Week 19 FX trading results

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I managed to produce a satisfactory gain of 4.6% this week. My score for following my road-map of trading rules and behaviours is also pretty good at 7.5 out of 10, but I still don’t feel like the master of my domain and that is keeping me from achieving a higher score. Nevertheless, I’m happy with this performance because it has been relatively consistent and I’m actually risking less per trade than when my equity stood at half of what it is now. They say fortune favours the brave, but I don’t have to stomach take super-sized risks and face another massive drawdown. It would simply be too much of a mental drain. Also, the 12,ooo level has presented a kind of mental barrier, and while I am presently just above the mark, the cushion of comfort isn’t enough to allow me to breathe more easily. If I can make it north of 13,000 I feel I’ll be able to take a little more risk.

My situation makes me think about logic of capital preservation and what it really means. While I believe preserving capital is imperative to profitable trading, I must confess that I don’t really understand what it means. The rational side of me says £1 is £1, end of story. From a ‘flow perspective’ a pound gained on a given trading day is surely the exact opposite of a pound lost. Meanwhile, from a longer term, ‘balance perspective’ should you treat the profits you have accumulated over the months any differently to your original capital? If so, why? I understand the behavioural studies that illustrate how the hurt suffered from a pound lost outweighs the benefit from a pound of profit, hence the supposed tendency to hold on to losing trades, but this issue of capital preservation is a bit deeper. For example, when Soros made $1bn betting on sterling exiting the ERM, he had a cushion of profit for the year and so was coming from a position of strength. But why should that have mattered? Personally, I find that if I make substantial profits in a given day, I don’t feel so bad if I give a small portion back to the market. However, with the passage of time, this money changes from perceived profit to perceived capital, blending in with the rest of my money. Why should there be any distinction in the first place? I’d welcome any good links on the topic.

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4 responses to “Week 19 FX trading results

  1. Most impressive run you’ve had, coming back from almost certain ‘tapped out’ status in four months or so. Old timers say you need to lose it all once or twice before the lessons are properly learned, but you seem to have been able to make the adjustment to profitable trading just in time.

    Betting with ‘scared money’ is very difficult; however I really believe that if you keep a long term perspective and that fearful attitude, over time you will find yourself relaxing enough to get more flow in your trading. It requires much patience and discipline.

    As a golfer I used to freeze up when standing over short putts. I eventually found a way to prevent this – I took two serious practice strokes, then made the same stroke on the ball without taking any time. My mantra became ‘putt like you don’t care’. My goal in trading is very near to that, I want to ultimately be able to trade like I don’t care, whilst my experience, discipline and ingrained method work in the background to prevent disaster.

  2. “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
    Warren Buffett

    Beginning trading books have little charts showing that coming back after a loss is much harder (percent-wise) than not losing it in the first place.

    “If I can make it north of 13,000 I feel I’ll be able to take a little more risk.”

    Why would you say that? If you were speaking of half a million, I might understand, but both your figures are low, in my humble… “For example, when Soros made $1bn betting on sterling exiting the ERM, he had a cushion of profit for the year and so was coming from a position of strength.”… – in your own words ——“position of strength”

    “But why should that have mattered?” Think this one over.

    I think your ‘gain’ is not in money, but in approach, which is very good, and in the long run, much more important as a money-making tool. The trading blogs are full of people with money who ‘blew’ it through foolish habits from very lowly poor traders to very wealthy ones (examples can be provided). The trading world is full of rules that no one follows.

    But your road-map shows you addressing these issues, which is most commendable. Have a good weekend.

  3. Thanks IPDaily, I’d say I did pretty much ‘blow up’, losing over 80% of my equity over a matter of months. When I started this blog I was blessed with an unhealthy dose of luck but I knew I was really testing the patience of the gods. I felt like Oliver going back and asking ‘please sir, can I have some more’. It was not sustainable. As for the transition to profitable trading, I have achieved this only with the benefit of hindsight, and I continue to fret about whether the profitability itself will be transitional; the two factors pertinent to my performance are 1) myself (within my control) 2) my trading approach (I’m in partnership with the gods here and no contracts are in place, not even a verbal agreement).

    I’m still far off my break-even, and I do indeed continue to trade with ‘scared money’, but I am not the nervous wreck I once was, which does provide some comfort. Your idea about keeping the fearful attitude makes perfect sense, for despite all the talk about being optimistic, the role of probability in determining success or failure this venture is so much greater than if my energies were directed to a more sustainable enterprise (a real-life trade, working for someone else, etc).

    I also play golf on on occasion as well, and I know that putting is where the points really add up. I’d bet that every golfer has suffered from putting anxiety at some point or another; for sure, I too, would like to play like I don’t care. I think I could only achieve this once I knew I had acquired enough skill through learning and practice. When it comes to trading, I’d like to be so comfortable with myself and my approach that I could afford to be less anxious, but I think I’ll never be able to achieve anywhere near the same level of comfort in trading as I could in sports, simply because of the fact that so much of my performance is out of my control when it comes to trading…there is that uncertainty that it could all fall apart at any time, due to external factors.

    please forgive the ramble

  4. Nonadamas, I always appreciate your comments, but I just don’t know about Warren Buffet here. If I followed rule number one and rule number 2, I wouldn’t be a risk taker, end of story. I appreciate the cautious attitude but I am not an arbitrageur, and if I want to make an abnormal return I must be willing to accept risk, risk that involves not just volatility but the real possibility of losses. It is part of the bargain most traders make. I wonder, does Buffet expand on his rules? I also wonder, ‘just who am I to question Buffet?(!)’

    I have tried to think through the ‘position of strength’ concept but I just can’t make it stick from a rational perspective. I find it less irrational than when I was down to £3500 and I approached my last few trades with a ‘nothing to lose’ / ‘all or nothing’ approach. Also, it’s true that my figures are dismally low in the grand scheme of things, but I prefer to think of the game in percentages. Whether my fund was £1m or £10k, should this make a difference to the percentage risked on a trade? If anyone has an answer other than ‘no’, I’d be interested to hear.

    Also, I should actually clarify my position re risk taking and my balance, and the idea about increasing my risk if I can make it to £13k: basically, in 2007 I have cut back on my risk as my edge has eroded, but if the numbers prove themselves, it may make sense to inch up the leverage again.

    Thanks for your comments about the gains not being monetary, but in approach. I feel the same way, and I value the approach and attitude as more important than the numbers.

    all the best amigo

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