Ironically the content here is quite a sharp left-hand turn to the post I made on Friday afternoon entitled “K7 strategy: 76 completed trades, up 4.6R, in 3 weeks”. What a difference 24 trades can make!! It now needs to read “K7 strategy: 100 completed trades, down 2.8R, in 3.5 weeks”.
Another big drawdown
I had somewhat of a losing streak over the last few sessions. From the start of Monday to the two trades I took early in this morning, during which time I executed 24 trades, I had a net loss of 7.45R. Streaks like that will always happen, even when trading profitably – but it’s still hard to stomach them sometimes. I seem to be getting better at stomaching them, so that’s good. It’s also human/natural (well, at least I’d like to think so) to be more impacted by it when a strategy (in this case K7) seems to be profitable, and then it’s profit+loss performance takes nosedive back to the zero line and cuts through it (see the chart just below). Prior to the nosedive, I sit there trading thinking that I am onto something and that it seems to be working, and after the nose-dive I am tempted to write off the strategy and go back to the drawing board. I have seen such patterns of my own trading performance more than once. I do try not to repeat it, but hey I am only human!
I’d like to think that just throwing a strategy in the garbage win is NOT the way to go. I actually feel that K7 is taking me in the right direction – I feel more comfortable with it. Thus, it would be smarter to do a review and figure out, without being too pedantic and trying to read too much into things, what is working, what is questionable, and what is not working. Let’s face it – I am basically breaking even with these 100 trades – surely with a couple of tweaks and adjustments, it must be possible to turn into a profitable approach. As shown on the chart below, I am already doing better than a random-selection approach, so surely I have tonnes of potential! (LOL – I am literally laughing as I am writing this blog post)
There are three lines on this chart. The blue line shows my actual performance in units of risk for the 100 trades taken with the K7 strategy. I generally always risk 1 unit of risk per trade. The financial value of 1R has gradually increased for the K7 strategy on a weekly basis – £100, £125 and then £140. The net result was a loss of 2.88R over 100 trades.
The grey line shows the cumulative actual performance assuming that on every single trade I lost the average amount for the strategy, i.e. 0.028R per trade. Thus, it’s the actual performance without the variance.
The orange line shows the cumulative transaction costs for the 100 trades, also expressed in R. The average transaction cost (bid-ask spread) plus commissions was 0.059R. Thus, if I took 100 trades completely randomly, without any directional bias, I would expect to be down approx 6R. So given that I lost 2.9R rather than 6R, I am doing slightly better than a monkey throwing darts at the Wall Street Journal for making his stock selections. You can see this on the graph because the grey line is above the orange line.
For interest’s sake, here’s the equivalent graph for the 72 trades of the Levels strategy (traded over February and March)- with that batch of trades the actual performance was actually worse than if I had picked the direction completely randomly. Some kind of star trader I am!! The orange line is sitting above the grey line! The net loss was 6.99R (or 0.097R per trade), the average transaction cost was 0.061R per trade.
Why are the drawdowns now easier to handle?
I am surprised at how well I am managing this latest drawdown. In November and December when I had the effective “Trader Shutdowns” it was a horrible time. Today I can surprisingly simply stand back and say “I have been losing money these last few trades” and can do some analysis and figure out how to solve the issues that might be causing it.
I think this is because of several reasons. Firstly my life right is a whole lot more balanced – with sports & nutrition, with fun/friends/socialising, with travel and with getting closer with friends, family and relationships. It makes me feel like I am looking after myself, I am helping out others and that life is not all about trading (even though it clearly forms a big chunk of my life). Secondly, I do have more of an inner self-confidence, even though I only solidified this over the weekend, I do really believe in it. That it is a question of “when” and “how”, rather than a question of “if”, I am going to become a profitable trader.
And I guess, finally, it’s because the more often you get knocked down and get back up again, the more resilient you become to it.
