Starting Again

27Sep10

I started this blog with the intention of having an online trading diary. I have not kept this up. My bad. I guess I tried to write for others where I should have actually written for myself. I’m going to give this another shot. If it works out, I’ll carry on. If not, I’ll shut down this blog.

During this past year I have gone a transformation as a trader. For several years I had dipped my toe into various styles, ranging from buy and hold to intently following level II. I tried my hand at fully automated trading and fully discretionary trading and explored the various combinations in between. I’ve had some moderate successes and some failures, I followed some excellent traders and some not-so-good ones. Somehow in all the styles I have tried, there was always something which didn’t quite fit the bill for me.

Now, I have slowed down my search and somewhat feel at peace with what I am presently doing. I have found a trading style which jives with me. It’s a rather strange feeling Not unlike finding the right partner to share your life with. You don’t really know why feel like you can live your life with someone, but you just know you do.

What I would like to do in the next few posts is to try to journal what I am doing. It’s really for my sake more than anything else. The reason I want to post it is for reasons I think I mentioned before: writing publicly forces you to get your thoughts in order and write properly, opens your thoughts to outside critique, and somewhat strengthens commitment.

I cannot imagine I would be posting very frequently to this blog. Writing is not my strength. I will also try to use twitter as much as possible as an on-the-fly journal.

Just as an brief intro to the way I am now trading, here are the main points:

1. The majority of my capital is in corporate bonds and other fixed income instruments. I do not trade these and anything I enter is intended to be held to maturity. This fixed income portion provides a considerably constant and foreseeable income and supplies the risk money for my trading.

2. The risk money earned by the fixed income portion is used to build a “risk budget” for my actual trading. For this portion, I trade mostly equities. My philosophy is to aim to leverage every little bit of information from the market as possible to gain an edge. While I have found some success with pure technical trading, I have never been able to achieve the performance I hoped for. Possibly one of the main reasons for my lack of performance in this regard could be purely psychological in that I was never able to trade with enough conviction if I did not have a fundamental reason to do so. I am an investor, not a trader, at heart, and the reason I trade is to be able to model my equity curve to my risk requirements, and not to the fluctuations of the market. If I could invest in a position and hold it forever, I would, but the market seldom gives us the opportunity to do so without substantial drawdown in the process. To summarize, I enter a position for fundamental reasons, but time the entry according to my evaluation of supply and demand (hence technical). Exits and position sizing are very much technical based and are really a function of my risk control structure.

3. While I do not run a legal fund entity, I account for my trading operation as a regular fund. I have accepted some funds from some close relatives and friends and I provide them with a monthly NAV report and short commentary. I have done this in order to increase my discipline and accountability.

4. I have come to terms with the fact that I cannot look at the market on a full time basis. The most damaging thing I have found during the years I was exploring various styles, was looking at the market at irregular intervals (such as watching the market on a minute – by – minute basis when I had the time, but then not look at it at all for several days). I have found one of the most important thing is to stick to a ‘pace’. A chosen rhythm if you will. Now i try to view the markets on a daily basis with most of my research being done on weekends. Four time frames matter the most to me – the weekly timeframe gives me a clear indication of the overall price history, a daily timeframe for pattern recognition, a 30 minute timeframe allows me to define precise entry points, stops and allows me to calculate risk, and a 5 minute time frame is just to get a clear reference of the intraday structure of the past few days. I will trade out of the 30 minute chart, with reference to the longer timeframes, rather than to the 5 minute. The greatest challenge using this technique is sizing positions adequately in order to filter out what needs to be considered noise in this style of trading.

5. I will try to hold a position as long as I possibly can without compromising my risk profile. My risk is evaluated from day to day, and is not related to the current P&L provided by that position. Basically at any point in time a position has a specific perceived upside and downside and a position is exited if the probability to the downside exceeds that of the upside, regardless of how it performed in the past.

This is more or less it. I will try to expand as much as possible on these topics in my next posts, and will try to keep a day-to-day journal of my thoughts and trades on twitter.

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