Hey, You don't use stops in your strategy, right? Instead control risk by having many small positions? When days like today happen I don't see how you can justify that as a good strategy. I mean you started this journal in an environment where every dip was bought over and over again.... Are you changing your strategy at all to long / short or staying the course?
Hi CA04, if someone thinks stops are effective on a day-to-day basis with a dip buying strategy, then they can use them. The way to survive the recent selloff, other than predicting it ahead of time, would be to limit more the number of open positions allowed. After the selling subsides, we should be good for another couple of years without Armageddon. When the dip buying environment returns, and it shall, I will be there buying every dip as I use to. I am in a 40% DD from my equity high of 81k, but it should be more like a 30% DD, had I not allowed so many open positions, and taken my exits a few days ago when called for. A 30% DD is within the backtesting expectations. If I can calibrate my system such that a nearly strait drop of 2000 points in the DOW in 12 trading days like now, results in a 30% DD for my system, I would be content with that. I think if I can achieve 60% returns over the long term then a 30% DD is allowable. I have heard of hedge fund managers telling their clients to expect a 50% DD. Of course, if I were trading a mid six-figure account, I would be scaling back my system to expect more like a 20% DD. I am sure recent market action wiped out many traders. I was not one of them, although I am in a coma. I am changing my strategy to buy and hold, along with dollar cost averaging until things stabilize. I hope the market stays in this area for years, so I can accumulate more shares at a better price. Maybe now there is a chance my current and future retirement contributions will be worth more in 20 years than they are now. Many have suggested I short the market and I would if I had more confidence in my abilities in that department. I don't consider myself an active day trader.
Might have justified stops in this case but you can't build using one example, on the average stops hurt more than help for this type of strategy.
Day's like Monday are exactly why you DON'T want stops IMO. That was pure panic selling. Every pundit had a different rationalization for it.
A friend of mine told me he got out of the market yesterday when the DOW closed down over 600 pts. The media was also reporting brokerages were being flooded with calls with people wanting to liquidate their accounts. When the markets become âcocktail party conversationâ by the average Joe, it can be a good contrary indicator. I am going to pay closer attention to when indexes begin trading below their 200 DMA in the future. Not every cross is significant, but after the long bull run we had, it should have been a red flag that the markets could be heading lower.
Hi Rol, Long time since I commented. Sorry to see your recent events, but glad to see you're sticking to it. The recent turn of events got me thinking. Your strategy is already somewhat insulated against black swan events for a particular stock, due to diversification. You've shown that major losses in a single trade are generally mitigated by the others. However, as you have painfully discovered, your long only strategy is quite vulnerable to systematic changes in the market. I'm wondering, if you developed a strategy to pick stocks to short, to pair with your long picks, whether that would help. It would not necessarily be like traditional pairs trading, where you had to pick a stock in the same sector or with a high correlation. In fact, you'd probably want the opposite. Cons: You cut your true buying power in half More fees How to pick pairs? Less profits during good times? Pros: Insulated against market-wide down-swings Less need to monitor or interfere with strategy?
Hi Konanz, I always knew my system is subject to damage from market corrections. I plan to hedge by limiting exposure upfront rather than through pairs trading. In the past, I always seemed to do better in my Roth IRA cash account than my margin account. I think this is so because I am restricted in buying power, and have to wait 3 days to reenter the market, which required me to be patient. The recent correction has been instructive for me to see what adjustments I need to make to my system going forward. My goal is still for a 30% max DD, with a 60% annual rate of return. I have added code to my system to alert me and be cautious when a regime change may be underway.