April Performance Review

Another month has gone by and it’s time to look at how I traded.

The first P&L graph shows a net loss for trades that where both initiated and closed in April. The bar graphs on the right show that there were more losing trades. I had a winner / loser ratio below 1 and to make things worse I also had  a negative Expectancy. All those show a poor trading pattern.

But taking a look at  the cumulative performance between March and April, because there were trades initiated in March that I closed in April, I see a different picture. The picture here is more complete and shows a positive P&L with a much better Expectancy. And for the first time I was able to increase to 3 the ratio between the largest winner and loser. That is a much encouraging report.

Also, it is particularly important that I look at my performance since December 09, when I began to twitter all trades, because I closed a position in $ACF that was initiated that month. That trade represents the largest profit to date. The P&L graph for this multi-month period continues its upward trend and the number of winners – for long trades - is now a bit greater than the losers. On the short side, however, winning trades are less than half of their losing counterpart, but the Expectancy improved considerably.

April P&L

April Trading Stats

Dec to Apr 2010 Performance

March To April Analysis

On the thought journaling side I found several entries where fear and euphoria took hold. I am noticing that these mixed emotions begin to show at short-term market turning points. I tried to concentrate on finding companies that beat expectations this earnings season, but sometimes is best to step aside.

I also noticed the urge to place trades to recover loses this past week and had to really fight those feelings and stick to the 5 trades per week plan. That training strategy is working, but I feel I need to take it one step further and try to limit to at most one trade per day. This way I really have  to be selective and work harder at finding and entering only the best setups.

That is the path I am going to take next month.

Fear and Euphoria

What a rollercoaster ride. A couple of weeks ago I began to think that the market was showing signs it was tired after an incredible multi-week run to the upside. So I tightened my stops and lightened my trading. Consequently, I got stopped out of many good positions. But many earning announcements continue to beat estimates and I realize that I have been shaken out of many good trades out of fear.
The AAPL earnings report started a kind of euphoria in the market, but not every company is like AAPL. Quite a few stocks have been sold off when their earnings meet or come in below expectations.
The key here is not to let either of the two extreme emotions dictate how I trade, but rather concentrate in good setups.
What I am going to do now is to screen for companies that traditionally beat expectations and that have strong fundamentals. I will be looking for over done pullbacks that offer good Reward / Risk entries and not let the euphoria make me chase stocks that are getting exhausted.

March Performance Review

Another month has gone by and it is time to evaluate my trading performance. In March I continued my battle with over trading by limiting the number of trades per week to 5. I tried to concentrate on better quality setups and it helped me improve the number of profitable trades vs losing trades. This month I added a new measure to the StockTradeJournal called “Expectancy” which is basically the kind of profit you can expect for a given time period based on your averages. It basically uses the average win times the average dollar gain minus the average lose rate times the average dollar loss. It captures both the “Batting average” and the Reward / Risk in trading. I am seeing some improvement in the average performance as you can see in the screen captures below.

Overall I see a big improvement in the expectancy since december. I also looked at both February and March combined since there were a number of trades that were initiated in Feb. and exited in March.  But I am still concerned about the R/R ratio being way below 3.  From the P&L graph I can see that in the Dec – Jan period I had a poor Win vs Loss record, yet I was more profitable which emphasizes the importance of having a high R/R.The StocTradeCalc should come in handy to improve that ratio as long as I interpret the charts correctly.

Next month I will try to improve on my R/R while still limiting the number of trades.

March Stats

December To March Performance

February and March Graphs

February and March Stats

March Graphs

Risk Management Pt 5

In previous posts I talked about position sizes and Reward / Risk ratios as important aspects of any Risk Management methodology for traders. Today I am going to share with you how I use these concepts in my trading with a specific example.
In the daily chart of ANR below you can see that the stock had a really strong day on Feb. 25th and the MACD was beginning to move higher. The over bought conditions had been removed thanks to the recent pullback and could provide a good entry. The next day the chart offered that opportunity. The stock continued to show strength and presented a good R/R with a stop just below the day’s lows and with a target at the bottom of January’s trading range. Using the formulas on the previous posts (or using the StockTradeCalc) the Reward / Risk turns out greater than 3 with a target of $49.69, a stop at 44.89 and an entry close to $46. The number of shares to buy for a $50 risk is 44.

