For now, I have settled on the following two provisions:  If the average trade over the last 25 trades has been profitable after slippage and commission, AND the average profit of the last 25 trades is no more than 2 standard deviations away from the average trade profit over the course of the “early” trades (N-25), then the system can be kept on.  In practice, I may have to relax the first criteria, as very many times the average profit over the last 25 trades can go negative but still be within statistical norms for the system.  But it’s fine for now…I always learn and tweak as I go.  There’s nothing magical about the number 25, and in fact, I’ve been waffling between using 20, 25, or 30 trades.  It would be nice to use at least 30 trades to have a decent sample size for a statistical test, but at the same time, this may not be practically feasible.  Remember, the goal here is to shut down the system if there is reason to believe it is “broken” due to a structural change in the market, and to react quickly enough such that the account is not crippled.  Of course, with any shutdown provision, there is always the chance that we will shut down too soon and miss out on the speedy recovery…speaking of which….

The Cable Glider has been performing well while I have had it shut off.  Indeed, it is on a 7 trade winning streak, and has returned to a zone where the numbers say that it should be turned back on.  (As I’ve mentioned in prior posts, the decision to turn it off in the first place was based more on emotion than analytics.)  I have a modified version of Cable Glider ready to go as well, and I’ll need to decide which version to go live with.

The Euro Ranger system continues to perform very much in line with its historical averages, so it looks like I will be back to running two systems again. 

My anti-Midas 2008 stumbling and bumbling continued as recently as last Thursday, when I erroneously had Euro Ranger turned off and missed a sizable gain.  In fact, I’m now sitting on a drawdown of around 25% since March 1, which was the time that I adopted the two system, lower risk approach. 

Even though the 2008 year to date results have been so poor, my systems and methodologies keep evolving and improving, and well, it’s never over as long as I remain adequately capitalized.  I still tend to beat myself up mentally for the mistakes that I make, but when I put things in perspective, I’ve come a long way as a trader.  Several years ago, my mistakes would be things that blew up my account.  Today, my mistakes tend to be things that turn 2% drawdowns into 4% drawdowns…so it’s a step in the right direction, and in truth, that’s all I can ever hope to do…more steps in the right direction, and less damaging setbacks. 

Here are the options that I explored:

Equity Curve Timing :  The idea here is to track a system’s cumulative profits and losses and to turn the system off when the cumulative profit moves below some trailing moving average of cumulative profit.  Since I only run two systems, I can’t say whether or not this is useful in general.  I can only say that for my systems, this technique does not seem helpful.  The same issues with using moving averages on a price chart show up on an equity curve chart as well.  Namely, moving averages are a lagging indicator.  Recognizing the fact that I don’t use moving averages in my trading systems, but I do use MACD, I could choose to get fancy and chart a MACD of my equity curve, but this probably won’t work well either.  My goal is to keep the system on most of the time and turn it off when there’s reasonable doubt about the fact that it still works at all.  Using an equity curve timing method seems unreasonable for that purpose.

Control Charts :   I tried the methods detailed at Vertical Solutions:

“As an example, my automated systems turn themselves off if both the ratio of expected wins to actual wins and the twenty trade rolling P&L move 3 standard deviations below their average.
”

This method sounds great, and it probably is.  However, this method told me to keep trading both Euro Ranger and Cable Glider.  So what’s wrong with that?  Nothing…other than the fact that I WANTED to turn Cable Glider off and I was searching for a method that would support that decision.  Of course, in retrospect, I realize how silly that approach is…think of a trader who is stuck in a losing trade and keeps switching indicators until he finds one that tells him to stay in the trade…yeah, bad idea.

At the beginning of this week, I settled on a simpler criteria.  If the rolling cumulative 20 trade profit of either of my systems is negative, I will shut them off.  I chose this criteria because of my biased view that I needed to shut Cable Glider down.

In fact, in a truly out of character moment, I decided that since I’m shutting Cable Glider off, I will double the amount that I risk in Euro Ranger….well, since I’ve really had the anti-Midas touch for all of 2008, it’s not hard to guess what happened this week…

Euro Ranger immediately suffered its worst single trade pip loss EVER, and Cable Glider (off) had a fabulous week, netting something in the neighborhood of 250 pips. 

