Hammering away, slow and methodical

A new year deserves a new journal with a catchier title. You can read my first journal here Rol's Trading Journal. Starting balance will be 35K. It should be interesting to see what one can do with close to the minimum in a pattern day trader equities account. I removed 40K to pay off loans and pay down my mortgage to the point that I can pay it off in 6 months. Even with a smaller trading account, I feel wealthier with reduced debt. I don't plan to make any contributions for at least 6 months, as I will be sending extra income to pay off my mortgage. This should help with analyzing system returns and drawdowns better without the magnified drawdowns from contributions as occurred last year. I may even withdraw any profits at the end of each month, and send them to the mortgage company, so I can benefit from some tangible rewards. There is a good chance the journal will be quite slow at times, as I wait patiently for pullbacks in the market. I don't want to get my hand smacked in the cookie jar. I would rather wait for the cookie jar to fall over, and like a dog, scarf up the cookie pieces.

There were some breakdowns last year with following my strategy, and performance suffered. I concentrated in positions at times, mostly to my detriment. I am still studying hedging methods with my long only strategy, besides simply limiting size. If I find my long only system down 5% and exposure exceeding 100% (2X buying power), the system shall begin shorting the S&P.

I am looking to achieve a minimum 30% return with a maximum 30% DD. I started with 30K in September 2010, and was actually on quite a roll up until August 2011. I did manage to bounce back some, but the swings and failure to follow my system began to take their toll on my resolve. The larger account size and trying to hit dollar goals also added pressure on performance. What I plan to do is nibble at the markets, with small positions, scaling into, as well as out of the market, like a wave coming ashore and then returning out to sea.

I am starting the year with an altered strategy. I am going to be much more selective with the symbols I track. It will follow stocks in the Nasdaq 100, and a selection of ETFs, that have performed well with my strategies. Naturally, I expect to be on the sidelines more. However, there will be times that the markets are highly correlated, and I will be sizing up. Last year, I did not like the negative news related impact on my positions, so focusing more on a wide variety of ETFs will help avoid some individual stock risk. I will track Index ETFs, Sector ETFs, Country ETFS, Emerging Market ETFs, Commodity ETFs, and a few short ETFs… just about any ETF that has a decent equity curve and daily trading volume.

I will mostly be buying and selling at the close, so I will from time to time make some trading calls before the market opens the next day. I currently am following 121 ETFs, and 67 stocks. I will probably add more stocks from the SP500 over time. My current holdings are SPDR Gold Trust, GLD and iShares Silver Trust, SLV, about 30K of each. I plan to hold these for as long as possible and see if they have legs. I know it already sounds like I am breaking my rules. I may deviate from time to time and size up, but I will make it a live call, so it should make me be quite choosey, knowing my trade is on public display.

I have been reading Dr. Elder, and like his method of trading pullbacks in channels. It is similar to what my strategy does, but I plan to use it to build up my discretionary skills. Even with auto trading, I think it is important to keep sharpening discretionary skills, to keep your trading in check. I will keep size very small, though, until I can prove to be consistent. I like Dr. Elder’s style because it is rules based, and he teaches how to grade your trades, which provides feedback.

I will continue to use the format of weekly updates, year to date, and end of quarter analysis. And so, the journey continues…

 

Nice post and good luck. Great you are trying to winnow down your debt. My only gripe is I could never understand the mindset of hedging with a small account. Hedging just adds another layer to the decision making process. And don't get me going on Elder. Doubtful he has ever been a successful trader and you will never ever see multi-year real money trading statements as validation. But if you think of him more as a teacher than a trader, then go for it.

 

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Hi KBaines, I often feel like you that hedging complicates things, and trading small the majority of the time is the solution. I am doing it just for a small psychological comfort when in a drawdown. Yea, the jury is not out on Elder, but it has been inspirational reading. I have always felt that if someone became a highly successful trader, the last thing on their mind would be to write a book about how they did it.

 

Rol, good luck with your new strategy.

Do you mean 3K positions of GLD and SLV?

There is a trading strategy on Collective 2 called 'Stock Swing Trader' that is worth taking a look at. Julian Van de Walle trades long and a short positions at any given time, chosing strong performing equities for long position and weak performing equities for short positions. His returns have averaged 73% per year for the last two years since he started the strategy.

 

Hi Camdo, I'll take a look at the strategy you mentioned. Sounds like a good method. No, that wasn't a typo on the GLD and SLV. Occasionally I may take "conviction trades" on ETFs. The GLD entry was somewhat spur of the moment, as I watched it breaking out of intraday resistance, and saw it oversold on the daily. SLV I began to enter a bit too early, and sold the first 200 shares entered to meet overnight margin. My initial small entry was to make the stock tank. I'll be placing daily stops, and only moving them up. I want to become better at catching longer term moves, and "sitting on my hands."

 

GLD and SLV are tightly correlated. The two positions are essentially the same bet on market direction. The impulsive SLV entry lacks discipline and planning.

I have gathered from your first post that a keystone of your new strategy is to keep the account at a minimum to enforce discipline that every trade must count.

Gld and SPY are generally uncorrelated, so a paired position would be hedged. The volatility of both is enormous, so the pair could be exited with both being profitable by using profit limit targets, provided the market does not move beyond the volatility range. In that case a small loss would be incurred but that is the advantage of the hedge. The strategy is for win-win net gain, but if it does not play out it is win-loss net even. The time frame is the important discipline.

 

I am aware of the correlation between gold and silver. I took the trades when no other signals presented themselves. I wanted exposure in both because one might perform better than the other one might in the short term. Yes, I consider them as a hedge for the broader market. I plan to leg out as more signals appear in stocks and ETFs.

 

I closed out my SLV and GLD yesterday, quite by accident. I had some faulty logic in my strategy exit override code. Instead of condition1 AND condition2, the code read condition1 OR condition2, with condition2 being Exit_Override = True, so the strategy exited when condition1 was true, and ignored condition2. In Market Wizards, Ed Seykota said he would override his systems at times. If I choose to override an exit, I then have a stop put in place.

 

Reentered 200sh GILD short today, after stopping out earlier for a $35 loss on 100sh. I knew my first entry was not working out quickly. For me, fading the open on shorts doesn't work most the time. I do better in the afternoon, I think, when it appears a long bull run has lost power, and preferably price and volume spiking at the highs for the day.

I feel a bit better about this one. The volatility has increased the past 2 days, as opposed to the slow grind up it has been doing. Also looks as if a double top was put in today, where I shorted. Seeing some divergence in bull power past 2 days on the 60min, with a new recent high today, I began shorting. In addition, there is a MACD crossover to the downside. The indicators and some of the interpretation are from my reading of Elder's, Come Into My Trading Room.

 

Nice trading on that GLD & SLV even with program errr!

I was wondering if the GUILD trade is based on a strict mechanical interpretation of the chart and indicators shown? Are you introducing fundamentals from the news, or general overall market (i.e. SPX) chart analysis to influence taking the short position? As I understand it, you are searching for an alternative strategy to compliment your RTM strategy.