Oh, so that’s what a 40% drawdown in one week feels like.  The Cable Gilder went a dismal 1 for 5 in last week’s trading, and gave back all of it’s gains for the month of February.  Certain specific features of the drawdown make it especially painful.  I was looking for evidence that I should not trade on holiday Mondays.  I could find nothing in the backtest of the system to suggest that I should not trade last Monday, so I kept the system active, and promptly went 0 for 2 and lost 20% of my equity.  I was also undecided on whether or not to trade on Thursday, since it was an EIA Petroleum inventory data day, again due to the shortened holiday week. 

In my study of the charts last weekend, I concluded that the “Wednesday” phenomenon that I see in the backtest is probably due to triple swaps every Wednesday and NOT due to the EIA petroleum inventory release.  With that knowledge, I kept the system active on Thursday and went 0 for 2 again…again both were relatively large losses, and the last loss was an EXACT hit on a reaction low.  Put another way, if the market had retraced just one pip less, I would have been looking at a monthly profit for February in excess of 20%  Instead, I have a monthly loss of 3.9% and a paltry year to date return of 4.3%  To say that leverage is a double-edged sword is a cute understatement!

 So, despite still being up over 80% over the course of the last 5 months, I feel like crap….and NOW, cue prospect theory!  I’m currently reading “More Than You Know” by Michael Mauboussin.  This book is really thought provoking, and has re-introduced prospect theory to me.  The key learning being that a loss hurts about 2 to 2.5 times as much as a gain feels good.  With that in mind, it’s back to the drawing board for me in a sense;  I’m going to play with my position sizing algorithm such that I’m unlikely to FEEL LIKE A LOSER even when I’m winning.  There are lots of nerdly thoughts running in my head right now, but none of them are forming a coherent course of action just yet.  I’ll see what develops. 

In the meantime, the Cable Glider will be idle until Thursday, so I have a bit more time to see if I come up with any beneficial revisions to the bet sizing algorithm.  On another bright note, I re-coded the Cable Glider with Metatrader 4, which gives me more flexibility when I’m looking for forex brokers in the future.