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.