Often, I use these concepts to set alerts to let me know that the optimum price for a good R / R has been reached. I do this by looking at supply and demand areas as natural places to put target and stop exits.  I have used ATR based stops in the past as well. Leigh Drogen has an excellent post on how he uses ATR to manage risk here. If you know that you want a R / R equal to 3 or greater, you can determine what the ideal entry price would be. When alerts fire at that optimum entry price, I don’t just enter the trade blindly, but if the fundamentals or technicals haven’t changed then it is a go and I pull the trigger. I do my homework after market hours by setting this kind of alerts and by making cross references with journal entries and watch lists.

Risk Management Pt 4

Managing risk in trading is all about keeping losses small and your winners big. In the previous post I talked about how to calculate Reward : Risk in a trade and that the aim is to only enter trades that offer at least 3:1. In other words aiming for gains that are at least three times the losses. I (in the first post) also talked about parameters to choose your position sizes according to skill level (proven edge), trading capital and type of account. Next is to determine the number of shares for a new position.

For example, I determine that I am only willing to risk $50 on anyone trade because I only have $30,000 in my margin account where I trade with a frequency of 50-60 trades per month. Since I am still learining and have no real edge, that means that if I have two really bad months in a row I could be out of the game. If I know where my stop and entry prices are for a trade, with a good R:R, then I can calculate the number of shares (Position Size) I need to buy with the following formula:

Quantity = $Risk / (Entry – Stop) For Longs,

Quantity = $Risk / (Stop – Entry) For Shorts.

For example,  I am looking to buy BTU at $47.75 with a stop at $45.98 and risk $50.

Quantity = 50 / (47.75 – 45.98) = 28 Shares.

Or you can just whip out your iPhone and use the StockTradeCalc if you don’t like math or excel. And of course there is a position size calculator in the Stock Trade Journal as well.

Risk Management Pt 3

Last post explored how a trader can evaluate his edge by implementing an analysis methodology and routine. I talked about the importance of having a large winner vs loser ratio both in profits and frequency. In other words a good Reward:Risk ratio in your trades.

Regardless of the buy or sale signals that a trading system generates a trader should look at what price the trade is considered a failed attempt. That price is where the stop-loss should be placed and the trade exited for a small loss. Likewise, a trader should look at a profit target where a sale (or cover) order will be executed. If you follow the 3:1 rule for a potential profit vs. potential loss, then you can determine if it makes sense to enter the trade.

This type of analysis should be done before even figuring out the size to trade. Use the following formula to determine the R/R:

(Target – Entry) / (Entry – Stop) for a long position.

(Entry – Target) / (Stop – Entry) for a short position.

I have programmed a calculator in the Stock Trade Journal application as well as the new StockTradeCalc for the iPhone to make it easier. Simply enter the prices in the given fields and press the calculate button to get the R/R for the trade. Of course you can use excel or a hand calculator as well.

Risk Management Pt 2

In the previous post I talked about the different variables in play to determine a good risk management model and technique. One of the variables was the trader’s edge. How do you know you have a real edge? How do you know how good that edge is?

To objectively know if your system is truly working you need to put in place some metrics and analyze your performance regularly. Start by looking at how large your winners vs. losers are. The largest winners should ideally be 3x  your largest loser. Also look at the number of winning trades vs. losing trades and make sure you have a good “bating” average. Using the baseball analogy, you want to have a large number of hits with a few home runs and very few strike outs.

This year I began to post an analysis summary of my monthly performance on the blog. Take a look  (Jan and Feb.) to see some of the metrics that I use  and the conclusions reached after the analysis. It is important that you use the analysis results to develop steps to correct mistakes and to  reinforce what you are doing well. This is a necessary process to develop a real edge and manage your risk effectively.

