Friday, February 28, 2014

2014 Jan-Feb Review ~ Trade Records, experimenting with programming trades & why every trade rules failed 100%, my next phase of trading...

As previously promised, I shall reveal my trades; and even better, let you into my "trading room" by showcasing a trade along with my thought process on how was it done.

My experimenting with Chartnexus XpertTrader backtesting, programming

Before I show my trade records, I like to update on my recent experimenting with programming trading rules, backtesting them and so on. One common dilemma faced by traders is whether to follow the rules or not; otherwise known as discretionary trading and programmed trading.

Discretionary trading refers mainly to trading by individuals, whom may decide whether to stay on a trade, or exit, entirely upto their discretion. Some may have certain trading rules, some may change their rules, some may ignore & trade entirely with their gut feeling. This camp, typically may look back & see some profit left on table, or suffered certain higher losses so on, and one possible fault they may blame themselves is that they should have followed this rule or that. How nice was it, if one could simply programme the trading strategies or rules into a computer, and let it trade on behalf, afterall our emotions cloud our judgements… right? Wrong!!

Now comes the programmed trading, in programmed trading basically you programmed a series of trading rules into a computer and the computer will execute the trade based on the rules. Sound good? It’s a disaster!

I tried 10+ trading rules, from famous Impulse systems, moving averages, MACD, RSI, parabolic SAR, mixture of trend following tools & oscillators and so on. Well not much time, about 4 hours of tweaking & back testing… the result? Every programmed trading rules failed over the long run of 1 year. Every one ended lesser than the initial capital, most of them lost more than 90% of it.

Perhaps I haven’t back test them enough, perhaps I should only back test them on a handful of stocks and not the entire SGX stocks (exclude) warrants, but even with money management rules say exit when loss exceeds 2%, profits exceeds 25%, setting a period of gaps before executing another trade and so on. The results are the same. If trading rules that we read from famous authors, popular gurus, do not work, then what for are we still trading? How come there are still so many people who made it with their trading strategies when programmed trading’s backtesting results showed that everyone of them failed over the long run of only 1 year.

I believed the problem is simply programmed trading is dead, they are not human, without humans’ greed & fear, and thus programmed trading are unable to react to changing circumstances. For example, when a trading rule did work, and your trade accumulated a paper gain of say 25%, but over the next few days, something was wrong, the price gap down, or started spiralling up and down in a roller coaster ride or whatever it is, fear will come in to want to protect the remaining profit before it evaporates away. But programmed trading is based on the formula, if your exit rule is not triggered, the trade will simply ride all the way down until it become a loss.

Another common trading error I faced, which I am experimenting to adapt it, is supposed you programme a trade to be execute when say moving averages are crossed and both trending up. Well a human being would be able to see from the chart that, perhaps its increasing with momentum and hold on, but bang! Some news came, and the price fell on the day, then the next day the price open higher and seem to resume, a human may wish to hold on and wait, but the programmed computer would exit the trade based on the rule that the moving average decreased the day before, and thus exited without a profit or more likely a small loss due to fees. And with time to come, the stupid programmed computer will keep repeating stupid trades, following rules blindly at every precise 0.1 change, resulting in many trades but little profit or many small losses.

Then you might asked, we already have a computer chess master which beat the world chess master; soon we will have a supercomputer that will beat the world wealthiest guru like Warren Buffett or George Soros… Chess could be programmed within say 100,000 of chess parameters; after all there are only 20+ chesses, 100+ boxes to move around, but what about market participants? What about booms and crisis? What about buyouts? Can human behaviours be calculated and thus predicted to be traded on, and profit? Maybe, but not yet. Until that day arrives, and robots probably replace human, then traders could retire to graveyards… I would only use trading rules as guide, chart patterns for analysis, but I myself, the sole decision maker; master of my own trades…

2014 Jan-Feb Review ~ Trade Records
As usual, there were stupid trades that I should have hold on such as Keppel REIT where I exited right at the recent lowest, and the next day, price begin to recover. Today its already close to my cost (price $1.175, cost $1.18).
Also, most warrants trade were exited at 1 bid difference, this is due to fear as a intra-day fluctuation is rather limited, and reversal is common intra-day.

“Come into my trading room”, sample of my trade
As you can read from my trading comments in the picture, its not easy to trade in warrants, as its rather fast & furious and at the same times slow & frustrating.

By fast & furious, I meant if the price move against you, your warrant price will collapse like hell, and you suffer easily 10% loss or more.

By slow & frustrating, if you get in with a call warrant in an intra-day uptrend, you may be right, but the STI is fluctuating up and down like crazy, when its over MAs are up, but the average price moves slowly until finally hours later, if finally move high enough for the market maker to move its bid. Some warrants move by 5 points, some 10 points (by 5, meaning say STI move 3000 to 3005).

Thus its important to familiarize with the derivative instrument one is using, and if price move against you, the risk tends to be triple to the potential rewards, as it shown on 20 Feb 14, when I exited at 1bid loss. The combined fee & loss takes me 2-3 successful trades to recover.

My next phase of trading...
There is a potential bear coming, I am watching it. As the saying goes, bull go up in steps, bear jump down the window. My next challenge is to catch a bear & slide down with a put warrant over several days.
It should be note that it is extremely dangerous to hold warrants for too long, as warrant generally expire worthless on its expiry date.

I am eager to earn trading profits to accumulate for my longer term goals such as buying a house, rent it, be a landlord etc. It will be hard and long journey, but saving at 0.2% pa interest can never get there, thus I must be good at investing. Most average traders suffer losses, I was one of them; my hope is that I would become a professional good trader and make consistently good profits to compliment my job income and realize my dreams.

I now allocate my capital between intra-day trading ($10K) and mid-term investing ($50K, 1 week+).
Thus I only follow 2-3 positions at any one time, hope I would remember my trading plans & stick to my cut loss rules (2-5%) and realize my dream.

Look out for next post...

No comments:

Post a Comment