The Journey to the K7 strategy
I have been spent a lot of time on trading. I am not profitable yet. However I do feel that i am improving. Though I need to be careful to try and yield as much as I can from the time and money that I invest into it. I am quite confident that i am continuing to improve and learning more in the technical, practical and psychological aspects of trading.
Thus I would say that the probability of me becoming a profitable trader continues to increase. It’s higher now than it was in November or December when I was in between the EMA and Levels strategies, and it’s higher than in February/March last year, when I was in between STAM, S3 and the EMA crossover strategies.
Many years ago I dabbled in equities and equity options, then worked as an assistant with an options market-maker and after that decided that I wouldn’t be able to make money from speculating in the financial markets. I just couldn’t see a way of doing it. Then a couple of experiences phased out over a couple of years led me to believe that this was not the case – that it would indeed be possible (for me personally) to make money in the financial markets. During this time I learned the concepts of money & risk management and the concepts of expectancy and standard deviation – concepts that i now consider as crucial, but that had alluded me beforehand. Additionally the experience which taught me these, also provided me with my trading capital.
Since then I have been working hard on developing my trading skills. In 2010-11 I traded the fx markets using swing-trading, gap-trading and then also futures trading in a live trading room. In 2012 I took a break. In 2013 I resumed with swing-trading based on strength/weakness and then moved onto EMA crossovers. From the crossovers I moved onto the Levels strategy – this transition was based on the only thing I could really get my head around – which was being able to draw key levels of support and resistance onto the charts. After some time, it seemed that the Levels was a bit too tight and was starting to frustrate me. So I moved onto K7 – which used Levels as a starting point but tried to loosen up a little in terms of setups (it actually took somebody else to point this out and nod me in the right direction!).
I have now done 100 live trades on K7. Hence , I am going to make an objective assessment – keep what works, try to resolve the aspects that are not working, and then continue trading it.
Objective Assessment of K7 after 100 trades (prior to doing a review of the individual trades)
So what works with the K7 strategy:
- Key Levels on 1H chart
- pivot levels on fx pairs
- technical patterns
- understanding of momentum (strength/weakness)
- entering at good levels (waiting for retracements)
- awareness of certain patterns and habits of the market (e.g. approaches to 00 handles) – only once the pattern is well-known is it time to multiply it out to other instruments
- starting at 7am (rather than 7.30am-8am)
- higher trading frequency (aim for 6 a day) allowing prompt feedback loop, and thus reduce overall project completion time (project being the journey to being a successful trader)
- Japanese auto manufacturer paradigm
- Balanced Life (people, sports, rest)
- Inner self-confidence/self-belief
- MT4-ATR dashboard (limited usage at this point)
- MT4-STAM dashboard (for measuring momentum)
- Daily Market Analysis document for planning and managing the day
- Pre-session Mind-Enhancing exercises
- post-session psychology reviews
Things I am not sure about and/or need to resolve:
- EMA Analysis – giving weighting to the EMA’s in judging trade situations
- Setup threshholds get too loose – partially because of large winning sessions, large losing sessions, high amount of trades
What is not working with K7:
- Setup quality threshhold has become overly loose
- Trades have possibly spread to too many instruments too quickly
- Open positions negatively impact my productivity and my ability to analyse the market further
- Constantly being attracted to new trading strategy ideas e.g. returning to STAM for swing-trading, using strength/weakness ratings as the foundation of a strategy
Definite Adjustments required to K7
- Keep everything that’s working
- Reduce the number of instruments to monitor – Cable, EURUSD, DAX – and possibly EURJPY – plus 1 flavour of the day – determine an order of priority among those instruments – thus a maximum of 5
- Tighten up the setup threshhold a little – Levels was too tight, the current form is too loose – get to something in the middle
- Trade only 1/2 a session per day – take the 6 trades in the 1/2 session and then stop – gives me more time to recover and rest, to review and to make space for EY+TS futures trading – and reduces risk of trading getting too loose – pick the time to trade carefully – depending on the news announcements