Stop! Take Stock of Your Trading Strategies Today

How often do you stop and take stock of your career, relationships, or life in general?

New Year’s Day is a popular choice for self-reflection. It’s a chance to consider what went well…and not so well. Others use a traumatic event as the catalyst. Bad news is often a spark to re-assess our course.

I take stock regularly. It constantly reminds me to be grateful when times are good. This mental weigh-in also keeps me focussed when things turn south.  I went through a particularly tough period in the late 1990s. The markets were volatile and fear was rife.

Two crises had swept through the market. The first hit came from the Asian Financial Crisis. Hot on its heels was the Russian debt default. Many thought a big collapse was imminent.

Yes, the markets did fall — the Dow lost a quick fire 20%. But the negativity didn’t last. Stocks were back at all-time highs within a few months. This period is merely a footnote in history for most. Although for me, the impact was far reaching. It was a time I had to stop and take stock.

Let me explain what I mean.

Financial crises are nothing new. They are part of the economic cycle. And each time it’s the same story. A once high flying investment bank comes crashing back to earth. The implosion of a financial juggernaut is a headline event. But this time I wasn’t reading about it…I was living it. The bank under siege — Bankers Trust — was my employer.

I began 1999 as a senior trader at a top firm. By mid-year, it was all over. I was out of a job for the first time in my career. Banks across the globe were pulling back risk. There was a glut of traders. Jobs were scarce. It was a time when many people left the industry.

Taking stock of the situation was essential. It put things into perspective. Sure, I didn’t have a job. But I knew I had valuable skills. It was just a matter of finding a way to use them.

Looking past the immediate gloom was the key. It gave me the emotional boost to stride forward. Bankers Trust’s demise felt like the end of the world. But it was actually a golden opportunity. This was the dawn of a highly creative period in my career. Redundancy was the nudge I needed to go out on my own. I haven’t looked back since.

Challenging times… for some

The recent market sell-off is also an opportunity to take stock. You’ve no doubt seen a number of trades go backwards. A few have probably hit their exit points. This can be emotionally testing.

I received an interesting email this week. It’s from a member who’s already taking stock of what the correction means for Quant Trader. Here’s what he says…

‘I have just completed my monthly review of the Quant portfolio. I joined from the get go and after 10 months I have to say I am impressed!

‘Some feedback on numbers…

‘As this was a bit of an experiment for me, I did not put all my cash into the project. I have been trading mainly long signal 1s. It took some time to set up a CFD account to start on the shorts, but I am now trading them as well.

‘I have compared the various investments I have over the same time and can report the following.

‘All Ordinaries down about 4.8%

‘Blue Chips down about 11.5%

‘Speculative Portfolio (taken mainly from PPP recommendations and then own research) up 12.2% (at one point this was up 46% but last month has hurt it!!)

Quant Trader (excluding trading costs and dividends)

  • Up 11% (open longs)
  • Up 14.8% (open + closed longs)
  • Even (shorts)

‘Forex Trading – even

‘So all up, I would say QT and PPP in general are doing pretty well given the market and volatility.

‘I have now gained enough confidence in the approach that I will be allocating another 5-10% to the project.’

Member, Dom

This correction is proving to be Dom’s ‘redundancy’ moment. He’s using a setback as an opportunity to access various strategies. There’s nothing quite as revealing as a receding tide.

The outcome of this exercise speaks volumes. Dom is more confident. As a result, he’s allocating more capital to the Quant Trader strategy. I believe this will lead to a better return over time.

I’m going to add to Dom’s analysis. This will give you a clear view of how Quant Trader is tracking.

Let me say this. The stats I’m going to show you are below their high point. And that’s fine. A system that needs ideal conditions to display its results is not worth trading.

Slicing and dicing the numbers

The following figures are for the period 17 November 2014 to 17 September 2015. That gives us 10 months of live signals to analyse.

The first table shows the average profit for long trades.

Now let me break this down further. This table separates open trades into profits and loss. It does the same for closed trades.

The first thing you may notice is that profits are larger than losses. Every trader wants this. But many lack an effective strategy to get it.

Quant Trader’s approach is straightforward. It lets profits run, and it cuts losses. This naturally leads to average profits being higher. You won’t achieve this by taking lots of small profits.

The other thing to note is the average holding period. You can see profitable trades have a higher average than losing ones. And that makes sense. If a trade isn’t working, you get out.

Okay, let’s put all this into a chart. I much prefer a visual to a table.

This shows the hypothetical performance of Quant Trader’s long signals. It assumes $1,000 on every long trade. There is no allowance for costs or dividends.

Now let’s look at the All Ordinaries over the same period.

Source: BigCharts

The two graphs are broadly similar. That’s what I expect. The undercurrent of the All Ordinaries will always be a key factor. But that doesn’t mean you can’t beat the market.

A robust strategy can make a big difference. This is where Quant Trader comes in. The aim is to hold strong stocks and cut weak ones. That is the basis of outperformance.

Anyone can make money in perfect conditions. But handling the tough times is the acid test. So far, I think it’s fair to say Quant Trader is holding its own.

Until next week,

By Jason McIntosh

Editor, Quant Trader

Editor’s note: Are any of your stocks up 100% in the last 10 months? Chances are the answer is no. The All Ordinaries is lower, so naturally many ASX stocks are down as well. But that doesn’t mean there are no opportunities — you just need to know where to look.

Quant Trader’s top five open trades are up between 303% and 109%. The system’s algorithms identify stocks on the move. It then lets its winners run. Click here to find out how you could buy stocks like these for your portfolio.

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Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, Markets and Money is published in 7 countries with a worldwide readership of almost 1 million people.

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