Risk Management Pt1

Risk management is probably the most important strategy traders need to implement. I have read many books and blogs on trading where a simple 2% risk rule is advocated, but I have found that it doesn’t work for me.

First, take some time to read this post from Dr Brett where he uses a simulation tool to look into the risk of ruin for a trader. As the good doctor points out, the risk of loosing all of your capital not only increases by raising the percentage of capital on the table, but also by how frequently you trade, your edge (how good you are,) and how much capital you have (if you consider margin and minimum cash balance requirements for your trading account.)

If you are an experienced trader you can be very successful with a risk of 2% per trade or greater. But if you are a beginner and are developing your edge, you should risk a fraction of that. As one of my trading teachers (Josip Causic) repeated constantly “The market will teach you the same lesson whether your risk $20 or $100.” As you develop successful trading strategies and systems you can increase the capital at risk. Also consider the minimum account balance required for the type of trading account you have. For example, if you have a margin account in the US you need a minimum of $25,000 or you’ll get a maintenance call from your broker. If you have $30,000 in your trading account you can potentially be out of the game very quickly. It will take a loss of $5,001 to get the dreaded call from your broker. Just 9 bad trades in a row at 2% of your portfolio each would put you below the limit.

Risk Management Pt 2

February’s Performance Analysis

This month I tried to tackle over trading. I decided to limit to 5 the number of trades I could enter in a week. Not necessarily one trade per day, but 5 trades per week. Check out the performance graphs and stats below.

The ratio of winners vs losers improved dramatically and it was a profitable month. However, the largest winner vs largest loser ratio was below 2. What was amazing was that all long positions were winners but more than half of the shorts were losers. Although it was a profitable month, the winnings were very small. This is shows that there is a correlation between the largest winner vs largest loser ratio and the amount of money you make. The numbers also show that I didn’t deploy as much cash as in previous months and that if I want to stick to the 5 trade per week limit I need to increase position size to maintain the same level of risk. I also realize that I need to look for better R/R opportunities.

Notice that I was stopped out for profit more than I was stopped out for a loss. Meaning that I was more effective in proactively managing stops as trades began to move my way. Also, I had more winning trades when the market was moving higher.

Reading my notes in the Diary section of my journal I found that a common theme was a lack of an overall market edge and that the memories of being whipsawed last month are still fresh. I did manage to pull the trigger on a number of shorts and I will continue to fine tune scans to generate short opportunities.

The last picture is a chart of the total performance since Dec. last year when I began to Twitter my trades.

Don’t Panic!

Fear is probably a trader’s worst enemy. I know I am constantly fighting the fear of loosing opportunity when a stock I monitor is moving higher quickly, or that I am going to lose big on a gap the next day.

I have been writing in my journal each time I face that feeling and came up with a check list for both entries and exits on extreme price moves. This check list came in very handy earlier this week on a short position I had on GMXR. It gaped on the pre-market on news of completion of a Nat Gas project and was set to open high at around $10.20 for a 13% loss.

My original stop was set to $9.76 with a market order to trigger for sure right at the opening bell. I decided to put my check list into practice and canceled my automatic stop order before the open to exit manually. Right at open I began to look at the orders on the L2 and the print with my finger on the “Close Position” button. What I saw was that lower and lower bids were being taken and the price began to drop precipitously. I kept my finger steady. I was looking at a 3 min chart where I saw around 9:45 that the price was finding support and began to rise quickly. I pulled the trigger and covered at $9.75 – a penny lower than my original stop and for a 5% loss.

Here is my “Don’t Panic” exit check list:

1. Check L2 for position sizes and prices.
2. Make sure that large positions – buy or sell- come from major EDNs like nasdaq, NYSE or BATS. If large orders come from BOSX or CBOE are most likely not real. See previous posts: Here and here
3. Look at the print and see where the price is moving while monitoring for large orders that support price direction.
4. Look at 3 min and 1 min charts to visually identify short-term supply or demand levels.
5. Exit only if all of the above point to price movement against the position.