So this week, my equity is at a new low for 2008, and now I’m facing the decision about whether or not to turn Cable Glider back ON…well now, it’s always something…

My plans had no provision for System Death.  I plan on becoming more studied on this subject, and I will incorporate it into future system deployments.    There is some good information over at Vertical Solutions, which I hope will point me in the right direction.

In the meantime, I will keep Euro Ranger active.  It was virtually break-even last month, but it has shown several consecutive months of profitability. 

The linear regression system that I was testing on the Japanese Yen totally fell apart in out of sample testing.  It’s a little bit disappointing, but then again, that’s why we test strategies before deploying them.

I’ll also be tinkering with tick charts a bit…this is something that I’ve never considered before, but I believe that it makes good sense to use tick charts instead of time based bar charts in a 24 hour market where most of the ticks are clustered into a small time frame.  For example, if we use a 500 tick bar on the Euro FX contract, we’ll see that sometimes a single bar can span a few hours (usually right after the session opens), and as little as 1 minute in a fast market.  Very interesting indeed…and that’s what I need right now…new ways of looking at the data.  We’ll see what it yields.

So what do my statements say?  Four straight months of losses.  The difference in accounting methods accounts for much of it, but in order to get here, I had to have one of the worst trading weeks on record in the last week of April.  Those losses erased my monthly gains and then some, and put me at a new 13 month equity low. 

Ouch ouch ouch…risk tolerance eliminated, ego bruised, etc etc.

To top it all off, I am afraid of May.  The British Pound isn’t acting well for Cable Glider, and the month of May has never been kind to the system.  Luckily, the Euro system has been printing money again…enough to offset the dreadful performance of the Cable Glider this month to date.   As of tonight, the account is up about 0.7% for the month…no accounting tricks necessary. ;-)  And so, I’m taking the rest of the month off. (Manufactured win #2…and a two week break.)

Total Return Month to Date: 4.2%

Well, the results are looking pretty good so far this month.  I should mention that I had an internet connectivity problem that caused me to miss a big positive trade in the British pound and a positive trade in the Euro.  If I had caught those properly, I believe I’d be up something closer to 9% for the month.  The Euro Ranger system has been a breakeven proposition for me so far this month.  Four small wins, two big losses, one small loss, one missed win.  That seems about normal.  If I had caught the missing win, the system would be 6 for 8 and be showing a profit in the neighborhood of 1.5%  This system really shines when Cable Glider is doing poorly…so in a sense, it’s good that it’s plodding along near the breakeven mark.

Cable Glider is showing 3 wins, 1 loss, and one big missed win.  Volatility in both Euro and British pound are still quite high, so I can by no means declare a return to normality, BUT for the record, if I had been trading this system by itself at 1% risk per trade all along, I’d be at a new equity peak right now.  Of course, in the long run, this is just the kind of risk that I actually want to be taking per trade…that is, if I had a diversified set of systems running simultaneously.

Speaking of which, I’ve been seeing some promising results on a Japanese Yen system that I’m developing.  The system’s main entry/exit signals come from changes in the linear regression slope of the typical price (high+low+close)/3.  I sure do hope that I can roll this system out in the future, because it will mean that I’ll be trading three different instruments with 3 different strategies….breakout in the Pound, mean reversion overshoot in the Euro, and something resembling band trading in the Yen…exciting stuff.

 One more thing…I don’t want to jinx it, and I can hardly believe it too, but right now I’m really loving my day job too. 

For a while, I had been thinking that I just had too much of my ego invested in the success of *my* trading systems…when they win, I’m a winner…when they lose, I’m a loser…after all, they’re *my* systems.  I thought that the solution to this issue could be found by actively detaching my ego from the results, but this seemed difficult and ineffective.

Well, I now realize that there was at least one piece missing from the puzzle.  That piece is called “doing the right thing”.   You see, after years of being immersed in personal finance literature and financial media, I have an underlying sense that I’m investing my retirement money well by investing mostly in index funds, both domestic and international.  So when the market goes down, I can easily think that it’ll come back eventually (at least before I retire) and that I have nothing to worry about.

