# winning trades (CG/ER) : 2/1
# losing trades (CG/ER) : 0/0
CG Return: 30.6%
Hedge Return: 1.6%
Current Allocation (CG/ER): 79% / 21%
Total Return Month to Date: 23.4%
Despite the fact that I only executed one trade this week, there is a lot to talk about. I just put a new volatility filter on the Cable Glider that instructs it to only take one contract when the average true range is persistently high and rising. My research indicated that this situation is one of the most dangerous for the Cable Glider’s results. So, I went live with the change and the filter was immediately triggered on the one and only trade of the week, which happened to catch nearly 300 pips. I believe that is the biggest single pip capture for the Cable Glider this year…so my system change caused me to gain only around $1400 instead of $15000 on that trade. At this point, I need to look back at the previous post about “pain of not participating” and “the new system underperforms the old system” in order to keep my head on straight. I’m not sure I really like my new volatility filter, but for now I will stick with it, as it will undeniably perform its intended purpose of lowering risk.
Also, when I woke up on Friday morning, my Tradestation data feed had gotten knocked offline, and I missed taking a short trade on the pound and 2 long trades on the Euro. The net effect of these trades would have been a loss. While I’m certainly happy that I didn’t lose money that I *should* have, I realize that this episode exposes a gap in my trading plan…namely, what to do when this situation (a missed trade) happens.
I’ve thought about it, and I’ve decided to add the following to my trading plan:
1) If, for whatever reason, I am in a trade that the system says I should not be in, I will exit immediately regardless of the current position’s profit or loss.
2) If I am not in a trade that the system says I should be in AND the trade is currently showing a loss, place a stop market order to enter the market at the originally intended entry price. This way, if the trade reverses to my original stop loss point (this is what happened yesterday), then I will completely avoid the loss. If the trade reverses to my original entry point, I will be no worse off than I would have been if the system had triggered the entry as planned.
3) If I am not in a trade that the system says I should be in AND the trade is currently showing a gain, enter the trade immediately, but reduce the number of contracts such that if the trade reverses to the original stop loss point, the loss will be no worse than what it would have been if the system had triggered the entry as planned. If the trade approaches the original entry point, it is okay to add contracts, only so long as the total amount risked is never more than what the system intended.
Situation #2 creates a feeling of “found money”, but it’s probably best to just feel lucky and ignore it.
Situation #3 will undoubtedly be frustrating, so it’s important to improve the reliability of my execution in order to minimize the number of times that this occurs. Mental preparation and rehearsal of situation #3 is key, so that I will not chase the trade when I’m emotionally hot about missing out on a gain.
I attended a webcast last week in which Bob Pardo, author of “Design, Testing, and Optimization of Trading Systems” discussed the idea of Thought Demons that hinder trading performance. This is just another term for negative self-talk. I found it very useful to list thought demons that affect me on each and every trade. I came up with a list of six thought demons that cause me emotional pain, and have ranked them from most painful (1) to least painful (6). If I am prepared for each type of pain beforehand, I will be better able to handle the situation when it arises.
Pain of loss
a) True Drawdown that SEEMS avoidable (1)
Whenever I’m in a drawdown where entry signals were BARELY triggered and then the trades reverse and take me out for a loss, this is the most painful, because it seems that optimizing my entry parameters differently could have saved me this pain. This is the most painful, because a drawdown always feels like a threat to my ability to continue as a full time trader, and losses that I ALMOST avoided make me feel unlucky too. The longer or deeper the drawdown, the worse the pain gets.
Antidote: I need to remind myself that my system at any given time represents my best attempt to make profit in the market and that drawdowns are unavoidable. Indeed, I’ve recovered from several drawdowns, and even if this particular drawdown really does end my run as a professional trader, I will never regret my decision to try. Anyway, I’m likely to recover from the drawdown, and losses are just what I need in order to be able to build better systems for the future.
b) True Drawdown that seems unavoidable (3)
If I suffer a drawdown that seems unavoidable, that is to say that most parameter sets would have still resulted in a drawdown, I don’t feel quite as bad, but I’m still in a real drawdown, which is a threat to my full time trading career.
Antidote: Same as (1)
c) Giving back profits on subsequent trades (6)
Giving back profits on subsequent trades is the least painful, because I know that losses are inevitable and it’s nice to initiate a drawdown from a new equity peak. No antidote is necessary.
Pain of not participating (2)
This is the second most painful of all. I trade a system that uses event-based filters to keep me out of the market. When things are going REALLY well, these filters are counter-productive. Missing a move is painful because I wonder whether I will experience the double whammy of missing a big profit and then participating in the subsequent losses.
Antidote: Most of the time, my event filters work well. They often allow me to have profitable months when a system without filters would have suffered losses. Event filters allow me to take a break from the market and recharge my batteries. A system that is in the market less of the time is inherently less risky. Whenever the unfiltered system does well, the filtered system usually does well too.
Pain of Profit
a) Why didn’t I trade more contracts? (5)
This one always creeps into my mind a little bit at the end of each winning trade, but it’s easy to suppress as I know that if I were taking more contracts, my risk to reward would not be properly balanced.
b) Why didn’t I take profits at the top? (4)
This one is painful too, but it’s not a big deal. My system does not attempt to catch tops, and will always give back some profit before exiting.
Here is the king of Thought Demons for a trading system developer…
The new system underperforms the old system in live trading.
The antidote for this is to realize that the system IS my edge and that system changes represent my best attempt to improve my edge. Each change is either an attempt to increase profits or to limit risk. A change that is intended to increase profit often has the side effect of increasing risk or drawdown in the short term. If the new system passed all of my criteria to be traded live, then I simply have to go with it until such time that I discover a better alternative. If the system change is meant to decrease risk, but it lowers my profit, I need to remind myself that that is exactly the price I pay for controlling risk, and in fact, risk has been controlled. In fact, if I look at my list above, I’ll see that the pain of missed profits is less than the pain of real losses.