For 2007, my account finished -3%. Twice in the year I was up as much as 20%, and once I was down over 10%. After 3 straight years of double-digit returns, this sub-par performance is certainly disappointing. However, I have a clear understanding of what went wrong and am confident that 2008 will be much more successful.
In hindsight, my trading suffered from the following:
- Over-trading
- Incorrect position-sizing
- Failure to follow a clearly defined strategy
- Over-reliance on purely discretionary trades
- Continuing to trade during stressful and intense life events
- Becoming married to a stock
It is important to note that most of these problems are linked together. For example, after having a new baby, moving into a new home, and getting a promotion that required more responsibilities at work, I had much less time to research and focus on trading. This led to me taking discretionary trades which I had researched very little, and consequently, I had very little conviction in these trades. Lack of conviction led to me overtrading, taking many, many small losses, and often selling too soon before a big move.
When I did develop some convictions about a trade, I often established a position that was too large. In these successful trades, I often focused on my juicy gains rather than the technicals (often I had no exit strategy) and then got punished by surprise downgrades or an earnings miss.
As for being married to a stock, [[MVIS]] should have been sold after the big announcement. That was my plan, and the announcement came on a day when I was out of the office with no access to the internet. Instead of selling it the next day, I held on. This really hurt my account over the rest of the year.
My Plan for 2008
I am going to focus on 6 strategies
1. I will allocate 20% of my capital to trading the RSI(2) strategy. I like this strategy as it forces me to buy weakness.Â
2. I will allocate 15% of my capital to buying stocks that have broken out and then pulled back.
3. I will allocate 15% of my capital to buying leading stocks that have pulled back to a major moving average, i.e., 20 or 50 day simple moving average.Â
4. I will allocate 20% of my capital to shorting stocks that have broken down and have failed to overtake the 50 and/or 200 day moving average.
5. I will allocate 15% of my capital to buying stocks that have just broken out and are sill within buying range or stocks that are making new 52-week highs. I will also use this portion to buy stocks because I want to own them, even if they do not meet any technical criteria. This will be my most discretionary allotment of capital.
6. I will allocate 15% of my capital to a market-neutral strategy still in development.
- I will limit each position to ~6% of the total account value.
- I will not make intraday trades unless they were researched prior to that day
- I will not daytrade at work.
- I will continue to develop exit rules for each strategy.
- I will continue to journal each trade based on the strategy it resides within.
Finally, I will continue to use a gauge of market strength or weakness to determine weightings. For example, if the market technicals are bullish, I will likely deploy 90-100% of my capital, assuming there are enough stocks meeitng the above criteria. When the market is weak, I will likely forgo any new trades and let the account move towards cash or increase the capital allotment for the short strategy. Currently this gauge of market strength is somewhat discretionary but may become more quantifiable as it develops.
Wood,
Sounds like a viable plan. Couple of questions;
*On the diversified strategies, have you backtested the strategies?
*If yes, what is [are] the expectancy[ies]?
*If no, why not?
jog
Duc,
RSI(2)<2 has been backtested and is proven profitable but I do not have an expectancy for it yet. As I simply do not take just any RSI(2)<2 stock as a candidate, but rather, pick very carefully or stocks that are oversold but near trendlines or support, it will be hard to backtest any further. Expectancy will be determined at some point this year when I have placed enough trades. I am focusing on an exit component for this strategy.
The breakout strategy is backtested and profitable for a certain proprietary screen. No expectancy has been generated though. However, you'll notice I don't plan to overweight trading breakouts as I believe I can do better buying breakouts that have pulled back. My psychology makes it hard for me to buy high and then suffer a retracement. I am going to try patience and instead catch the stock on the retracement.
I am working on coding the language through Stockfetcher to test the pullback to moving average strategy. It is not simple to do. I might need to upgrade platforms to get access to a better backtesting and more data to test.
I have not backtested the market neutral strategy.
I have not backtested the short strategy.
Ultimately, the main reason for lack of backtesting is not having the requisite software and data feed. However, I am skeptical at the ability to generate accurate code for testing the pullback type of strategy. Maybe I am wrong.
Wood,
Interesting in that all the strategies are more or less short-term in nature [swing trades?]
While I certainly agree on strategy diversification, as you are now commited to following, but have a think on time-frame diversification in addition.
With regards to backtesting, I’m not 100% convinced that the standard methodology is acually that sound in practice, even though in principal it would appear prudent.
jog
Duc, while in essence these are swing trades, there will undoubtably be trades that will be left on longer term. For example, if I buy a pullback on a leading stock, I will be likely to keep at least a portion of the original shares as long as a stop isn’t hit.
One of my mistakes last year was taking profits too quickly, so I definitely want to let winners run.
The problem is, which to let run, and which to hold? I think that is when fundamentals come into play, and as of yet, I do not have much of a way to allow for fundamentals, short of IBD rankings.
Anyway, yes, a concious effort at time-frame diversification is something I will look to add in.
And you will no longer be associated to the married stock?
Sounds like a good plan. I’m biased, but I would urge you to make fundamentals more of a primary concern. The IBD rankings are always nice, but sometimes (at least, imo) its nice to break it down and look at margins, growth and valuation separately.
WSJ has a nice earnings summary, which I get alot of ideas from:
http://online.wsj.com/mdc/public/page/2_3024-digest_earnings.html?mod=topnav_2_3100
Best of luck to you!
Hi
Intresting startegy.
Can you please give me some sence of the risk allocated with each strategy using numbers 1 to 10 ( 10 is the strategy with highest risk)?
Jeff P- no, I am still married, but believe me, the sex has not been what it used to be. (I’m talking about MVIS, not my real life.)
iio- actually I’ve been making an effort to start incorporating more fundamental analysis. Right now I’m reading It’s Earnings That Count, by Heiserman. Thanks for the link, I will check it out.
Marmary- I would be guessing on risk. There are so many variables. Also, what is risky for me may not be for you. Maybe you could be more specific about the strategies you are interested in, tell me what you consider risk to be, tell me more about your style, time horizon, and psychology, and I could give you a better answer.
Wood
Thanks for getting back to me. as you know mutual funds from one bank have these kinds of rankings, what I was looking for was something similar to that.
I see that you are allocating 15% to buy stocks breaking out of base and 15% for stocks that are on the pull back. Can you describe the risks with this strategy!
for instance on Jan 2nd AMZN CMED and AWN broke out of their base on high Volume. I bought AMZN at its buy point and over the past 2 day it has just been terrible!