 BUT, with my trading systems, I have no underlying sense that I’m doing the right thing…it seems that the systems need to be tweaked often or they fall apart completely…a bit like the difference between buying a house and buying a car.  In the case of the house, present downturn notwithstanding, we can expect the value to rise in the long run…with the car, well, we know it’s destined for the junk heap eventually.

Total Return Month to Date: 0.3%

My triumphant return to profitability

Well, it was a strange month indeed.  I’m still basically riding the flat line.  Cable Glider is actually on a 4 trade winning streak right now, but those gains have been offset by 2 consecutive losses in the Euro Ranger system. 

The average true ranges in the markets that I follow continue to be very high, which means that my position sizes must be relatively small to compensate for this.  Back when it was abnormal for the 40 period ATR on a 30 minute chart of GBP/USD to be above 20 pips, positions could be sized agressively enough that the system would tend to catch gains of up to 4 times what was being risked.  Nowadays, that same ATR can print in the 40 to 50 pip range, and a similar ATR on the Euro chart can be around 25 pips.  Most notably, the gains that the Cable Glider is catching are now tending to be less than 1 times the risk, and the range expansion in the Euro has forced me to take on more risk than I intended.  Right now, my level of capital and selected risk tolerance permit me to trade only one Euro contract at a time.  I know that there are mini-Euro contracts available, but they look much less liquid, so I avoid them.

So for now, it’s a good thing that I have a day job…my systems continue to sputter along in an environment that hardly resembles the environment that they were trained on.

Total Return Month to Date: 0.0%

Well, Tradestation came out with a new build this week, and I really managed to screw things up.  I missed a profitable Euro trade entirely, and somehow my stop order to exit a profitable British pound trade was either gapped through or not entered into the market correctly.  I’m shaking my head in disgust…this should have been my triumphant return to profitability, but as it stands, this week’s shenanigans have left me absolutely flat for the month…things could be worse…see January and February 2008…

Wins/Losses :  4/6

Total Return Month to Date: -8.6% 

This was a perfectly dreadful month.  As I was tweaking my systems and my position sizing, I seemed always to be losing with larger position sizing and winning on my smaller trades.  At the risk of sounding like a broken record, I continue to notice that my systems seem to be positively correlated with the US equity markets and negatively correlated to the forex results of most of the other bloggers whose sites I read. 

I am willing to go forward in the month of March with the Cable Glider and the Euro Ranger each risking about 2% of equity per trade…as usual, in a continuing drawdown, I’m not motivated to say much else.

# losing trades (CG/ER) : 3/0

Total Return Month to Date: -3.1% 

I’m still going through a transition period.  Last week, I found myself unable to stick with my trading plan, and I hurt my results slightly.  This week I cut my risk to the bare minimum so that there would be no chance that I would override a signal.  There was only one trade entered this week, for a 125 pip gain on the long side in the British pound.  Since I had cut my risk down so much, I am still underwater for the month. 

Today marks the end of my first stint as a full-time trader.  I’m starting a new job on Monday, and for the foreseeable future, I’ll need to keep my risk in the futures market quite low so that it is not a distraction while I am adjusting to the change.

In an attempt to unmarry myself from the Cable Glider’s methodology, I plan to report only the combined results of both of my systems.  Further study has revealed that these systems do complement each other quite nicely, provided that enough of my total risk is allocated to the Euro Ranger system.

I have a feeling that things might get quite “boring” around here.  I certainly won’t be producing any spectacular gains in the near future, but of course, I hope to never see another 40 plus percent drawdown either.

The Cable Glider system is up about 5% this month.  In truth, it had 2 terrible weeks in January, followed by a small recovery and some sideways action.  All the while, Euro Ranger has posted a perfect record.  Only time will tell, but perhaps I’ll look back on this day and realize that I panicked and jumped back into a job too quickly.  Indeed, it’s very possible that I don’t “need” a job at this point, but at the same time, I don’t “need” to be trading full-time to be effective.  The only thing that’s certain is that as long as I have a job, I don’t need to take money from my trading account to pay my living expenses, and after 9 months, that’s a welcome change.