My goal for 2011 is to post something at least once a week. This is a good time to subscribe to my RSS feed to have new posts delivered to you rather than having to keep checking here for updates.

Story of a bad trade and a missed opportunity

The market took a big bite out of me this week just as when I am not giving it its fullest attention.

I took a short-side trade in Manulife Financial (MFC.TO) last Thursday simply because of a price pattern. I did not seek to confirm my hypothesis with short-term price action and intermarket analysis like I usually would because I’ve been so consumed with setting up my trading system on the cloud. I became careless because of my recent win streak and my involvement in so many matters. I lost my focus.

My short in Manulife Financial (MFC.TO) is deep in red as of this writing. The market gapped above my stop loss price over the weekend and never eased back for me to exit at my stop as planned. I’ve placed in a limit order to target a retracement to $14.50 because there’s not much left to recuperate if I dump my position now. MFC.TO is well above $15, so I am prepared for the worst. Judging by the volume, this looks like a valid breakout too.

At least my put options don’t expire until January. If my puts expire, this will be a loss of $372 + $9.90 commission = $381.90 = 3.9% of my RRSP account. To put this into perspective, according to my trade log, this may become my biggest single loss in a trade in this account. Three folds greater than my previous biggest loser at 1.23%. Ouch!

Manulife Financial (MFC.TO)

Manulife is only half of my blunder this week. The real killer is in Ventana Gold (VEN.TO). As you may recall, I have been very bullish on VEN.TO. In fact, I’ve been stalking this gem for months by nibbling on small bullish positions to test the water now and then.

Just as when I dug myself into a hole because of this extended loss, VEN.TO launched off on a rocket (Fig. 2). I am just staring at its takeoff outside the fence without the ability to take a position because of my self-regulated risk exposure limit. There goes a few weeks of research and analysis out the window. Double ouch!

Ventana Gold (VEN.TO)

As bad as my trading can be, at least I am adament with my risk management and traded within my limits. A 3.9% loss in a trade is horrible, but it’s not catastrophic. I will survive this one, redo my research, regain my focus, and be able to fight on another day. This is what trading is about.

Third Quarter 2010 Trading Review

Markets hitched a one-way train in the third quarter. TSX opened in July at 11200. It closed September at 12368. A whopping 10% jump in three months! S&P500 made a similarly impressive 9.7% jump. We simply don’t get 10% moves even in most years.

I made fewer trades this quarter but held each one for longer to ride the trend. However, I am not as successful as I’d hope. In particular, my worst trade this quarter was in Ventana Gold (VEN.TO). The position was profitable, but the money made was only a quarter as what I should have made. I was too aggressive to go long when VEN.TO was heading into a brick wall.

Ironically, my best trade this quarter was one that didn’t make money. In hindsight, I was wrong in the direction of a position but managed to escape with just a scratch. If I had been stubborn in this failed Manulife short, my profit this quarter would have been wiped out. It was a close call (technically, it was a put contract). It looks as though I did learn something in the past year.

My main focus this quarter has been the backend of my trading work. Namely in quantitative finance study and development. My automated strategy performed well in the Dukascopy JForex contest. I won sixth place in July and first place in August. My win streak (I also won in April) garnered the attention from the people at Dukascopy and they kindly invited me to the Geneva Forex Event for a TV interview. By far the most impressive thing that happened to me this quarter was this trip to Geneva.

Quarterly Metric Q3 Q2
Sarting Fund $9,404.87 $8,000.00
End of Quarter Fund $9,630.75 $9,404.87

Total Net Profit $225.88 $1,404.87
Gross Profit $381 $1,800
Gross Loss -$155 -$395
Profit Factor 2.45 4.56
Net Profit % 2.40% 17.56%
Max. Drawdown % 0.85% 3.36%

Total Commission 121.1 $155.1
Commission / Net Return 53.61% 11.04%

I’ve said this in the last quarter, commissions are the bane of my trading. Last quarter it took away 11% of my total return. This time it’s 54%! The structure of my equities commission requires that I trade less but punch hard. This isn’t my style. My intention is to trade less by being more picky in my RRSP trading account.

The 0.85% max. drawdown this quarter is impressive though. I sometimes lose more than that in a single position.

Sterling Ratio 0.22 1.44
Excess Return 2.29% 17.46%
SDev Return per Trade 1.01% 2.21%
Kurtosis 1.89 -0.93
Skewness 1.65 0.72

Despite my modest 2.4% return this quarter, it’s not a good number in light of the market liftoff. My low modified Sterling Ratio says so. On the other hand, the statistics from my trades improved. I achieved consistency by lowering the standard deviation of my trades and skewed my trade returns more to the positive. Yet another thing to caution is my high kurtosis value. Which means my total returns are due to big profits from a couple of trades.

Other than these, there is not much to add about the rest of the data.

95th Percentile P&L $193.49 $421.15
5th Percentile P&L -$50.37 -$102.13
Net Profit Mid 90% Only -$60.56 $824.07

Total # of Trades 9 14
Percent Profitable 28.57% 61.54%
# of Winning Trades 2 8
# of Losing Trades 5 5
# of Break-even Trades 2 1

Average Trade Profit % 0.27% 1.18%
Average Winning % 2.01% 2.59%
Average Losing % -0.32% -0.83%
Ratio Win% / Loss% 6.25 3.12

Max. Conseq. Winners 3 5
Max. Conseq. Losers 3 3
Largest Winning Trade $228.25 $464.05
Largest Losing Trade -$58.19 -$116.75

Avg. Time Held [days] 8.30 5.17

Goal for the Fourth Quarter

My goal from the previous quarter is to learn and build my first indicator in JForex. I achieved that just this week. However, I plan to change direction in my work by using less JForex and using more custom tools.

My goal for the next quarter is to learn R programming and implement a JForex to R data exchange system (done, good old CSV files).

A whole year, two hundred and six posts later

Recent lack of actions in the market has given me opportunities to focus less on the day-to-day market action and more on my own trading development. Besides working on my quantitative research, one of the tasks that I like to do is to review what I have thought previously in a similar time. This takes us back to a year ago, August of 2009.

Headlines from my fifteen posts back then shows that I was trying desperately (in hindsight) to short the market. Why would I do that? Take a look at this 3-year long weekly chart of S&P500.

S&P500 weekly chart

On the chart, August 2009 looked like a great shorting opportunity. The resistance level at 1000 seem too good to be true (it was). In fact, I said the following words on August 22, 2009:

While there’s been much talk of economic recovery and a new bull market is already with us, I still am not convinced just yet. True, the bears might be MIA. But all signs say that this bull we’re seeing is standing on thin ice.

How wrong I was. Since breaking the 1000 resistance back then, the S&P hitched on the bull train to steam upward steadily on to 1150 (Figure 1). It took a break there and continued on to 1207.

Looking through my trades back then, I eventually stopped shorting the market after S&P broke above 1025. That was the good part.

The bad part is that I wasn’t able to change my view and remained stubbornly bearish (but at least didn’t commit to any new shorts) for weeks afterward.

If I were to sum up my lesson in the past year, here’s what I would say to myself back in August 2009.

Trading is not about being right. It is about knowing when you are wrong and doing something about it.

On a final note, it was in August of last year that I started to paper trade the forex market. I can’t believe it has been a whole year already!