For 2007, my account finished -3%.Â Twice in the year I was up as much as 20%, and once I was down over 10%.Â 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:
- 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,Â after having a new baby, moving into a new home, and getting a promotion that required more responsibilities at work, I had much lessÂ 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 noÂ 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 onÂ 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.Â 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 stocksÂ because I want to own them, evenÂ if they do not meet any technical criteria.Â This will be my most discretionary allotment of capital.
6. I will allocate 15% of my capital to a market-neutral strategyÂ still in development.
- I willÂ limit each position to ~6% of the total account value.
- I will notÂ 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 marketÂ technicals areÂ 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 strengthÂ is somewhat discretionary but may become more quantifiable as it develops.