Going backwards against the trend

[Synergy]

My spec end breakout system has been in drawdown for 3 months now, while the market is pushing forwards pretty strongly. It's a strange feeling. I've been trading it close to 2 years now and i'm approaching my max drawdown - which is around 13%. Unlike when the overall market is falling, i'm finding it easier to trade correctly, but am more concerned that something has changed and the system is just not working here.

In the past the system has performed well in a rising market and fairly poorly in a falling one, especially a quickly falling one. Since the new year, performance has been terrible.

I'm not at the stage where i'm about to pull the pin, but I am after ideas. If I were to get to -20% drawdown in this sort of market I will need to look very carefully at what i'm doing, and that might mean stopping for a while until it improves.

When is a bad run a bad run? and when has something fundamental to the system changed?

Anyone else finding these conditions strange?

 

[Gringotts Bank]

What was the date when you realised it wasn't looking so good? oh, 3 months...right.

What else happened at that point in time that caused you to lose focus?

 

[tech/a]

No my Breakout short term method is +48% in the last 4 mths (When I started it)
+65 % if I didn't include some Index futures losses!!!

Trade your equity curve.
Once it breaks its trend line close all positions and paper trade the system record your Equity curve.

Once it breaks back above the trend line or (if you wish )Makes a new high start trading it again.

If it never does then there is something seriously wrong with the method and or its testing.

 

[Synergy]

No my Breakout short term method is +48% in the last 4 mths (When I started it)
+65 % if I didn't include some Index futures losses!!!

Those numbers look a bit more like fun!

I've had a look at what my theoretical equity curve is doing and it's not in such bad shape. I'll need to dig a bit deeper to work out why i'm off course compared to my system. It may be that I've just missed a couple of good trades and haven't been able to unload a few duds as quickly as i would have liked. Either way the direction is a steady down trend.

 

[KurwaJegoMac]

When is a bad run a bad run? and when has something fundamental to the system changed?

Anyone else finding these conditions strange?

Personally I've had good performance, about 35% in the 6 months to date. Although in the last 3 months to date I've been around 15%. A lot of the stocks I trade have had fairly lengthy runs since about October and entering now means I'm often late into a move - I try and catch a move early on a breakout so I'm finding it more challenging to mimic the same returns I got pre-New Year.

It just goes to show that no single strategy/method/technique will work well all the time.

How closely have you reviewed your trading results for the last 3 months? Are you finding that your 1R loss stop is being hit more often? Are profitable trades being cut too late? i.e. is there a common theme? Market conditions change all the time and sometimes a little tweak like a wider/narrower stop can make all the difference.

 

[skc]

Can you review and identify which paramaters have changed? Review the usual ones like R:R, win rate, hold duration, stop loss distance etc. What edge did you start with and which number has caused the erosion of that edge?

You want to know, at a minimum if you had -

- More losers and less winners, or
- Smaller winners, or
- Larger losers, or
- Some combination of the above

With those numbers you can then drill lower into individual trade level and see if a small handful of trades has caused the issue.

The other thing I would look at is whether you have accidentally concentrated your trades in a particular sector or not... I know it's fundamental rather than technical, but you can compare your stocks with that index (as opposed to the broader XJO) you might find that the sector was in decline, and so you are not going against the trend as much as you thought. The recent rise in XJO was probably all due to the Big 4 and Big 2 (as they report and people position for the dividends).

Very difficult to speculate the reason for your drawdown without these facts.

 

[Synergy]

Ok I've had a look at the numbers... Although my drawdown is 3 months, it's really only the start of this year i'm concerned about.

Wins = 12 (27% - normally 45)
Losses = 32
avg win and loss value are the same (avg win normally 3*avg loss)
hold time is up - but i got stuck with a few over the break. Looking back this is part of the problem.

I've also missed some good winners. Missed them in that my buy price was hit, but my order wasn't. A couple of these would have been significant winners. I've also had a couple of trades that have given back a lot of profit very quickly. A couple were 50%+ at one stage.

It's encouraging to hear that everyone else is having a good time of it though. I'd rather hear that than know everyone else was struggling in a rising market. Then something would be wrong.

I think next year I will consider sitting out of the market over Christmas. Jan 10 and Jan 11 have been my worst months so far. I think liquidity is a bit low at the start of the year. All in all I think things are probably ok. I'll put it down to time of year and a random bunch of other things for now.

 

[tech/a]

I've also had a couple of trades that have given back a lot of profit very quickly. A couple were 50%+ at one stage.

Consider then a trailing stop which is activated at 50% return. or X%
On pennies I wouldnt leave home without it.
On runners (During the day) Ill chase them up 1c or increments of 1c behind price------Made a packet on LEG and UNX doing this on 31/12

Strangely my best returns were over the break.

 

[Gringotts Bank]

Synnergy, was Christmas time eventful/stressful/boring/irritating, etc.? Did anything in your life change around this time that may have affected your general outlook?

I'm not interested in details, by the way! What I'm getting at is that mood affects ability. Maybe you can see a correlation. Next year don't invite your mother in law to Xmas dinner.

 

[KurwaJegoMac]

I've also missed some good winners. Missed them in that my buy price was hit, but my order wasn't. A couple of these would have been significant winners. I've also had a couple of trades that have given back a lot of profit very quickly. A couple were 50%+ at one stage.

