Diversification

Apologies for the long absence from blogging, I was wrecked with an unbelievably potent virus after my last post that left me bedridden for 4 days. (I’ve come to discover that when your sister catches a cold in a foreign country, RUN). I’ve also just recently arrived in the amazing city of London! (am here for a year to do my Masters program at LSE) Still trying to settle in, but i’ll be sure to update more when I do. – School starts on Friday, urk.

An update on trading so far, things have been going pretty nicely. I’m starting to see some of the benefits of diversification, especially when it comes to big contracts. While crude oil and the S&P were having bullish runs, my system jumped into TNotes just when the stock market was exuberant. I was reluctant to go long TNotes, but my system was right – soon after, the stock markets tanked and Notes jumped. It was almost uncanny.

Of course, not all trades have been profitable. The system went long the S&P yesterday, which proceeded to tumble 28 points in a day. I exited at my initial stop-loss point of $1400, but it could have been a lot worse. Again, another reminder of the importance of stops. It was a good thing that my TNote trade (again – diversification!) more than made up for that drastic loss. My forex trades, however, seem to be losing money in small amounts. Both the USD/SGD and the EUR/JPY have not been trending for the past month – I suspect they are being manipulated. I suppose that this is one of those non-trending regimes that my system will have to ride through.

All in all, so far I’m up by a little bit (partly in part from accidental profits from the mistaken crude oil trade I did 2 weeks ago, and from a copper trade that my dad accidentally entered). I need to be patient and allow the system to do its work. So far, I’ve been pretty good in following my system’s instructions. Let’s hope I stay this way.

Profitable Mistake

Remember my previous post about crude oil?

My dad texted me in church today and told me that instead of closing my mini crude oil contract at $70.66, I had mistakenly shorted the FULL crude oil contract at that price instead. The outcome could have been disastrous. Instead, oil traded down to $67.47, leaving me with a small loss of $1,557.50 in the mini contract but a large, unintended profit of $3,150 in the full contract.

I’ll sure as hell going be extra careful not to make such mistakes in the future, but thank goodness this one proved to be a good one.

Fear and Greed

So… four days since the launch of my trading system (perhaps I could come up with a really cool name for it, like Operation Make-Me-Obscenely-Rich or something), I’ve bought and sold positions in all 5 markets, gotten my feet wet, made a few accounting blunders, but am otherwise still alive and kicking.

While I’ve done a number of trades so far, some good and some bad, I’d like to blog about a particular trade that I did today where I succumbed to the two emotions that every trading book has been warning me about: (yes, as you may have already guessed from the title), fear and greed.

I was long a mini crude oil contract at $70.625. Yesterday, the market went in my favor up to around $72. (A one point move is equal to $500 USD in profits or losses) My stop-loss was set at $71.34, which would have left me with a nice profit of $357 even if I’d been stopped out. I hadn’t set any stop-losses so far, preferring the flexibility of a mental stop. If the market gapped below my stop-loss, I could always get out. But if I had entered a stop, market noise could have triggered it, forgoing my chance for future profits. Or so I thought.

I woke up this morning and checked the markets. While oil had gone below my stop the night before, it was trading back up at around $71.6. The fact that the market had gone below my stop the night before should have warned me to either a) get out or b) put in my original stop (since if it was hit, then I would have been just as well off as if the stop had triggered the night before). Instead, greed and overconfidence convinced me that oil was only going to go up and I should “let my profits run” by not setting a stop that was so close to where the market was trading. The market traded to $71.3 a couple of minutes later – now I was officially beyond my stop out point – but still I left the trade as it was, convinced that it was just market noise.

I went to the gym, but on my way back I decided that I shouldn’t deviate from the system too much: a stop is a stop. I decided that if the market was above 71.34, I would place the stop, and if it was below, I would get out. I checked the markets and I realized to my horror that oil was trading at 70.6, and then it went down to 70.55: my huge profit had turned into a small loss!

Fear hit me as I watched the figures jump up and down – there must have been a news release of some sort – as I tried to figure out when I should get out. I’d made a (perfectly legit) loss in oil a couple of days ago and I was hoping that this trade would make up for it. Now, it had turned into a question of whether it would ADD to my losses or not. When the market hit 70.66, I jumped and sold my position – leaving me with a miniscule profit of $17, but -$7 after commissions. I had pretty much broke even.

Of course, (and I’m sure many traders can attest to this experience), once I’d gotten out of my position, the market immediately began to move my way. It’s now trading at $71. I realize now that if I had set my stop in the first place, I would have been out of the market with a happy profit of $350 instead of having a stressful morning with a $7 loss.

A couple of lessons I learnt:

1) A system is a system – if a market trades below my stop out point, even if it’s just one tic below, I get out. No questions asked. This would both minimize my losses and protect my profits. While “let your profits run” is great advice for the trader, I should never use it as an excuse for greed.

2) Don’t panic in the face of fear – I should have waited for the market to stabilize before putting my trade in. Jumping in when markets are volatile is a surefire way of getting the worst price. I was right to decide to get out, but wrong in my choice of deciding when to do it.

Thankfully, this wasn’t an expensive lesson – I pretty much broke even – but it’s one where I’ll remember for a long time. I figured that I should blog about it so I can recognize the situation when I’m faced with it again.

Update: Good thing I got out when I did. Oil is now trading below $70.

Another update: An immediate benefit from this lesson learnt on stops. I placed a stop at 1000.5 while the S&P was trading at 1012. It was hit within an hour of the market opening, letting me exit with a profit of $300. Wheee-ew.

Bond, James Bond

Closed out my short bond position today with a profit of $16,313, using my Highlow Breakout system. As you can see from the graph below, I shorted at 135.0000 on 5th January 2009, and exited the trade at 118.6785 on the 1st June 2009. This is quite possibly the last trade of my first set of trading systems that I’ve been using this year.

Easily, this was my best trade of the year, the one that earned the majority of my profits. However, I need to remind myself that this might have been pure luck. The Highlow breakout system is flawed, as I’ve learnt from trading it this past year. For example, if the low had broken through the threshold level (as shown by the horizontal line) but not the high, and if the price continued to climb upward after that, the system would not trigger a trade even if a trend is clearly underway. Furthermore, this gave the system a “profit target” to meet. The price, however, could have approached the target steadily before turning around and giving back most or all of the profits without ever hitting the target.

More research is warranted on this asset market. I like my system, but I’m going to have to be able to find a way to incorporate smaller stop-losses in it, as well as an indication of how I can take profit. Interest rates are supposedly the easiest to trade trend-following systems with, so perhaps I might look into that using Neuroshell.

As for now, I’ll take my profits and reconsolidate. I’d give myself a tiny pat on the back, but I wouldn’t let my ego get too big over it. I’ll start serious research on Tuesday.