If you're finding that your orders aren't getting filled you need to consider putting a higher bid. Yes you might not get it at the exact price you want, but personally I would rather be a part of the move than miss it for the sake of saving a couple % on the entry. That being said though, it depends on your strategy too - if you get out after a small % gain then you don't have the luxury of paying a slightly higher price than what your ideal entry is. That's the nature of the game though, you can't always expect to get your ideal buy and sell price. As I said before, I'd rather be in the move slightly above my entry price than miss out altogether. But that's just me :

You mentioned a few stocks giving away profits rather quickly - I'm presuming you're playing with small caps? Possibly penny stocks? They can have crazy volatility - you have to account for this when utilising stops. As the saying goes, 'let your profits run' - but don't be afraid to bank them should you see demand for the stock drying up. Better to have cut a profit early rather than end up with nothing at all. Remember that in the event that you do cut the profit too early, there's no reason why you can't just buy back in.

Consider doing what Tech/a mentioned with trailing stops or profit protection stops. Keep a close eye on areas of support and don't be afraid to sell out once support is breached. As I said before, you can always buy back in if you sold too early.

 

[Wysiwyg]

Which trend and Index is that? XJO - Chart A, B, C or something in between. Trend is in the eye of the beholder.

 

[Synergy]

Which trend and Index is that? XJO - Chart A, B, C or something in between.

For me it's definitely A. Short term system... 4 months is a lot of trades.

was Christmas time eventful/stressful/boring/irritating, etc.?

Nope, I can certainly rule this one out. I feel I'm doing a reasonable job at following the system.

Consider then a trailing stop which is activated at 50% return. or X%

I have got a stop that tightens right up, but not until 80%. The system has been performing well overall though. I do feel that I should be able to make a closer stop work around 50% though, but I haven't been able to make it profitable.

If you're finding that your orders aren't getting filled you need to consider putting a higher bid.

This is something i've thought about a little bit...
If a system makes an average of 5% per trade, and buys below the previous close, with each tick worth on avg 2.5%, then the profit is quickly eaten up if the buy price is increased. I often feel there are trades where I should be trying to buy higher, but in the end, thats not the system i'm trading. If i started doing this there would be many signals I couldn't take as I'd be picking up more trades.

 

[Wysiwyg]

The other thing I would look at is whether you have accidentally concentrated your trades in a particular sector or not... I know it's fundamental rather than technical, but you can compare your stocks with that index (as opposed to the broader XJO) you might find that the sector was in decline, and so you are not going against the trend as much as you thought.

Now there is some valuable experience.

For me it's definitely A. Short term system... 4 months is a lot of trades.

I'm with you Synergy, as most people are optimistic toward the future.

 

[skc]

Ok I've had a look at the numbers... Although my drawdown is 3 months, it's really only the start of this year i'm concerned about.

Wins = 12 (27% - normally 45)
Losses = 32
avg win and loss value are the same (avg win normally 3*avg loss)
hold time is up - but i got stuck with a few over the break. Looking back this is part of the problem.

I've also missed some good winners. Missed them in that my buy price was hit, but my order wasn't. A couple of these would have been significant winners. I've also had a couple of trades that have given back a lot of profit very quickly. A couple were 50%+ at one stage.

With you avg win and loss value being reasonable, it doesn't sound like your result is influenced by a few isolated one-offs.

Your win loss balance is off by ~8 trades. You mentioned a few trades that gave back profits. You also mentioned a few missed buys... if you fixed those you system might not be as broken as it looks.

But it certainly looks like your stop placement/adjustments needs improvement. To me the whole market hasn't had the 'full head of steam' mode in this trend. It's been a steady but non-impulsive up move, which is very different to what we've seen since Mar 08. May be that has some bearing on how much of your open profit you should be risking.

 

[Synergy]

Well at least I'm back on song with the trend if nothing else.

Talk about black swans...

The thing about losing ground in a rising market, is you lose further ground when it falls. I considered advice given a month ago, and decided that everything was probably within the normal trading range and to continue unchanged. Even last week I was ok with this decision, despite a drawdown approaching what I'd decided was my predetermined 'tap out' point - 20%. Losses were steady and I felt as though I was still in control.

Today though it is obvious this was a bad decision. Despite trying to tap out today, it seems i've instead been killed.

My average holding is now at -13%, losing around 8% of total portfolio value today with a drawdown closer to 30%.

I felt comfortable enough trading when I was losing money steadily. Mentally I was doing well. Now I feel I have lost too much to sell...

A mistake.

I've had several trades gap down in a big way on top of an already worrying portfolio drawdown. My mistake is that I let my drawdown get too close to my cut off point so that one large drop has put me well past this point.

If I looked at each stock individually there would only be a couple i'd normally be happy to hold. The question is do I take a huge loss and sell everything regardless. Or do I assume the market has fallen about far enough, and stay fully invested in the hope of making back some lost ground....

I at least feel I have learnt something. Set your max drawdown 10% less than you thought you were comfortable with (I did this bit) and then set another point less than this where you make sure you sell everything you own. Now that I've passed my max DD, mentally i'm shot. My decision making has turned to hope rather than logic.